Note 10 – Income Taxes

Income (loss) before the provision (benefit) for income taxes consists of the following:

	2014		2013
US	$	1,724,000	$	(8,676,000)
Foreign		258,000		(354,000)
Total	$	1,982,000	$	(9,030,000)

The provision (credit) for income taxes in the accompanying consolidated financial statements consists of the following:

	2014		2013
Current
Federal	$	-	$	(216,000)
State		68,000		48,000
Foreign		(82,000)		(23,000)
	$	(14,000)	$	(191,000)

Deferred
Federal	$	-	$	-
State		-		-
Foreign		(7,000)		(112,000)
		(7,000)		(112,000)
Income tax credit	$	(21,000)	$	(303,000)

A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:

	2014			2013
Tax due at statutory rate		34.00	%		34.00	%

State tax provision, net of federal		9.43	%		4.96	%
Valuation allowance		(28.63)	%		(35.28)	%
Foreign tax credits		(12.88)	%		0.05	%
Foreign rate differential and other		(3.04)	%		(0.38)	%
Total		(1.12)	%		3.35	%

Net deferred tax assets (liabilities) consisted of the following at September 30, 2014:

	Domestic		Foreign		Worldwide

Credits	$	1,496,000	$	-	$	1,496,000
NOLs		2,295,000		37,000		2,332,000
Stock compensation		492,000		-		492,000
Accruals		394,000		-		394,000
Other		114,000		-		114,000
Gross deferred tax assets		4,791,000		37,000		4,828,000

Valuation allowance		(4,238,000)		-		(4,238,000)
Deferred tax assets, net		553,000		37,000		590,000

Depreciation		(495,000)		(62,000)		(557,000)
Intangibles		(58,000)		(161,000)		(219,000)
Other		-		(18,000)		(18,000)
Gross deferred tax liabilities		(553,000)		(241,000)		(794,000)

Net deferred tax asset (liability)	$	-	$	(204,000)	$	(204,000)

Net deferred tax assets (liabilities) consisted of the following at September 30, 2013:

	Domestic		Foreign		Worldwide

Credits	$	1,473,000	$	-	$	1,473,000
NOLs		243,000		36,000		279,000
Stock compensation		338,000		-		338,000
Accruals		541,000		-		541,000
Intangibles		2,565,000		-		2,565,000
Other		233,000		-		233,000
Gross deferred tax assets		5,393,000		36,000		5,429,000

Valuation allowance		(4,849,000)		-		(4,849,000)
Deferred tax assets, net		544,000		36,000		580,000

Depreciation		(544,000)		(71,000)		(615,000)
Intangibles		-		(98,000)		(98,000)
Gross deferred tax liabilities		(544,000)		(169,000)		(713,000)

Net deferred tax asset (liability)	$	-	$	(133,000)	$	(133,000)

In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based upon the Company’s current losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against its U.S. net deferred tax assets. The net change in the valuation allowances for the years ending September 30, 2014 and 2013 was ($0.6 million) and $3.1 million, respectively.

As of September 30, 2014, the Company has federal net operating losses of $5.2 million. As of September 30, 2013, the Company has no federal net operating losses. As of September 30, 2014 and 2013, the Company has state net operating losses of $9.3 million and $4.2 million, respectively. The state net operating losses begin expiring in 2031. At September 30, 2014 and 2013, the Company has foreign net operating loss carryforwards of approximately $183,000 and $182,000, respectively which can be carried forward indefinitely.

As of September 30, 2014 and 2013, the Company has federal research credits of $1.4 million and $1.3 million, respectively. The federal credits begin expiring in fiscal year 2028. As of September 30, 2014 and 2013, the Company has state research credits of $138,000 and $148,000, respectively. The state credits begin expiring in fiscal year 2023.

As of September 30, 2014 and 2013, the Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of September 30, 2014 and 2013, the Company has no accrued interest or penalties related to uncertain tax positions.

The Company is subject to taxation in the United States and the United Kingdom. At September 30, 2014, domestic tax years from fiscal 2011 through fiscal 2014 remain open to examination by the taxing authorities and tax years 2013 and 2014 remain open in the United Kingdom.