(

)

Income Taxes

Income tax expense (benefit) for the years ended

October

31,

2018,

2017

and

2016

consists of:

Fiscal year ended October 31, 2018	Current		Deferred			Total
U.S. Federal	$	14,163	$	(49,281	)	$	(35,118	)
State		18,467		—			18,467
Totals	$	32,630	$	(49,281	)	$	(16,651	)

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

Reported income tax expense for the years ended

October

31,

2018,

2017

and

2016

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

23.17%

in fiscal year

2018

and

34%

in fiscal years

2017

and

2016

to income before income taxes as follows:

	Years ended October 31,
	2018			2017			2016
“Expected” income taxes (benefit)	$	243,772		$	(593,031	)	$	(610,332	)
Increase (reduction) in income tax expense (benefit) resulting from:
Remeasurement of deferred taxes related to the Tax Act		1,272,517			—			—
State income taxes, net of federal benefit		2,641			(29,422	)		(79,386	)
Meals and Entertainment		24,661			32,119			29,783
Provision to return reconciliation adjustment		(57,118	)		18,064			8,760
Other differences, net		964			4,503			12,084
Change in valulation allowance		(1,504,088	)		562,329			644,990
Reported income tax expense (benefit)	$	(16,651	)	$	(5,438	)	$	5,899

The Tax Cuts and Jobs Act (the “Tax Act”), enacted on

December 22, 2017,

lowers the statutory federal corporate income tax rate from

35%

21%.

The reduction of the statutory federal corporate tax rate to

21%

became effective on

January 1, 2018.

Because the Company’s fiscal year

2018

commenced on

November 1, 2017,

the annual statutory federal corporate tax rate applicable to fiscal year

2018

is a blended rate of

23.17%.

Beginning in fiscal year

2019,

the annual statutory federal corporate tax rate will be

21%.

As a result of the reduction in the federal corporate tax rate, the Company remeasured its net deferred tax assets and the corresponding valuation allowance in the

first

quarter of fiscal year

2018

which is the period that includes the enactment date of the Tax Act. The Company estimates the reduction in the value of its net deferred tax asset is approximately

$1.3

million, which will be offset by the change in valuation allowance of

$1.3

million. As of

October 31, 2018,

the Company has completed its analysis of the revaluation of its net deferred tax assets and there were

material changes to the discrete adjustment recognized in the

first

quarter of fiscal year

2018.

The Tax Act also repealed the corporate AMT for tax years beginning after

December 31, 2017,

and provides that existing AMT credit carryforwards are refundable in tax years beginning after

December 31, 2017.

The Company has recorded

$49,281

of AMT credit carryforwards that are expected to be fully refunded between fiscal years

2019

and

2022.

This amount is a deferred tax asset for which a valuation allowance is

not

necessary and is presented as income taxes refundable-noncurrent on the consolidated balance sheet as of

October 31, 2018.

The Company continues to assess the impacts of the Tax Act on future fiscal years as well as analyze applicable information and data, and interpret any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.

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,

2018

and

2017

are presented below:

	October 31,
	2018			2017
Deferred tax assets:
Accounts receivable, due to allowances for doubtful accounts and sales returns	$	36,779		$	71,085
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		780,446			1,088,631
Liabilities recorded for accrued expenses, deductible for tax purposes when paid		472,641			114,713
Share-based compensation expense		474,163			265,027
Net operating loss carryforwards		528,939			2,099,195
AMT credit carryforwards		49,281			—
Other		59,219			118,119
Total gross deferred tax assets		2,401,468			3,756,770
Valuation allowance		(2,118,487	)		(3,622,575	)
Net deferred tax assets		282,981			134,195
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and capital gain recognition		(231,672	)		(130,626	)
Other receivables, due to accrual for financial reporting purposes		(2,028	)		(3,569	)
Total gross deferred tax liabilities		(233,700	)		(134,195	)
Net deferred tax asset	$	49,281		$	—

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, 2018,

$1,232,000

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

$724,453

and

$677,738,

respectively; originating with fiscal years

2015

and

2016,

and will

not

begin to expire until fiscal year

2031.

For the years ended

October 31, 2018

and

2017,

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

$2,118,487

and

$3,622,575,

respectively, against net deferred tax assets existing as of

October 31, 2018

and

2017.

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 tax benefits for fiscal years

2018

and

2017

follows:

	October 31,
	2018			2017
Unrecognized tax benefits balance at beginning of year	$	65,549		$	78,322
Gross decreases for tax positions of prior years		(7,708	)		(12,773	)
Gross increases for current year tax positions		2,306			—
Unrecognized tax benefits balance at end of year	$	60,147		$	65,549

During fiscal year

2018,

the Company accrued interest of

$5,635

and reduced accrued penalties by

$1,927

related to unrecognized tax benefits. During fiscal year

2017,

the Company reduced accrued interest and penalties by

$4,633

and

$3,194,

respectively, related to unrecognized tax benefits. As of

October 31, 2018

and

2017,

the Company had approximately

$40,469

and

$36,761,

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

$41,520

and

$36,336

as of

October 31, 2018

and

2017,

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, 2015

through

October 31, 2017.