Income Taxes

No income tax benefit was recognized on losses reported for the years presented due to uncertainty of realization. In fiscal 2011, the Company provided a valuation allowance against its deferred tax assets due to the uncertainty of future realization and, thus, no tax benefit has been recognized on subsequent reported pretax losses.

A reconciliation of the U.S. statutory tax rate to the Company’s effective tax rate follows:



	2017					2016
	Amount			Percent		Amount			Percent
U.S. statutory tax	$	(2,384,000	)	(34.0	)%	$	(4,343,000	)	(34.0	)%
Increase in valuation allowance	2,280,000			32.5		2,318,000			18.1
Goodwill writedown	—			—		2,046,000			16.0
Foreign tax rate differences	238,000			3.4		—			—
Permanent differences	18,000			0.3		45,000			0.4
State tax, net of federal benefit	(126,000		)	(1.8	)	(119,000		)	(0.9	)
Other, net	(26,000		)	(0.4	)	53,000			0.4
Effective tax rate	$	—		—	%	$	—		—	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2017 and 2016 are presented below:



	2017			2016
Deferred tax assets:
Inventories	$	1,543,000		$	1,558,000
Accrued compensation	539,000			528,000
Warranty accrual	150,000			244,000
Depreciation	100,000			98,000
Allowance for doubtful accounts receivable	320,000			337,000
Unearned revenue	237,000			205,000
U.S. net operating loss carryforwards	8,794,000			7,223,000
Foreign net operating loss carryforwards	1,916,000			1,575,000
Tax credits	989,000			989,000
Other	1,181,000			724,000
Gross deferred tax assets	15,769,000			13,481,000
Deferred tax liabilities:
Other	64,000			56,000
Gross deferred tax liabilities	64,000			56,000
Total deferred tax assets and liabilities	15,705,000			13,425,000
Less valuation allowance	(15,705,000		)	(13,425,000		)
Net deferred tax assets and liabilities	$	—		$	—

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. As of September 30, 2017, there were no undistributed earnings of foreign subsidiaries.

The Company provides for a valuation allowance against its deferred tax assets due to the uncertainty of future realization. The full valuation allowance is determined to be appropriate due to the Company's operating losses since fiscal year 2010 and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible.

Pretax domestic loss amounted to approximately $(5,309,000) and ($12,441,000) in fiscal years 2017 and 2016, respectively. Pretax foreign loss amounted to approximately ($1,703,000) and ($333,000) in fiscal years 2017 and 2016, respectively. The Company has U.S. and foreign net operating loss carryforwards (NOLs) of approximately $23.8 million and $8.7 million, respectively, available to offset future taxable income. Such NOLs can be carried forward over periods through September 30, 2037 in the U.S. and indefinitely in foreign jurisdictions. On August 29, 2014, the Company merged with IQinVision, Inc. In connection with this merger, the Company's ability to utilize pre-merger net operating losses and tax credit carryforwards in the future is subject to certain limitations pursuant to Section 382 of the Internal Revenue Code. The annual limitation on utilization of the Company's U.S. net operating loss carryforwards is presently estimated at $500,000.

Subsequent to year end, on November 7, 2017 the Company completed a rights offering that could further limit its ability to utilize prior net operating losses and tax credit carryforwards in the future pursuant to Section 382 of the Internal Revenue Code. This will not materially impact the balance sheet or statement of operations as all deferred tax assets have a full valuation allowance.

The Company follows the provisions of ASC 740 as it relates to uncertain tax positions. Unrecognized tax benefits activity for the years ended September 30, 2017 and 2016 is summarized below:



	2017		2016
Beginning balance	$	45,000	$	45,000
Additions (reductions) based on tax positions related to prior years
	—		—
Additions (reductions) based on tax positions related to the current year
	—		—
Ending balance	$	45,000	$	45,000

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2017 and 2016, there was no accrued net interest and penalties related to tax positions taken or to be taken on the Company’s tax returns and recorded as part of the reserves for uncertain tax positions. The Company files U.S. Federal and State income tax returns and foreign tax returns in the United Kingdom, Germany and Israel. The Company is generally no longer subject to tax examinations for fiscal years prior to 2014 in the U.S. and 2011 in the U.K., Germany and Israel.