Note 9 – Income Taxes

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

	2016		2015
US	$	(503,000)	$	(865,000)
Foreign		888,000		506,000
Total	$	385,000	$	(359,000)

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

	2016		2015
Current
Federal	$	-	$	-
State		3,000		11,000
Foreign		(9,000)		(71,000)
	$	(6,000)	$	(60,000)

Deferred
Federal	$	-	$	-
State		-		-
Foreign		57,000		54,000
		57,000		54,000
Income tax expense (credit)	$	51,000	$	(6,000)

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

	2016			2015

Tax due at statutory rate		34.00	%		34.00	%

State tax provision, net of federal		9.13	%		7.91	%
Valuation allowance		93.66	%		-46.10	%
Foreign tax credits		-77.28	%		56.91	%
Foreign rate differential and other		-46.39	%		-51.12	%
Total		13.12	%		1.60	%

Net deferred tax assets (liabilities) consisted of the following at September 30, 2016:

	Domestic		Foreign		Worldwide

Credits	$	1,466,000	$	-	$	1,466,000
NOLs		3,303,000		25,000		3,328,000
Stock compensation		143,000		-		143,000
Accruals		385,000		-		385,000
Other		150,000		-		150,000
Gross deferred tax assets		5,447,000		25,000		5,472,000

Valuation allowance		(4,739,000)		-		(4,739,000)
Deferred tax assets, net		708,000		25,000		733,000

Depreciation		(696,000)		(200,000)		(896,000)
Intangibles		(12,000)		(88,000)		(100,000)
Gross deferred tax liabilities		(708,000)		(288,000)		(996,000)

Net deferred tax asset (liability)	$	-	$	(263,000)	$	(263,000)

Net deferred tax assets (liabilities) consisted of the following at September 30, 2015:

	Domestic		Foreign		Worldwide

Credits	$	1,488,000	$	-	$	1,488,000
NOLs		2,775,000		34,000		2,809,000
Stock compensation		82,000		-		82,000
Accruals		333,000		-		333,000
Other		138,000		-		138,000
Gross deferred tax assets		4,816,000		34,000		4,850,000

Valuation allowance		(4,377,000)		-		(4,377,000)
Deferred tax assets, net		439,000		34,000		473,000

Depreciation		(403,000)		(145,000)		(548,000)
Intangibles		(36,000)		(135,000)		(171,000)
Gross deferred tax liabilities		(439,000)		(280,000)		(719,000)

Net deferred tax asset (liability)	$	-	$	(246,000)	$	(246,000)

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, 2016 and 2015 was $0.4 million and $0.2 million, respectively.

As of September 30, 2016 and 2015, the Company has federal net operating losses of $7.1 and $6.2 million, respectively. As of September 30, 2016 and 2015, the Company has state net operating losses of $15.2 million and $11.7 million, respectively. The federal and state net operating losses begin expiring in 2023 and 2027, respectively. At September 30, 2016 and 2015, the Company has foreign net operating loss carryforwards of approximately $146,000 and $171,000, respectively which can be carried forward indefinitely.

As a result of the conversion of the Xcede convertible notes and accrued interest to preferred stock in November 2016 (See Note 3), the Company’s ownership percentage in Xcede decreases to less than 80%. Based on this ownership percentage, beginning in fiscal year 2017, Xcede will no longer be included in the consolidated federal tax return and the Company will no longer be able to offset taxable income or share net operating losses with Xcede. The tax accounting impact, including the assessment on the valuation allowance against the U.S. net deferred tax assets, will be evaluated in subsequent periods. The valuation allowance will be addressed independently for the Company and Xcede, instead of on a consolidated basis.

As of both September 30, 2016 and 2015, the Company has federal research credits of $1.5 million. The federal credits begin expiring in fiscal year 2025. As of September 30, 2016 and 2015, the Company has state research credits of $93,000 and $127,000, respectively. The state credits begin expiring in fiscal year 2026.

As of September 30, 2016 and 2015, 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, 2016 and 2015, 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, 2016, domestic tax years from fiscal 2013 through fiscal 2016 remain open to examination by the taxing authorities and tax years 2014 through 2016 remain open in the United Kingdom.