NOTE 4 – INCOME TAXES

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

	Year ended June 30,
	2017		2016		2015

Current
Federal	$	-	$	-	$	29
State		4		24		83
	$	4	$	24	$	112

The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2017, 2016 and 2015 is as follows:

	Year Ended June 30,
	2017			2016			2015

Statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net		(4.5	%)		(18.6	%)		5.3	%
Meals and entertainment		(1.5	%)		38.7	%		1.2	%
AMT and research and development credits		0.0	%		(218.9	%)		0.0	%
Other		0.2	%		1.5	%		0.0	%
Effective rate before valuation allowance		28.2	%		(163.3	%)		40.5	%

Change in valuation allowance		(28.5	%)		228.2	%		(31.7	%)
Effective tax rate		(0.3	%)		64.9	%		8.8	%

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.

At June 30, 2017 and 2016, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands):

	June 30,
	2017			2016
Deferred tax assets relating to:
Stock compensation	$	398		$	627
AMT and research and development credits		523			523
Deferred rent		77			82
Inventory		211			169
Professional fees		155			140
Accrued vacation		43			33
Accounts receivable allowance		49			24
Contribution carryovers		12			8
Net operating loss carryforwards		1,443			1,044
Total deferred tax assets		2,911			2,650
Deferred tax liablities related to depreciation differences		(783	)		(621	)
Net deferred tax assets before valuation allowance		2,128			2,029
Valuation allowance		(2,128	)		(2,029	)
Net deferred tax assets	$	-		$	-

At June 30, 2017, the Company had net operating loss carryforwards of $4.8 million which will expire, if unused, between June 30, 2032 and June 30, 2037. At June 30, 2017, 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, 2017, 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 offset by the valuation allowance and have no net effect.