Income Taxes

6 Months Ended

12 Months Ended

Jan. 31, 2014

Jul. 31, 2013

Dec. 31, 2013

Inventergy Inc [Member]

Jul. 31, 2013

Cortelco Systems Holding Corp [Member]

Income Taxes

11.

Income Taxes

The Company’s income tax expense (benefit) of ($14,000) and $7,000 for the six months ended January 31, 2014 and 2013, respectively, consisted of estimated current state income taxes of Cortelco. No deferred taxes are provided in the accompanying financial statements due to the valuation allowance established.

As of January 31, 2014, the Company has federal and state net operating loss carryforwards of approximately $28,000,000 which expire at various dates through 2034. The Internal Revenue Code provides limitations on utilization of existing net operating losses against future taxable income based upon changes in share ownership. If these changes occur, the ultimate realization of the net operating loss carryforwards could be limited which would result in some portion of the carryforwards becoming permanently impaired.

9.	Income Taxes

Income tax expense consisted of the following for the fiscal years ended July 31, 2013 and 2012 (in thousands):

	Fiscal year ended
	July 31, 2013		July 31, 2012
Current
Federal	$	-	$	-
State		20		20
		20		20
Deferred
Federal		-		-
State		-		-
		-		-
	$	20	$	20

A reconciliation between the income tax expense recognized in the Company's consolidated statements of operations and the income tax expense (benefit) computed by applying the domestic federal statutory income tax rate to income before income taxes for fiscal years 2013 and 2012 is as follows (in thousands):

	2013		2012

Income tax expense at federal statutory rate (35%)	$	85	$	186
State income taxes		13		13
Change in valuation allowance		382		(160)
Effect of tax rate differences and newly enacted tax rates in Puerto Rico		(245)		-
Imputed interest expense on notes payable - related parties		(193)		(32)
Other, net		(22)		13
Total income tax expense	$	20	$	20

The deferred tax effects of the Company's principal temporary differences at July 31, 2013 and 2012 are as follows (in thousands):

	2013		2012

Allowance for doubtful receivables	$	105	$	177
Inventories		227		858
Basis difference in property and equipment		(12)		(5)
Accrued warranty costs		87		50
Accrued expenses and other		123		115
Deferred revenue		-		(42)
Net operating loss carry-forwards		10,668		9,663
Valuation allowance		(11,198)		(10,816)
Total deferred tax asset	$	-	$	-

At July 31, 2013, the Company has federal and state net operating loss carry-forwards of approximately $28 million which expire on various dates through 2033. As a Puerto Rico corporation not doing business in the United States, CSPR is subject to Puerto Rico income taxes but is exempt from U.S. federal income taxes. CSPR has net operating loss carry-forwards totaling approximately $500,000 available to offset future taxable income of CSPR expiring at various dates through 2022.

Approximately $450,000 of CSPR’s net operating loss carry-forwards were generated in its assembly of telecommunication equipment business which is subject to a reduced income tax rate pursuant to an exemption granted under the tax code of the Commonwealth of Puerto Rico. Such NOL is limited in availability to offset future taxable income of CSPR’s assembly operations.

Tax periods for all years after fiscal 2009 remain open to examination by the federal and state taxing jurisdictions to which the Company is subject.

8.	Income Taxes

Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income taxes are as follows as of December 31, 2013:

Deferred taxes
Net operating loss carryforwards	$	170,103
Intangibles – startup costs		1,171,673
Stock-based compensation		73,082
Gross deferred tax assets		1,414,858
Valuation allowance		(1,414,858)

Net deferred tax assets	$	-

Based on the Company’s historical net losses during its development stage, the Company has provided a full valuation allowance against its deferred tax assets as of December 31, 2013.

As of December 31, 2013, the Company had $427,025 of federal and $427,025 of state net operating loss carryforwards available to offset future taxable income. These net operating losses will begin to expire in 2033 for state and federal tax purposes if not utilized.

The use of the Company's net operating loss carryforwards is subject to certain annual limitations and may be subject to further limitations as a result of changes in ownership as defined by the Internal Revenue Code and similar state provisions. Such limitations could result in the expiration of net operating loss carryforwards prior to utilization.

The Company files U.S. Federal and U.S. state tax returns. As of December 31, 2013, all tax years remain open in most jurisdictions. The Company is not currently under examination by income tax authorities in federal or state jurisdictions.

Income Taxes

Income tax expense (benefit) consisted of the following for the fiscal years ended July 31, 2013 and 2012 (in thousands):

	Fiscal year ended
	July 31, 2013		July 31, 2012

Current
Federal	$	155	$	270
State		30		50
		185		320
Deferred
Federal		17		(1)
State		3		-
		20		(1)
	$	205	$	319

A reconciliation between the income tax expense recognized in the Company's consolidated statements of operations and the income tax expense (benefit) computed by applying the domestic federal statutory income tax rate to income (loss) before income taxes for fiscal years 2013 and 2012 is as follows (in thousands):

	2013		2012

Income tax expense at federal statutory rate (35%)	$	486	$	349
State income taxes		21		33
Change in valuation allowance		64		(35)
Effect of tax rate differences and newly enacted tax rates in Puerto Rico		(176)		-
Imputed interest expense on notes payable - related parties		(193)		(32)
Other, net		3		4
Total income tax expense	$	205	$	319

The deferred tax effects of the Company's principal temporary differences at July 31, 2013 and 2012 are as follows (in thousands):

	2013		2012

Allowance for doubtful accounts	$	39	$	43
Inventories		227		233
Basis difference in property and equipment		(7)		(1)
Accrued warranty costs		46		46
Accrued expenses and other		65		107
Net operating loss carry-forwards		41		70
Valuation allowance		(103)		(170)
Net deferred income taxes	$	308	$	328

Due to uncertainties surrounding the timing of realizing the benefits of its net favorable tax attributes in future tax returns; to the extent that it is more likely than not that the deferred tax assets may not be realized, the Company has recorded a valuation allowance against its deferred tax assets at July 31, 2013 and 2012. The Company determined that it is more likely than not that the net deferred tax assets of CSPR at July 31, 2013 and 2012 will not be realized. Accordingly a valuation allowance of $103 and $170 was provided as of July 31, 2013 and 2012, respectively, applicable to net deferred tax assets of CSPR.

As a Puerto Rico corporation not doing business in the United States, CSPR is subject to Puerto Rico income taxes but is exempt from U.S. federal income taxes. CSPR has net operating loss carry-forwards totaling $500,000 available to offset future taxable income of CSPR expiring at various dates through 2022.

Tax periods for all years after fiscal 2009 remain open to examination by the federal and state taxing jurisdictions to which the Company is subject.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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