NOTE

— INCOME TAXES

The following information is provided for the years ended

June

30:

(In thousands)	2019			2018
Components of (loss) before income taxes:
United States	$	(23,005	)	$	(23,332	)
Foreign		737			—
(Loss) before income taxes	$	(22,268	)	$	(23,332	)

Provision for income taxes:
Current	$	88		$	--
U.S. federal		221			922
State and local		132			35
Total current		441			957

Deferred		(6,370	)		(4,748	)
Total provision for income taxes	$	(5,929	)	$	(3,791	)

(In thousands)	2019			2018
Reconciliation to federal statutory rate:
Federal statutory tax rate		21.0	%		27.6	%
State and local taxes, net of federal benefit		3.3			1.1
Foreign operations		(0.3	)		--
Federal tax credits		0.8			0.9
Valuation allowance		3.8			3.5
Domestic production activities deduction		--			0.6
Uncertain tax position activity		0.3			0.4
Shared based compensation		(1.3	)		(1.3	)
Tax rate changes		(0.2	)		(14.2	)
Other		(0.8	)		(2.3	)
Effective tax rate		26.6	%		16.3	%

The Tax Cuts and Jobs Act (the “Act”) was signed into law in

December 2017

and makes numerous changes to the Internal Revenue Code. Among other changes, the Act reduces the U.S. corporate income tax rate to

21%

effective

January 1, 2018.

Because the Act became effective mid-way through the Company’s fiscal

2018

tax year, the Company will have a U.S. statutory income tax rate of

27.6%

for fiscal

2018

and will have a

21%

U.S statutory income tax rate for fiscal years thereafter. During the year ended

June 30, 2018,

the Company recognized a net deferred tax expense of

$3,322,991

as a result of the revaluation of its deferred tax balances due to the tax rate changes caused by the Act. The company completed its accounting for the income tax effects of the Act during the year ended

June 30, 2018.

The components of deferred income tax assets and (liabilities) at

June

30,

2019

and

2018

are as follows:

(In thousands)	2019			2018

Uncertain tax positions	$	128		$	119
Reserves against current assets		1,800			1,348
Accrued expenses		1,722			2,028
Interest		388			--
Deferred compensation		308			402
Stock-based compensation		926			1,296
State net operating loss carryover and credits		2,374			2,194
Long term capital loss carryforward		2,555			2,555
Goodwill, acquisition costs and intangible assets		8,949			4,728
U.S. Federal net operating loss carryover and credits		1,139			232
Deferred income tax asset before valuation allowance		20,289			14,902

Valuation allowance		(3,820	)		(4,749	)
Deferred income tax asset		16,469			10,153

Depreciation		(2,169	)		(2,045	)
Deferred income tax liability		(2,169	)		(2,045	)

Net deferred income tax asset	$	14,300		$	8,108

The Company has deferred tax assets for US federal net operating loss carry forwards of

$914,000

and

$187,000

June 30, 2019

and

June 30, 2018,

respectively. The amount recognized this year of

$727,000

has an indefinite carry forward period. The remainder of

$187,000

was acquired from Virticus Corporation and will expire over a

-year period beginning in

June 30, 2029.

The acquired federal net operating loss is subject to Internal Revenue Code Section

382.

The Company has determined, more likely than

not,

the amount will be realized before expiration.

The Company has deferred tax assets for research and development credits of

$225,000,

and

$45,000,

June 30, 2019

and

June 30, 2018,

respectively. The amount recognized this year of

$180,000

has a

year carry forward. The remainder of

$45,000

was acquired from Virticus Corporation and will expire over a

-year period beginning

June 30, 2029.

The acquired credit is limited by Internal Revenue Code Section

382.

The Company has determined, more likely than

not,

the amount will be realized before expiration.

The Company has state net operating loss carryovers and credits of

$2,374,000

and

$2,194,000

June 30, 2019

and

June 30, 2018,

respectively. The amount recognized in fiscal

2019

relates to net deferred tax assets of

$180,000

of various state net operating losses.

Also related to the acquisition of Virticus Corporation, the Company has recorded a deferred state income tax asset related to a state net operating loss carryover and a state research and development credit in Oregon in the amount of

$108,000

and

$108,000,

for fiscal years

2019

and

2018,

respectively. The Company has determined this asset more likely than

not,

will

not

be realized and that a full valuation reserve is required. The Oregon net operating loss will expire over a period of

years, beginning in

June 30, 2027.

As of

June

30,

2019,

and

2018,

the Company has recorded a deferred state income tax asset net of federal tax benefits related to non-refundable New York state tax credits in the amount of

$2,086,000

and

$2,086,000,

respectively. These credits do

not

expire, but pursuant to New York state legislation enacted in fiscal

2014,

the Company has determined that this asset, more likely than

not,

will

not

be realized. As of

June 30, 2019,

and

2018,

the Company has recorded a full valuation reserve in the amount of

$2,086,000

and

$2,086,000,

respectively.

During fiscal

2015,

the Company generated a capital loss from the sale of a Canadian subsidiary. During fiscal

2019,

the Company entered into an agreement to sell its New Windsor, NY facility, which is expected to close in the

first

quarter of fiscal

2020

and result in a taxable capital gain. The Company expects to use

$929,000

of the capital loss deferred tax asset, and therefore, released a valuation allowance for this amount this year. The remaining capital loss carryforward deferred tax asset of

$1,626,000

has a full valuation allowance established against it because the Company has

expectation of generating capital gains to utilize the loss before it expires at the end of

June 30, 2020.

Considering all issues discussed above, the Company has recorded valuation reserves of

$3,820,000

and

$4,749,000

as of

June

30,

2019

and

2018,

respectively.

June

30,

2019,

tax, interest, and penalties, net of potential federal tax benefits, were

$586,000,

$245,000,

and

$151,000,

respectively, of the total reserve for uncertain tax positions of

$982,000.

The entire uncertain tax position of

$586,000,

net of federal tax benefit, would impact the effective tax rate if recognized. At

June

30,

2018,

tax, interest, and penalties, net of potential federal tax benefits, were

$651,000,

$259,000,

and

$159,000

respectively, of the total reserve for uncertain tax positions of

$1,069,000.

The entire uncertain tax position of

$651,000

net of federal tax benefit, would impact the effective tax rate if recognized. The liability for uncertain tax position is included in Other Long-Term Liabilities.

The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Consolidated Statements of Operations. The Company recognized a

$65,000

net tax benefit in fiscal

2019

and

$20,000

net tax benefit in fiscal

2018,

related to the change in reserves for uncertain tax positions. The Company recognized interest net of federal benefit and penalties of

$14,000

and

$7,000,

respectively, in fiscal

2019

and

$9,000

and

$35,000,

respectively, in fiscal

2018.

The reserve for uncertain tax positions is

not

expected to change significantly in the next

twelve

months.

The tax activity in the liability for uncertain tax positions was as follows:

(in thousands)	2019			2018

Balance at beginning of the fiscal year	$	736		$	842
Decreases — tax positions in prior period		(120	)		(185	)
Increases — tax positions in current period		59			41
Increases – tax positions in prior period		---			42
Settlements and payments		---			(4	)
Lapse of statute of limitations		---			—
Balance at end of the fiscal year	$	675		$	736

The Company files a consolidated federal income tax return in the United States, and files various combined and separate tax returns in several state and local jurisdictions. With limited exceptions, the Company is

longer subject to U.S. Federal, state and local tax examinations by tax authorities for fiscal years ending prior to

June

30,

2016.

The Internal Revenue Service completed the audit of the tax year ended

June 30, 2016.