. INCOME TAXES

Income taxes consisted of the following:

	Years ended September 30,
	2017		2016
Current tax provision
Federal	$	-	$	-
State		1,600		1,840
Total current tax provision		1,600		1,840
Deferred provision (benefit)
Federal		166,600		(159,800	)
State		29,400		(28,200	)
Total deferred provision (benefit)		196,000		(188,000	)

Provision (benefit) for income taxes	$	197,600	$	(186,160	)

A reconciliation of income taxes at the federal statutory rate of

34%

to the effective tax rate was as follows:

	Years ended September 30,
	2017			2016
Income taxes computed at the federal statutory rate	$	(231,000	)	$	(499,000	)
Change in valuation allowance		197,000			(66,000	)
Expired net operating loss carryforwards		283,000			487,000
Nondeductible compensation, interest expense and other		21,000			99,000
State income taxes, net of federal tax benefit		(24,000	)		(36,000	)
Change in R&D credit carryover		(98,000	)		(98,000	)
Stock options and other prior year true-ups		48,000			(75,000	)
Other		1,600			1,840
Provision (benefit) for income taxes	$	197,600		$	(186,160	)

The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset at

September

30,

2017

and

2016

were as follows:

	At September 30,
Deferred tax assets:	2017			2016
Net operating loss carryforwards	$	16,443,000		$	16,410,000
Research and development credit		2,559,000			2,461,000
Share-based compensation		898,000			598,000
Equipment		(80,000	)		(23,000	)
Patents		69,000			102,000
Accruals and other		546,000			832,000
State tax deduction		(7,000	)		(7,000	)
Federal AMT Credit		52,000			52,000
Allowances		157,000			211,000
Gross deferred tax asset		20,637,000			20,636,000
Less valuation allowance		(12,306,000	)		(12,109,000	)
Total deferred tax assets, net of valuation allowance	$	8,331,000		$	8,527,000

September

30,

2017,

the Company had net deferred tax assets of approximately

$8,331,000.

The deferred tax assets are primarily composed of federal and state NOL carryforwards and federal and state research and development (“R&D”) credit carryforwards. At

September

30,

2017,

the Company had federal NOL carryforwards of approximately

$47,019,000,

which expire from

2022

through

2036.

The Company also has an estimated

$1,990,000

and

$569,000

of federal and state R&D tax credits, respectively, at

September

30,

2017,

a portion of which will begin to expire in the

2018

tax year. The Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are

not

recognized for NOL carryforwards resulting from windfall tax benefits occurring from

October

2008

onward. At

September

30,

2017,

deferred tax assets do

not

include excess tax benefits from stock-based compensation of approximately

$1,130,000.

The Company reviews

its ability to realize its deferred tax assets on a quarterly basis.

In doing so, management considers historical and projected taxable income of the Company, along with any tax planning strategies and any other positive or negative evidence. Realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards and other deferred assets. The Company has sustained profitability over

six

of the

seven

most recent fiscal years. In the past few years, the Company has developed products and expanded its marketing efforts into the mass notification market, which is a very large and growing market. While the Company is still in the early stages of market penetration, it has increased its confidence in forecasted taxable income based on growth opportunities in this market. It has also increased its forecasted revenues and taxable income for its directional product opportunities, where it is a leading player in the world market. As a result, du

ring the quarter ended

September 30, 2015,

the Company determined it was more likely than

not

that a portion of the deferred tax assets will be realized and, accordingly, released a portion of the valuation allowance. While the Company incurred net losses in the years ended

September 30, 2017

and

2016,

it was significantly impacted by a non-recurring expense in fiscal

2017

and primarily due to non-recurring expense in fiscal

2016.

The Company expects to utilize the deferred tax asset in the future. The Company adjusted its deferred tax asset value in the quarter ended

September 30, 2017

and continues to maintain a valuation allowance of

$12,306,000.

Since future financial results

may

differ from previous estimates, periodic adjustments to the Company’s valuation allowances

may

be necessary.

The Company

recorded a tax provision for the minimum state tax requirement for the year ended

September

30,

2017

as the Company’s annual effective tax rate is zero. During the quarter ended

June

30,

2012,

the Company amended its federal tax return for the year ended

September

30,

2008

to make an election to carry back its fiscal year ended

September

30,

2008

applicable NOL for a period of

years, and carry forward the loss for up to

years, as per Section

172

(b)(

)(H) of the Internal Revenue Code of

1986

(“Section

172”

), as amended per the American Recovery and Reinvestment Tax Act of

2009

for eligible small businesses. As of

September 30, 2017,

the Company had

unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company

’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of NOL and credit carryforwards.