Income Taxes

12 Months Ended

Dec. 31, 2015

Income Tax Disclosure [Abstract]

Income Taxes

Income tax expense (benefit) from continuing operations consists of the following for the years ended December 31: 

		2015		2014			2013
				(in thousands)
Current:
Federal	$	212		$	129		$	95
State		226			150			113
		438			279			208
Deferred:
Federal		2,997			1,714			1,353
State		586			385			902
		3,583			2,099			2,255
Valuation allowance release		(588	)		(341	)		(37,527	)
Total income tax expense (benefit)	$	3,433		$	2,037		$	(35,064	)

The reconciliations of the U.S. federal statutory rate to the effective income tax rate for the years ended December 31, 2015, 2014 and 2013 are as follows:

	2015		2014			2013
Tax provision at U.S. federal statutory rates	34.0	%		34.0	%		34.0	%
State taxes	2.3			2.6			3.5
Federal rate adjustment	—			—			34.6
State rate adjustment	—			—			0.5
Deferred tax asset adjustments	6.8			6.4			5.9
Non-deductible permanent items	0.7			0.4			0.6
Acquisition costs	7.0			—			—
Stock options	—			—			0.4
Other	(1.0	)		0.3			0.5
Change in valuation allowance	(7.3	)		(6.3	)		(1,219.1	)
Effective income tax rate	42.5	%		37.4	%		(1,139.1	)%

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31, 2015 and 2014 are as follows: 

	2015			2014
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	394		$	284
Accrued liabilities		1,266			1,473
Net operating loss carry-forwards		31,325			34,473
Fixed assets		16			83
Intangible assets		—			744
Share-based compensation expense		2,422			1,566
Other		613			286
Total gross deferred tax assets		36,036			38,909
Valuation allowance		(5,427	)		(6,015	)
		30,609			32,894
Deferred tax liabilities:
Intangible assets		(9,147	)		—
Total gross deferred tax liabilities		(9,147	)		—
Net deferred tax assets	$	21,462		$	32,894

During 2015, management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.  Significant pieces of objective positive evidence evaluated were the cumulative earnings generated over the three-year period ended December 31, 2015 and the Company’s strong future earnings projections.  Based on this evaluation, as of December 31, 2015, the Company reversed $0.6 million of its valuation allowance.  We believe, however, that it is more likely than not that $0.8 million in state net operating loss carryforwards will not be realized.  Accordingly, a valuation allowance has been maintained on these state net operating losses.  In addition, included in the NOL deferred tax asset above is approximately $13.5 million of federal NOLs attributable to excess stock option deductions.  Due to a provision within ASC Topic 718, Compensation – Stock Compensation (“ASC 718”) concerning when tax benefits related to excess stock option deductions can be credited to paid-in-capital, the related valuation allowance of $4.6 million cannot be reversed, even if the facts and circumstances indicate that it is more likely than not that the deferred tax asset can be realized.  The valuation allowance will only be reversed as the related deferred tax asset is applied to reduce taxes payable.  The Company follows ASC 740 ordering to determine when such NOL has been realized.

At December 31, 2015, the Company had federal and state net operating loss carry-forwards (“NOLs”) of approximately $88.2 million and $51.4 million, respectively.  The federal NOLs expire through 2035 as follows (in millions):

2021	$	4.6
2022		1.7
2023		—
2024		4.1
2025		7.7
2026		25.5
2027		15.5
2028		5.2
2029		7.7
2030		10.6
2031		1.3
2032		—
2033		0.1
2034		2.5
2035		1.7
	$	88.2

The state NOLs expire through 2035 as follows (in millions):

2016	$	19.6
2017		3.1
2028		2.6
2029		5.8
2030		11.0
2034		2.1
2035		1.5
California NOLs		45.7
Other State NOLs		5.7
Total State NOLs	$	51.4

Utilization of the net operating loss and tax credit carry-forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the IRC, as well as similar state provisions. These ownership changes may limit the amount of NOLs and research and development credit carry-forwards that can be utilized annually to offset future taxable income and tax, respectively.  A Section 382 ownership change occurred in 2006 and any changes have been reflected in the NOLs presented above as of December 31, 2015.  As a result of an acquisition in 2001, approximately $9.9 million of the NOLs are subject to an annual limitation of approximately $0.5 million per year.

The federal and state NOLs begin to expire in 2021 and 2016, respectively. Approximately $10.8 million and $5.0 million, respectively, of the federal and state net operating loss carry-forwards were incurred by subsidiaries prior to the date of the Company’s acquisition of such subsidiaries. The Company established a valuation allowance of $4.1 million at the date of acquisitions related to these subsidiaries. During 2013, the valuation allowance has been reversed.  The tax benefits associated with the realization of such NOLs will be credited to the provision for income taxes. In addition, federal NOLs of approximately $13.5 million relate to stock option deductions. Therefore, once the stock option deductions reduce income taxes payable in the future in accordance with ASC 718, approximately $4.6 million will be credited to stockholders’ equity rather than to income tax benefit.

At December 31, 2015, deferred tax assets exclude approximately $1.4 million and $0.3 million of tax-effected federal and state NOLs pertaining to tax deductions from stock-based compensation. Upon future realization of these benefits, the Company expects to increase additional paid-in capital and reduce income taxes payable. The benefit of excess stock option deductions is not recorded until such time that the deductions reduce income taxes payable. The $1.4 million federal amount is a component of the $4.6 million that will be credited to stockholders’ equity once the stock option deductions reduce income taxes payable in the future in accordance with ASC 718. For purposes of determining when the stock options reduce income taxes payable, the Company has adopted the “with and without” approach whereby the Company considers NOLs arising from continuing operations prior to NOLs attributable to excess stock option deductions.

At December 31, 2015, the Company has federal and state research and development tax credit carry-forwards of $0.3 million and $0.2 million, respectively.  The federal credits begin to expire in 2021.  The state credits do not expire.

As of December 31, 2015 and 2014, the Company had unrecognized tax benefits of approximately $0.5 million and $0.6 million, respectively, all of which, if subsequently recognized, would have affected the Company’s tax rate.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2015			2014
	(in thousands)
Balance at January 1,	$	636		$	636
Reductions based on the lapse of the statutes of limitations		(109	)		—
Balance at December 31,	$	527		$	636

The Company files income tax returns in the United States and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state income tax examinations for years prior to 2010 (except for the use of tax losses generated prior to 2010 that may be used to offset taxable income in subsequent years). The Company has estimated that $42,000 of unrecognized tax benefits related to income tax positions may be affected by expiring statutes of limitation within the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company accrued $10,000 and $28,000 of interest, respectively, associated with its unrecognized tax benefits in the years ended December 31, 2015 and 2014.