15.

INCOME TAXES

The provision for income taxes for the fiscal years ended

August

31,

2017

and

2016

consists of the following:

	Fiscal Year Ended August 31,
	2017			2016
Current:
Federal	$	—		$	—
State		62,000			20,000
Foreign		754,000			647,000
		816,000			667,000
Deferred:
Federal		(135,000	)		6,000
State		(9,000	)		—
Foreign		28,000			(47,000	)
		(116,000	)		(41,000	)
	$	700,000		$	626,000

Reconciliations of the expected federal income tax at the statutory rate with the provisions for income taxes for the fiscal years ended

August 31, 2017

and

2016

are as follows:

	Fiscal Year Ended August 31,
	2017			2016
Tax computed at statutory rates	$	1,591,000		$	(195,000	)
State income tax, net of federal benefit		53,000			20,000
Tax effect on equity in income of international joint ventures		(1,998,000	)		(956,000	)
Tax effect on dividends received from joint ventures and investment at carrying value		3,159,000			2,681,000
Tax effect of foreign operations		841,000			997,000
Foreign tax credit		(3,680,000	)		(3,178,000	)
Research and development credit		(212,000	)		(408,000	)
Valuation allowance		989,000			1,620,000
Stock based compensation		81,000			90,000
Non-controlling interest		(143,000	)		(148,000	)
Other		19,000			103,000
	$	700,000		$	626,000

The Company has

not

provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of foreign joint ventures that are essentially permanent in duration. The Company’s portion of the cumulative undistributed earnings of foreign joint ventures that are essentially permanent in duration were

$17,960,860

and

$17,779,912

as of

August 31, 2017

and

2016,

respectively. During fiscal

2016,

the Company recorded deferred income tax expense of

$3,000

representing foreign withholding taxes to be paid with respect to the portion of the cumulative undistributed earnings of foreign joint ventures that it determined were

not

essentially permanent in duration. If some or all of the undistributed earnings of the joint ventures are remitted to the Company in the future, income taxes, if any, after the application of foreign tax credits will be provided at that time. To the extent undistributed earnings of the Company’s joint ventures are distributed in the future, it is

not

expected to result in any material additional U.S. income tax liability after the application of foreign tax credits.

The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets as of

August

31,

2017

and

2016

are as follows:

	August 31,
	2017			2016
Accrued compensation	$	310,300		$	150,600
Inventory costs		87,000			95,300
Accrued joint venture expenses		15,200			54,200
Other accrued expenses		74,000			87,000
Goodwill and other intangible assets		1,317,700			1,332,000
Stock-based compensation		241,600			210,600
Foreign tax credit carryforward		6,105,700			5,679,000
Other credit and loss carryforwards		3,473,100			3,214,300
Total deferred tax assets		11,624,600			10,823,000
Valuation allowance		(9,578,700	)		(8,893,300	)
Total deferred tax assets after valuation allowance		2,045,900			1,929,700
Property and equipment		(206,000	)		(215,600	)
Other		(83,300	)		(74,300	)
Total deferred tax liabilities		(289,300	)		(289,900	)
Net deferred tax assets	$	1,756,600		$	1,639,800

As of

August 31, 2017

the Company had foreign tax credit carryforwards of approximately

$6,105,700

which will begin to expire if

not

utilized prior to

August 31, 2021.

In addition, the Company had federal and state tax credit carryforwards of

$2,855,100

as of

August 31, 2017

which begin to expire in fiscal

2019.

These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards. The Company also has foreign net operating loss carryforwards of

$618,000

as of

August 31, 2017

which begin to expire in fiscal

2020.

As of

August 31, 2017,

the Company has recorded a valuation allowance of

$6,105,700

with respect to the foreign tax credit carryforwards. In addition, the Company has recorded a valuation allowance of

$2,855,100

with respect to federal and state tax credit carryforwards, and has recorded a valuation allowance of

$618,000

with respect to the foreign net operating loss carryforwards.

As of

August 31, 2016,

the Company had recorded a valuation allowance of

$5,679,000

with respect to the foreign tax credit carryforwards. In addition, the Company had recorded a valuation allowance of

$2,643,300

with respect to federal and state tax credit carryforwards, and had recorded a valuation allowance of

$571,000

with respect to the foreign net operating loss carryforwards.

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than

not

that some portion or all of its deferred tax assets will

not

be realized. The Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than

not

that all of its deferred tax assets, except for its foreign tax credit carryforward, federal and Minnesota research and development credit carryforwards, and foreign net operating loss carryforwards will be fully realized. The Company determined that its deferred tax asset related to foreign tax credit carryforwards will

not

be realized due to insufficient federal taxable income within the carryforward period and the fact that for ordering purposes the foreign tax credit carryforwards are

not

allowed to be utilized until after any current year foreign tax credits are utilized. In addition, based on historical data and future projections, the Company determined that it is more likely than

not

that its deferred tax asset related to federal and Minnesota research and development credit carryforwards will

not

be realized due to insufficient federal and Minnesota taxable income within the carryforward period after considering the foreign tax credit usage. The Company determined that its deferred tax asset related to foreign net operating loss carryforwards will

not

be utilized due to insufficient taxable income within the carryforward period.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

	Fiscal Year Ended August 31,
	2017			2016
Gross unrecognized tax benefits – beginning balance	$	238,000		$	203,000
Gross increases (decreases) - prior period tax positions		(4,000	)		15,000
Gross increases – current period tax positions		16,000			20,000
Gross unrecognized tax benefits – ending balance	$	250,000		$	238,000

The entire amount of unrecognized tax benefits would affect the effective tax rate. It is

not

expected that the amount of unrecognized tax benefits will change significantly in the next

months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the Company’s income tax provision. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. There was

liability for the payment of interest and penalties as of both

August 31, 2017

and

August 31, 2016.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of

August 31, 2017,

the Company is

longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to

August 31, 2014.