NOTE 5 – INCOME TAXES

The components of income tax expense are as follows (in thousands):

	Year ended June 30,
	2016		2015		2014

Current
Federal	$	-	$	29	$	13
State		24		83		20
	$	24	$	112	$	33

The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2016, 2015 and 2014 is as follows:

	Year Ended June 30,
	2016			2015			2014

Statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net		(18.6	%)		5.3	%		(6.9	%)
Meals and entertainment		38.7	%		1.2	%		1.2	%
AMT and research and development credits		(218.9	%)		0.0	%		0.0	%
Other		1.5	%		0.0	%		(4.0	%)
Effective rate before valuation allowance		(163.3	%)		40.5	%		24.3	%

Change in valuation allowance		228.2	%		(31.7	%)		(21.0	%)
Effective tax rate		64.9	%		8.8	%		3.3	%

A valuation allowance has been recorded to reduce the Company’s net deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

During the years ended June 30, 2016 and 2015, the Company recorded $0.3 million and $0.4 million, respectively, to release the deferred tax valuation allowance for the taxable income generated during the periods. At June 30, 2016 and 2015, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands):

	June 30,
	2016			2015
Deferred tax assets relating to:
Stock compensation	$	627		$	892
AMT and research and development credits		523			455
Deferred rent		82			44
Inventory		169			92
Professional fees		140			163
Accrued vacation		33			23
Accounts receivable allowance		24			13
Contribution carryovers		8			31
Net operating loss carryforwards		1,044			1,124
Total deferred tax assets		2,650			2,837
Deferred tax liablities related to depreciation differences		(621	)		(555	)
Net deferred tax assets before valuation allowance		2,029			2,282
Valuation allowance		(2,029	)		(2,282	)
Net deferred tax assets	$	-		$	-

At June 30, 2016, the Company had net operating loss carryforwards of $3.5 million which will expire, if unused, between June 30, 2032 and June 30, 2036. At June 30, 2016, the Company had various tax credit carryforwards of $0.5 million, of which $0.3 million will expire beginning on June 30, 2030 and $0.2 million which may be carried forward indefinitely.

As of June 30, 2016, the Company’s estimated net operating losses for tax return filing purposes exceeds the gross amount for financial reporting purposes by $0.6 million related to excess income tax benefits on stock-based compensation. The tax effect of this excess tax expense will be recorded as an increase to additional paid in capital in a future reporting period when the cash benefit is realized.