NOTE 10—INCOME TAXES

The Company is subject to US federal income tax as well as income tax in multiple states and foreign jurisdictions. For all major taxing jurisdictions, the tax years 2004 through 2014 remain open to examination by the taxing authorities due to the carryforward of unutilized net operating losses. As of December 31, 2014, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.

 

Components of the income tax benefit (provision) are as follows for the years ended December 31 (in thousands):

 

		2014				2013				2012
Current tax benefit (provision):
Federal		$	—			$	(49	)		$	—
State			(3	)			(2	)			(2	)
Foreign			(11	)			—				—
Total			(14	)			(51	)			(2	)
Deferred tax benefit (provision):
Federal			(437	)			(205	)			485
State			(2	)			(200	)			26
Total			(439	)			(405	)			511
Change in valuation allowance			439				405				(511	)
Total benefit (provision) for income taxes		$	(14	)		$	(51	)		$	(2	)

A reconciliation of income taxes computed by applying the federal statutory income tax rate of 34.0% to income (loss) before income taxes to the recognized income tax benefit (provision) reported in the accompanying consolidated statements of operations is as follows for the years ended December 31 (in thousands):

 

		2014				2013				2012
U.S. federal income tax at statutory rate		$	(94	)		$	185			$	849
State taxes, net of federal benefit			(5	)			(23	)			64
Non-deductible expenses			(9	)			(8	)			(20	)
Foreign income tax rate differential			(265	)			(283	)			(309	)
Valuation allowance			439				405				(511	)
Foreign earnings			—				(182	)			(52	)
Other			(80	)			(145	)			(23	)
Total benefit (provision) for income taxes		$	(14	)		$	(51	)		$	(2	)

 

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recorded a full valuation allowance against its deferred tax assets, as realization of such assets is uncertain based on the Company’s history of operating losses. Significant components of deferred tax assets and liabilities are shown below (in thousands):

 

		December 31,
		2014				2013
Current deferred tax assets:
Allowance for bad debts		$	33			$	131
Share-based payment expense			145				152
Allowance for obsolete inventory			119				29
Accrued compensation			75				67
Contribution carryover			—				9
Other accruals			106				175
Total			478				563
Non-current deferred tax assets:
Depreciation			5				(4	)
Capital loss			178				176
Net operating loss			3,170				3,535
Credit carryover			49				49
Total			3,402				3,756
Valuation allowance			(3,880	)			(4,319	)
Net deferred tax assets		$	—			$	—

At December 31, 2014, the Company had federal and state net operating loss carry forwards of approximately $10,026,000 and $13,503,000, respectively. The federal and state net operating loss carry forwards begin to expire in 2024 and 2016, respectively.

Included in the net operating loss carryforward balances noted above are approximately $2,377,000 and $1,066,000, for federal and state purposes, respectively, which are attributed to the exercise of non-qualified stock options for which the tax effect will be a component of the Company’s Additional Paid in Capital.

Pursuant to Internal Revenue Code Section 382, use of the Company’s net operating loss carry forwards will be limited if a cumulative change in ownership of more than 50% occurs within a three-year period.

Following the Company’s adoption on January 1, 2007 of ASC 740-10 regarding accounting for uncertainty in income taxes, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with the guidance. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of that review, the Company concluded there were no uncertain tax positions and no cumulative effect on retained earnings at the time of adoption. Subsequent to that date of adoption through December 31, 2014, the Company has continued to evaluate its tax positions and concluded that it has not had any material uncertain tax positions.