NOTE 9 – INCOME TAXES

The Company's income before income taxes and equity in net loss of affiliate consists of the following (in thousands):

	Year Ended February 28,
	2016			2015		2014
Domestic	$	22,461		$	24,684	$	17,185
Foreign		(120	)		116		726
Total income before income taxes and equity in net loss of affiliate	$	22,341		$	24,800	$	17,911

The income tax provision consists of the following (in thousands):

	Year Ended February 28,
	2016			2015			2014
Current:
Federal	$	(182	)	$	-		$	-
State		(208	)		(325	)		(42	)
Foreign		(60	)		(49	)		(45	)
Total current		(450	)		(374	)		(87	)

Deferred:
Federal		(4,331	)		(8,134	)		(6,346	)
State		209			216			325
Total deferred		(4,122	)		(7,918	)		(6,021	)

Total income tax provision	$	(4,572	)	$	(8,292	)	$	(6,108	)

Differences between the income tax provision reported in the consolidated statements of comprehensive income and the income tax amount computed using the statutory U.S. federal income tax rate are as follows (in thousands):

	Year Ended February 28,
	2016			2015			2014
Income tax provision at U.S. statutory federal rate of 35%	$	(7,819	)	$	(8,680	)	$	(6,269	)
State income tax provision, net of federal income tax effect		(833	)		(867	)		(770	)
Foreign taxes		(102	)		41			209
Valuation allowance reductions (increases)		2,541			250			(865	)
Research and development tax credits		1,008			1,556			1,126
Other, net		633			(592	)		461
Total income tax provision	$	(4,572	)	$	(8,292	)	$	(6,108	)

The components of net deferred income tax assets for U.S. income tax purposes are as follows (in thousands):

	February 28,
	2016			2015
Net operating loss carryforwards	$	10,660		$	20,318
Depreciation, amortization and impairments		1,598			1,785
Research and development credits		9,747			8,738
Stock-based compensation		2,383			1,869
Other tax credits		917			635
Inventory reserve		502			484
Warranty reserve		752			697
Payroll and employee benefit accruals		2,421			1,797
Allowance for doubtful accounts		241			258
Other accrued liabilities		2,694			2,158
Other, net		(84	)		242
Gross deferred tax assets		31,831			38,981
Valuation allowance		(1,618	)		(4,159	)
Net deferred tax assets	$	30,213		$	34,822

During fiscal 2016, the Company reduced the deferred tax assets valuation allowance by $2.5 million based on its assessment of the future realizability of the deferred tax assets. This valuation allowance reduction relates to state net operating loss carryforwards (“NOLs”) and federal research and development (“R&D”) tax credits that are projected to be used before their expiration dates.

At February 28, 2016, the Company had NOLs of approximately $53 million and $65 million for federal and state purposes, respectively, expiring at various dates through fiscal 2033. If certain substantial changes in the Company's ownership were to occur, there could be an annual limitation on the amount of the NOL carryforwards that can be utilized.

As of February 28, 2016, the Company had R&D tax credit carryforwards of $6.7 million and $6.3 million for federal and state income tax purposes, respectively. The federal R&D tax credits expire at various dates through 2036. A substantial portion of the state R&D tax credits have no expiration date.

As described further in Note 10, the Company has tax deductions on exercised stock options and vested restricted stock awards that exceed stock compensation expense amounts recognized for financial reporting purposes. These excess tax deductions, which amounted to $4.5 million, $6.5 million and $12.8 million in fiscal years 2016, 2015 and 2014, respectively, reduce current taxable income and thereby prolong the tax shelter period of the NOL and R&D tax credit carryforwards referred to above.

The Company follows FASB ASC Topic 740, “Income Taxes,” which clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. Management determined based on its evaluation of the Company's income tax positions that it has one uncertain tax position relating to federal R&D tax credits of $1.0 million at February 28, 2016 for which the Company has not yet recognized an income tax benefit for financial reporting purposes.

Activity in the amount of unrecognized tax benefits for uncertain tax positions during the past three years is as follows (in thousands):

Balance at February 28, 2013	$	1,089
Decrease in fiscal 2014		(60	)
Balance at February 28, 2014		1,029
Change in fiscal 2015		-
Balance at February 28, 2015		1,029
Change in fiscal 2016		-
Balance at February 28, 2016	$	1,029

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. states, Canada, United Kingdom and New Zealand. Income tax returns filed for fiscal year 2011 and earlier are not subject to examination by U.S. federal and state tax authorities. Certain income tax returns for fiscal years 2012 through 2016 remain open to examination by U.S. federal and state tax authorities. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods in which net operating losses or tax credits were generated and carried forward, and to make adjustments up to the net operating loss or tax credit carryforward amount. Income tax returns for fiscal years 2012 through 2016 remain open to examination by tax authorities in Canada.

The Company also has deferred tax assets for Canadian income tax purposes amounting to $3.1 million at February 28, 2016 which relate primarily to research and development expenses and non-capital loss carryforwards. The Company has provided a 100% valuation allowance against these Canadian deferred tax assets.