Income Taxes

12 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 2. 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 began providing a full valuation allowance against its net 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:

	2018						2017
	Amount			Percent			Amount			Percent
U.S. statutory tax	$	(1,325,000	)		(24.5	)%	$	(2,384,000	)		(34.0	)%
(Decrease) increase in valuation allowance		(3,030,000	)		(56.0	)		2,280,000			32.5
Impact of federal rate change on deferred tax balances		4,410,000			81.5			—			—
Foreign tax rate differences		72,000			1.3			238,000			3.4
Permanent differences		16,000			0.3			18,000			0.3
State tax, net of federal benefit		(110,000	)		(2.0	)		(126,000	)		(1.8	)
Other, net		(33,000	)		(0.6	)		(26,000	)		(0.4	)
Effective tax rate	$	—			—	%	$	—			—	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2018 and 2017 are presented below:

	2018			2017
Deferred tax assets:
Inventories	$	1,029,000		$	1,543,000
Accrued compensation		348,000			539,000
Warranty accrual		79,000			150,000
Depreciation		61,000			100,000
Allowance for doubtful accounts receivable		149,000			320,000
Unearned revenue		183,000			237,000
U.S. net operating loss carryforwards		7,349,000			8,794,000
Foreign net operating loss carryforwards		2,277,000			1,916,000
Tax credits		989,000			989,000
Other		1,011,000			1,181,000
Gross deferred tax assets		13,475,000			15,769,000
Deferred tax liabilities:
Other		38,000			64,000
Gross deferred tax liabilities		38,000			64,000
Total deferred tax assets and liabilities		13,437,000			15,705,000
Less valuation allowance		(13,437,000	)		(15,705,000	)
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, 2018, there were no undistributed earnings of foreign subsidiaries.

The Company provides for a valuation allowance against its net deferred tax assets due to the uncertainty of future realization. The full valuation allowance is determined to be appropriate due to the Company’s continuing 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 $(3,604,000) and ($5,309,000) in fiscal years 2018 and 2017, respectively. Pretax foreign loss amounted to approximately ($1,805,000) and ($1,703,000) in fiscal years 2018 and 2017, respectively. The Company has U.S. and foreign net operating loss carryforwards (NOLs) of approximately $28.7 million and $10.5 million, respectively, available to offset future taxable income. Such NOLs can be carried forward over periods through September 30, 2038 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. 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 did not materially impact the balance sheet or statement of operations as the net deferred tax asset has a full valuation allowance.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code and established new tax laws that affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 34% to 21%. In addition, net operating losses generated subsequent to the Tax Act can only be used to offset 80% of taxable income with an indefinite carryforward period for unused carryforwards.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. This guidance did not have a material impact on the Company’s operating results or financial condition.

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, 2018 and 2017 is summarized below:

	2018		2017
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, 2018 and 2017, 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 2015 in the U.S. and 2012 in the U.K., Germany and Israel.