(

)

Income Taxes

Income tax expense (benefit) for the years ended

October

31,

2017,

2016

and

2015

consists of:

Fiscal year ended October 31, 2017	Current			Deferred		Total
U.S. Federal	$	—		$	—	$	—
State		(5,438	)		—		(5,438	)
Totals	$	(5,438	)	$	—	$	(5,438	)

Fiscal year ended October 31, 2016	Current			Deferred		Total
U.S. Federal	$	35,118		$	—	$	35,118
State		(29,219	)		—		(29,219	)
Totals	$	5,899		$	—	$	5,899

Fiscal year ended October 31, 2015	Current			Deferred		Total
U.S. Federal	$	(624,825	)	$	2,098,615	$	1,473,790
State		(120,917	)		129,509		8,592
Totals	$	(745,742	)	$	2,228,124	$	1,482,382

Reported income tax expense for the years ended

October

31,

2017,

2016

and

2015

differs from the “expected” tax expense (benefit), computed by applying the U.S. Federal statutory income tax rate of

34%

to income before income taxes as follows:

	Years ended October 31,
	2017			2016			2015
“Expected” tax benefit	$	(593,031	)	$	(610,332	)	$	(957,121	)
Increase (reduction) in income tax benefit resulting from:
State income taxes, net of federal benefit		(29,422	)		(79,386	)		(78,880	)
Loss of permanent deductions due to NOL carryback		—			—			35,636
Other differences, net		54,686			50,627			67,491
Change in valulation allowance		562,329			644,990			2,415,256
Reported income tax expense (benefit)	$	(5,438	)	$	5,899		$	1,482,382

The tax effects of temporary differences that give rise to significant portions of the Company

’s deferred tax assets and deferred tax liabilities as of

October

31,

2017

and

2016

are presented below:

	October 31,
	2017			2016
Deferred tax assets:
Accounts receivable, due to allowances for doubtful accounts and sales returns	$	71,085		$	87,472
Inventories, due to allowance for damaged and slow-moving inventories and additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986		1,088,631			999,468
Liabilities recorded for accrued expenses, deductible for tax purposes when paid		114,713			67,758
Share-based compensation expense		265,027			134,653
Investment in Centric Solutions		—			6,984
Net operating loss carryforwards		2,099,195			1,958,734
Other		118,119			110,773
Total gross deferred tax assets		3,756,770			3,365,842
Valuation allowance		(3,622,575	)		(3,060,246	)
Net deferred tax assets		134,195			305,596
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and capital gain recognition		(130,626	)		(301,590	)
Other receivables, due to accrual for financial reporting purposes		(3,569	)		(4,006	)
Total gross deferred tax liabilities		(134,195	)		(305,596	)
Net deferred tax asset	$	—		$	—

As a result of the acquisition of AOS, the Company recorded certain deferred tax assets totaling

$1,517,605

(after purchase accounting adjustments), related to gross net operating loss (“NOL”) carryforwards of

$4,455,525,

estimated to be available after considering Internal Revenue Code Section

382

limitations. As of

October 31,

201

$1,680,000

of these gross NOL carryforwards remain unused and

may

be used to reduce future taxable income. These remaining gross NOL carryforwards begin to expire in fiscal year ending

October 31, 2028.

Additionally,

the Company has federal and state gross NOL carryforwards of

$4,203,483

and

$1,462,204,

respectively; all of which originated beginning with fiscal year

2015,

and will

not

begin to expire until fiscal year

2030.

For the years ended

October 31,

201

and

2016,

the Company considered all positive and negative evidence available to assess whether it is “more likely than

not”

that some portion or all of the deferred tax assets will

not

be realized. For each year, the Company concluded that in accordance with the provisions of Accounting Standards Codification

740,

Income Taxes

, the negative evidence outweighed the objectively verifiable positive evidence. As a result, the Company established a valuation allowance of

$3,622,575

and

$3,060,246,

respectively, against net deferred tax assets existing as of

October 31, 2017

and

2016.

The Company estimates a liability for uncertain tax positions taken or expected to be taken in a tax return. The liability for uncertain tax positions is included in other noncurrent liabilities on the accompanying consolidated balance sheets.

A reconciliation of the unrecognized ta

benefits for fiscal years

2017

and

2016

follows:

	October 31,
	2017			2016
Unrecognized tax benefits balance at beginning of year	$	78,322		$	79,322
Gross decreases for tax positions of prior years		(12,773	)		(1,000	)
Unrecognized tax benefits balance at end of year	$	65,549		$	78,322

During fiscal year

201

the Company reduced accrued interest and penalties by

$4,633

and

$3,194,

respectively, related to unrecognized tax benefits. During fiscal year

2016,

the Company accrued interest of

$6,284

and reduced accrued penalties by

$250,

respectively, related to unrecognized tax benefits. As of

October 31, 2017

and

2016,

the Company had approximately

$36,761

and

$44,587,

respectively, of accrued interest and penalties related to uncertain tax positions. The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized is

$36,336

and

$43,191

as of

October 31, 2017

and

2016,

respectively. The Company does

not

expect its unrecognized tax benefits to change significantly in the next

months.

The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. The statute of limitations remains open for U.S. and certain state income tax examinations for years ended

October 31,

201

through

October 31, 2016.