K. INCOME TAXES

12 Months Ended

Dec. 31, 2015

Income Tax Disclosure [Abstract]

INCOME TAXES

The sources of our income (loss) from operations before income taxes were as follows:

	Year ended December 31,
	2015			2014		2013
	(in thousands)
Domestic	$	14,062		$	1,226	$	(684	)
Foreign		(2,894	)		3,256		(722	)
Total income (loss) before income taxes	$	11,168		$	4,482	$	(1,406	)

The provision for income tax expense for the years ended December 31, is as follows:

	2015		2014		2013
Current:	(in thousands)
Federal	$	168	$	193	$	–
State		207		6		–
Foreign		–		–		–
Total	$	375	$	199	$	–
Deferred:
Federal	$	–	$	–	$	–
State		–		–		–
Foreign		–		–		–
Total	$	–	$	–	$	–
Income tax expense	$	375	$	199	$	–

Deferred income tax assets and liabilities result principally from net operating losses, different methods of recognizing depreciation, reserve for doubtful accounts, inventory reserves for obsolescence and accrued vacation, together with timing differences between book and tax reporting. At December 31, the net deferred tax assets and liabilities are comprised of the following approximate amounts:

	2015			2014
	(in thousands)
NOL carryforward	$	14,318		$	12,266
Inventory reserves		1,616			676
AMT credit		347			224
Unrealized gains and losses		1,549			470
Stock compensation		1,084			550
Fixed assets and intangibles		(4,432	)		(1,537	)
Other		244			25
		14,726			12,674
Less valuation allowance		(14,726	)		(12,674	)
Deferred tax assets, net	$	–		$	–

The valuation allowance was established to reduce the deferred tax asset for the amount that will likely not be realized. This reduction is primarily necessary due to the uncertainty of the Company’s ability to utilize all of the net operating loss carry forwards. The valuation allowance increased by $2.1 million in 2015 and decreased by approximately $1.5 million in 2014. The increase in 2015 was primarily the result of current year changes in deferred income tax assets and liabilities, including increases in our net operating loss carryforwards. The decrease in 2014 was primarily the result of prior year changes in deferred income tax assets and liabilities.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. In considering whether or not to continue to maintain the valuation allowance, we consider all available positive and negative evidence, including: historical profits and losses, forecasts of future profits or losses, and trends in the industries that we serve that may affect our ability to continue to generate profits. Objective evidence, such as historical losses, limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2015, a valuation allowance of $14.7 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or if objective negative evidence is no longer present and additional weight is given to subjective evidence such as our projections for growth.

The Company has a U.S. net operating loss carry forward of approximately $50.3 million, which expires between 2022 and 2032. The Company also has U.S. research and development tax credits of $1.5 million which expire between 2024 and 2035. The Company has a net operating loss carryforward from its China operations of approximately $6.2 million, which expires between 2016 and 2020. The Company has a net operating loss carryforward from its Taiwan operations of approximately $2.6 million which expires between 2020 and 2025. Utilization of U.S. net operating losses and tax credit carry forwards are subject to an annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382. During 2015, the Company updated its Section 382 analysis resulting in the recognition of additional utilizable net operating losses which had no impact on the Company’s balance sheet or income statement due to the Company having a full valuation allowance. Additional ownership changes could result in the expiration of the net operating loss and tax credit carryforward before utilization.

The U.S. NOL carryforwards and research and development tax credit carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs and tax credits are presented net of these unrecognized tax benefits.

The Company has approximately $0.9 million of windfall tax benefits from previous stock option exercises that have not been recognized as of December 31, 2015. This amount will not be recognized until the deduction would reduce our U.S. income taxes payable. At such time, the amount will be recorded as an increase in paid-in-capital. The Company uses ASC 740 ordering when determining when excess tax benefits have been realized.

A reconciliation of the U.S. federal income tax rate of 34% for the years ended December 31, to the Company’s effective income tax rate follows:

	2015			2014			2013
	(in thousands)
Expected (benefit) taxes	$	3,797		$	1,524		$	(467	)
Non-deductible expenses		157			138			619
Foreign differences		(1,267	)		295			–
Increase (decrease) in valuation allowance		2,052			(1,729	)		(7,533	)
Section 382 limitation		(4,382	)		–			7,423
Other		18			(29	)		(42	)
Tax expense	$	375		$	199		$	–

The Company’s wholly owned subsidiary, Prime World is a tax-exempt entity under the Income Tax Code of the British Virgin Islands.

The Company’s wholly owned subsidiary, Global Technology, Inc., has enjoyed preferential tax concessions in China as a national high-tech enterprise.  In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises. Global Technology, Inc. was recognized as a National high-tech enterprise in 2008 and was entitled to a 15% tax rate for a three year period from November 2008 to November 2014. Global Technology, Inc. renewed its National high-tech enterprise certificate and was therefore extended its three year tax preferential status from November 2014 to September 2017.

As of December 31, 2015, December 31, 2014 and December 31, 2013, the total amount of unrecognized tax benefit was $1.8 million, $1.6 million, and $2.2 million, respectively. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

	2015			2014			2013
	(in thousands)
Unrecognized tax benefits — January 1	$	1,659		$	2,200		$	–
Gross increases — tax positions in prior period		332			1,659			2,200
Gross decreases — tax positions in prior period		(194	)		(2,200	)		–
Unrecognized tax benefits — December 31	$	1,797		$	1,659		$	2,200

As of December 31, 2015, we had $1.8 million of unrecognized tax benefits related to US tax benefits recognized for prior branch losses and research and development credits. As of December 31, 2014, we had $1.7 million of unrecognized tax benefits related to US tax benefits recognized for prior branch losses and research and development credits. As of December 31, 2013, we had $2.2 million of unrecognized tax benefits related to US tax benefits recognized for prior year branch losses.  If recognized, there would be no impact our effective tax rate as a result of the full valuation allowance previously recognized. We believe that it is reasonably possible that $0.3 million of our remaining unrecognized tax positions may be recognized by the end of 2016.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, it has not accrued penalties or interest during 2015 as a result of net operating losses. During 2014, the Company also accrued no penalties or interest.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company’s open tax years subject to examination in the U.S. federal and state jurisdictions are 2012 through 2014. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward. The Company is subject to examination for tax years 2008 forward for various foreign jurisdictions.