7. INCOME TAXES

Components of income before income taxes and the income tax provision are as follows:

Income (loss) before income taxes


	Year ended December 31,
	2014			2013			2012
	(in thousands)
U.S.	$	(46,562	)	$	(38,114	)	$	(17,849	)
Foreign		2,647			2,603			5,263

Total	$	(43,915	)	$	(35,511	)	$	(12,586	)

Income taxes


	Year ended December 31,
	2014			2013			2012
	(in thousands)
Current
U.S.	$	—		$	—		$	(204	)
State		—			—			(357	)
Foreign		6			6			(163	)

Total current income tax expense (benefit)		6			6			(724	)

Deferred
U.S.		(218	)		(5,863	)		(5,536	)
State		(36	)		691			(1,049	)
Foreign		326			6			261

Total deferred income tax expense		72			(5,166	)		(6,324	)

Total income tax expense (benefit)	$	78		$	(5,160	)	$	(7,048	)

The reconciliation of income tax computed at the federal statutory rate to income before taxes is as follows:


	Year ended December 31,
	2014			2013			2012
U.S. Federal statutory rate		(34.0	)%		(34.0	)%		(34.0	)%
State taxes net of federal benefit		(5.7	)		(5.5	)		(8.9	)
Permanent differences		—			—			—
Foreign rate differential and transactional tax		(0.5	)		(0.7	)		(3.8	)
Impact of foreign tax holiday		(1.5	)		(1.8	)		(10.4	)
Valuation allowance		41.8			26.9			—
Other		0.1			0.6			1.1

		0.2	%		(14.5	)%		(56.0	)%

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s net deferred income taxes are as follows at December 31:


	2014			2013
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	55		$	20
Inventory reserves		918			1,340
Accrued liabilities		57			76
Warrant interest expense		269			277
Stock compensation expense		2,689			2,850
State net operating loss—net of tax		5,923			3,500
Net operating loss carryforward		31,658			16,206
Unrealized loss on securities held for sale		—			240
Tax credits		581			514
Valuation allowance		(27,151	)		(9,547	)

Total deferred tax assets		14,999			15,476
Deferred tax liability:
Depreciation		(15,423	)		(15,620	)
Unrealized gain on securities held for sale		—			—
Prepaid expenses		(169	)		(123	)

Net deferred tax liability	$	(593	)	$	(267	)

The Company’s deferred income tax assets and liabilities were reported on the consolidated balance sheets as follows.


	2014			2013
	(in thousands)
Current deferred income tax assets	$	1,267		$	—
Long term deferred income tax liabilities		(1,860	)		(267	)

Net deferred tax liability	$	(593	)	$	(267	)

In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), the Company evaluates its deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. The Company is in a cumulative loss position for the past three years which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. Based on an evaluation in accordance with the accounting standards, as of December 31, 2014 and 2013, a valuation allowance of $27.2 million and $9.5 million, respectively has been recorded against the net U.S. deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Until an appropriate level of profitability is attained, the Company expects to maintain a full valuation allowance on its U.S. net deferred tax assets. Any U.S. tax benefits or tax expense recorded on the Company’s Consolidated Statement of Operations will be offset with a corresponding valuation allowance until such time that the Company changes its determination related to the realization of deferred tax assets. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. Although the Company is in a full tax valuation allowance position, at December 31, 2014 the Company recorded, as a result of the allocation of income tax between continuing and other comprehensive income, a tax benefit of $254,000 in continuing operations. The net deferred tax liabilities at December 31, 2014 and 2013 are related to tax liabilities that will reverse after the expiration of the Malaysia tax holiday discussed below.

At December 31, 2014, the Company had separate Federal and Illinois net operating loss carryforwards (“NOL”) of $117.8 million and $144.9 million, respectively, which begin to expire in 2021 and 2019, respectively. The Company has not recorded a deferred tax asset for NOL’s, included in the aforementioned amounts, attributable to stock option exercises in the amount of $21.7 million for federal purposes and $26.4 million for state purposes because the Company cannot record these excess tax benefit stock option deductions until the benefit has been realized by actually reducing taxes payable. Last, the Company has recorded an uncertain tax position of $2.6 million that further reduces the net operating loss deferred tax assets reported in the financial statements. The Illinois State Legislature has suspended the full use of net operating loss carryforwards for taxable years ending after December 31, 2010 and before December 31, 2011, and has limited the net operation loss deduction to $100,000 for the years ending December 31, 2012 through December 31, 2013. In addition, at December 31, 2014, the Company had Federal and Illinois research and development credits and investment tax credits of $426,000, $171,000 and $53,000, respectively which begin to expire in 2017. Tax credits are accounted for using the flow through method and therefore are taken in the year earned.

The Company completed an analysis of the utilization of net operating losses subject to limits based upon certain ownership changes as of March 31, 2014. The results of this analysis indicated no ownership change limiting the utilization of net operating losses and tax credits. The Company believes that an updated analysis will not likely indicate an ownership change that would limit the utilization of net operating losses and tax credits at December 31, 2014.

The Company prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. At December 31, 2014 and 2013, the Company had unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s financial statements of $1.1 million that are related to tax positions taken in 2012.

There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2014, 2013 and 2012. Included in the balance of total unrecognized tax benefits at December 31, 2014, are potential benefits of $1.0 million that if recognized, would affect the effective tax rate in the year recognized.

The Company files income tax returns in the United States federal jurisdiction and in a state jurisdiction. During 2009, the Company began foreign operations in Malaysia and Japan and is subject to local income taxes in both jurisdictions. The Company is exempt from Malaysian income tax for a five-year period beginning in 2009 with a five year renewal. The impact of this tax holiday decreased foreign taxes for the years ended December 31, 2014, 2013 and 2012 by approximately $335,000, $651,000, and $1.3 million, respectively. The benefit of the tax holiday on net income per share (diluted) for the years ended December 31, 2014, 2013 and 2012 was $0.01, $0.03 and $0.06, respectively. The Company’s Malaysia tax returns for the periods ended December 31, 2010 thru 2012 have audited by the Malaysia Inland Revenue Board with no changes made to the taxable income for those years. All other tax years in Malaysia are open to examination by tax authorities.

The Company’s federal tax returns for the periods ended December 31, 2010, 2008 and 2007 have been audited by the Internal Revenue Service (IRS) with no changes made to the Company’s taxable losses for those years. The Company’s state tax returns for the periods ended December 31, 2009 through 2012 have been audited by the Illinois Department of Revenue with no changes made to the Company’s taxable losses for those years. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2001 thru 2006, 2008, 2009 and 2011 thru 2013 are open to examination by tax authorities for Federal purposes. Due to net operating loss carryforwards at the State level, tax years ended 2004 thru 2006 and 2008 thru 2013 are open to examination by state tax authorities.

U.S. income and foreign withholding taxes have not been provided on approximately $11.1 million of cumulative undistributed earnings of foreign subsidiaries. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of a dividend, at December 31, 2014 there would have been no impact to the provision of income taxes. Due to the U.S. NOL’s and the full valuation allowance recorded any additional income from the dividends would have been offset by the NOL’s and a corresponding adjustment to the valuation allowance. At December 31, 2014 dividends per the Malaysia statute are not subject to withholding. Determination of the amount of unrecognized deferred income tax liabilities that may be due in the future on these earnings is not practicable because such liability, if any, is dependent on circumstances existing, if and when remittance occurs.