Income Taxes

On December 22, 2017, the President signed into law the United States Tax Cuts and Jobs Act (U.S. TCJA) significantly revising the Internal Revenue Code of 1986, as amended. The U.S. TCJA includes, among other items, (1) a permanent reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; (2) limitations on the tax deduction for net interest expense to 30% of adjusted earnings’ (3) a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (4) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system; (5) elimination of the Alternative Minimum Tax regulations; (6) recovery of Alternative Minimum Tax Credits over a five year period; and (7) modifying or repealing many other business deductions and credits.

The Company has assessed the impacts of the changes resulting from the U.S. TCJA and has recognized an income tax benefit and a corresponding receivable of $73 thousand related to the recoverability of Alternative Minimum Tax Credits. Deferred tax assets, liabilities and valuation allowances have been remeasured at the new rate of 21%. There was no income impact from the remeasurement since all U.S. net deferred tax assets are fully reserved by the Company. At present, we do not estimate any material impacts from the repatriation tax. While we have completed our provisional analysis of the income tax effects of the U.S.TCJA, the related tax effects may need to be adjusted, possibly materially, due to further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by regulatory bodies, and actions and related accounting policy decision we may take as a result of the new legislation. We will complete our analysis over the one-year measurement period from the enactment of the law as provided for by SAB 118, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period(s) when such adjustments are determined.

The Company is subject to U.S. federal income tax and files a consolidated federal income tax return which includes all eligible U.S. subsidiary companies. The Company is also subject to tax in the states of Alabama, Illinois, Montana, New Jersey and Tennessee. During the year ended December 31, 2016, the Company began significant operations in certain foreign countries and is, accordingly, subject to tax in those foreign jurisdictions consisting of Canada (including the province of Ontario), Estonia, Luxembourg and Jersey.

Income (Loss) before income tax for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):



	2017			2016			2015
	(in thousands)
U.S. operations	$	(21,938	)	$	(9,514	)	$	6,911
Foreign operations	6,662			(2,184		)	(208		)

Global Total	$	(15,276	)	$	(11,698	)	$	6,703

The Company’s current tax (benefit) expense was $(85,000), $287,000 and $35,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The (credit) provision for income taxes attributable to continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):



	2017			2016			2015

Current tax expense (benefit):
Federal	$	(86	)	$	26		$	—
State and local	20			35			19
Foreign	42			272			28
Total current tax expense	(24		)	333			47
Deferred tax expense:
Federal	—			—			—
State and local	—			—			—
Foreign	(61		)	(46		)	(12		)
Total deferred tax expense	(61		)	(46		)	(12		)

Total income tax (benefit)/expense	$	(85	)	$	287		$	35

The (benefit from) provision for income taxes differed from the amount of income taxes determined by applying the applicable federal tax rate (34%) to pretax income (loss) from continuing operations as a result of the following (in thousands):



	2017			2016			2015

Expected Statutory expense (benefit)	$	(5,195	)	$	(3,977	)	$	2,244
U.S. TCJA recovery of alternative minimum tax credits	(73		)	—			—
Change in the fair values of derivative and amortization of debt discount	2,939			2,584			(5,597		)
Other non-deductible expenses	24			63			7
Change in valuation allowance including U.S. TCJA rate reduction	(2,012		)	590			3,254
Reduction in deferred tax assets related to U.S. TCJA rate reduction	7,504			—			—
Shortfalls related to stock compensation expense	129			154			—
Tax rate differential - foreign vs. U.S.	(2,276		)	822			114
State income taxes, net of federal benefit	13			23			13
Shortfalls related to stock compensation expense	129			154			—
Prior year true-up	(13		)	—			—
Exchange gain	(13		)	28			—
	$	(85	)	$	287		$	35

Deferred tax balances included in the Consolidated Balance Sheets as of December 31, 2017 and 2016 consisted of the following:



	2017			2016
	(in thousands)
Deferred Tax Assets:
Allowance for doubtful accounts	$	506		$	118
Inventory reserve	619			467
Accrued expenses	664			831
Property, plant and equipment	214			317
Tax operating loss carryforwards	9,327			10,962
Tax credit carryforwards	168			254
Stock compensation	1,817			2,301
Total deferred tax assets	13,315			15,250
Less valuation allowance	(13,309		)	(15,250		)
Net deferred tax assets	6			—
Deferred Tax Liabilities:
Intangible assets	(165		)	(205		)
Total deferred tax liabilities	(165		)	(205		)
Net deferred tax liability	$	(159	)	$	(205	)

The Company evaluates the recoverability of its deferred tax assets based on its history of operating results, its expectations for the future, and the expiration dates of the net operating loss carry forwards. Based on the preponderance of the evidence, the Company has concluded that it is more likely than not that it will be unable to realize the net deferred tax assets in the immediate future and has established a full valuation allowance for substantially all deferred tax assets. Accordingly, the Company has provided a valuation allowance of $13.3 million and $15.3 million for the years ended December 31, 2017 and 2016, respectively, on its deferred tax assets. The change in the valuation allowance during the year 2017 was $1.9 million, as follows:



Valuation allowance at beginning of year	$	15,250
Change in accounting for stock compensation windfalls	1,112
Current year operating loss	3,048
Change in tax rate to 21%	(7,504		)
Other	1,403
Valuation allowance at end of year	$	13,309

Operating loss and tax credit carry forwards as of December 31, 2017 were as follows:



	2017		2016
	(in thousands)
Federal:
Net operating losses (expiring through 2037)	$	41,688	$	31,336
Research tax credits (expiring through 2025)	168		168
Alternative minimum tax credits (available without expiration)	—		86
State:
Net Operating Losses:
Tennessee (expiring in 2032)	659		529
New Jersey (expiring in 2037)	4,320		1,764
Illinois (expiring in 2037)	389		222
Alabama (expiring in 2032)	24		—
Foreign
Net operating losses (no expiration)	$	255	$	232

At December 31, 2017, the Company’s U.S. federal net operating loss carryforwards will expire as follows:



Year	Net Operating Loss (in thousands)
2020 - 2023	$	8,228
2024 - 2029	9,063
2030 - 2031	6,205
2032 - 2036	10,016
2037	8,176
Total	$	41,688

The Company’s ability to use net operating loss carry forwards is subject to substantial limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which limit the utilization of net operating losses upon a more than 50% change in ownership of the Company’s stock that is held by 5% or greater stockholders. The Company examined the application of Section 382 with respect to an ownership change that took place during 2010, as well as the limitation on the application of net operating loss carry forwards. The Company believes that operating losses subsequent to the change date in 2010 (aggregating $23.1 million) are not subject to Section 382 limitations. The Company has estimated that the annual limitation starting in 2010 aggregates from $1.0 million to $2.3 million per year including the effect of amortization of built in gains. The Company's loss carryforwards may be further limited in the future if additional ownership changes occur.

The Company is subject to the provisions of ASC 740-10-25, Income Taxes (ASC 740). ASC 740 prescribes a more likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum 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. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions.

Federal income tax returns for the years 2014 and 2015 have been examined by the U.S. Internal Revenue Service without any income tax expense consequences. For federal purposes (except for the years 2014 and 2015), post 1998 tax years remain open to examination as a result of net operating loss carryforwards. The Company is currently open to audit by the appropriate state income taxing authorities for tax years 2013 through 2016. The Company has not recorded any liability for uncertain tax positions at December 31, 2017 or December 31, 2016.