Income Taxes

Prior to the Reverse Merger, the Company was a limited liability company, and the Company’s taxable income or loss was allocated to the members in accordance with their respective percentage ownership. Therefore, no provision or liability for income taxes has been included in the financial statements prior to August 8, 2012.

For financial reporting purposes, income before income taxes includes the following components:



	June 30, 2014		June 30, 2013
United States	$	4,291	$	3,752
Foreign	2,864		574
Total	$	7,155	$	4,326

Income tax provision for the years ended June 30, 2014, and June 30, 2013, consist of the following (in thousands):



	June 30, 2014			June 30, 2013
Current:
Federal tax expense	$	3,298		$	426
State tax expense	194			64
Foreign tax expense	396			232
Total current	3,888			722
Deferred:
Federal	(1,477		)	—
Total deferred	(1,477		)	—
Provision for income taxes from continuing operations	2,411			722
Federal income tax (benefit) from discontinued operations	—			(132		)
Total provision for income taxes	$	2,411		$	590

A reconciliation of the federal statutory rate to the effective income tax rate follows:



	June 30, 2014		June 30, 2013
Federal income taxes	34.0	%	34.0	%
State income taxes	1.8	%	1.1	%
Foreign taxes	—	%	5.9	%
Permanent items	0.4	%	(4.7	)%
Exempt foreign income	(1.4	)%	—	%
Uncertain tax positions	9.4	%	—	%
Utilization of operating loss carryforward	—	%	(13.2	)%
Valuation allowance and other	(10.5	)%	(8.0	)%
Effective rate	33.7	%	15.1	%

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets and liabilities represent amounts available to reduce or increase taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including carrybacks (if applicable), reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.

Goodwill recorded as part of an asset purchase agreement is deductible for tax purposes and only recorded as a book charge if it is impaired. A deferred tax liability is recorded as the tax deduction is realized, which will not be reversed unless and until the goodwill is disposed of or impaired. The Company will continue to record an income tax expense related to the amortization of goodwill as a discrete item each quarter unless and until such impairment occurs.

Significant components of the Company's deferred tax assets at June 30 are shown below. A valuation allowance has been established as realization of such deferred tax assets has not met the more likely-than-not threshold requirement. If the Company's judgment changes and it is determined that the Company will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction to income tax expense.

Components of our deferred tax assets and liabilities were as follows (thousands):



	June 30, 2014			June 30, 2013
Deferred tax assets arising from:
Accrued liabilities and reserves	$	731		$	140
Deferred revenue	51			—
Bad debt reserves	94			96
IRS Code Section 263(a)	287			155
Inventory reserve	170			129
Intangible assets	574			2,530
Other	59			—
Tax effects of net operating loss carry-forwards	2,031			2,119
Less valuation allowances	(609		)	(4,430		)
Deferred tax assets	3,388			739

Deferred tax liabilities arising from:
Property and equipment	(1,911		)	(727		)
Deferred revenue on asset transfer	—			(12		)
Deferred tax liabilities	(1,911		)	(739		)

Net deferred tax asset	$	1,477		$	—

At June 30, 2014 and 2013, the deferred tax asset current portion was approximately $1.2 million and $0, respectively, and were recorded in prepaid and other current assets. At June 30, 2014 and 2013, the deferred tax asset non-current portion was $0.3 million and $0, respectively, and was recorded in other assets. At June 30, 2014 and 2013, the income tax payable was $1.8 million and $0.1 million, respectively, and were recorded in accrued expenses.

As of June 30, 2014 and 2013, the Company had federal net operating loss (“NOL”) carryforwards of approximately $5.5 million and $5.8 million, respectively. At June 30, 2014 and 2013, the Company had state net operating loss carryforwards of approximately $5.1 million and $5.3 million, respectively. The federal loss carryforwards will begin to expire in 2028 through 2032 unless previously utilized. The state loss carryforwards will begin to expire in 2023 through 2033 unless previously utilized.

Pursuant to the Internal Revenue Code ("IRC") Sections 382 and 383, use of the Company's U.S. federal and state NOL carryforwards may be limited in the event of a cumulative change in ownership of more than 50% within a three-year period. The Company had an ownership change in 2012 and, as a result, certain of the Company's net operating loss carryforwards are subject to an annual limitation, reducing the amount available to offset income tax liabilities absent the limitation.

The following table summarized the changes in the Company's unrecognized tax benefits during the year ended June 30, 2014:



Gross unrecognized tax benefits at June 30, 2013	$	—
Increase in prior year position	568
Gross unrecognized tax benefits at June 30, 2014	$	568

The Company expects no material changes to unrecognized tax positions within the next twelve months. The amount of unrecognized tax benefit that, if recognized, would favorably impact the effective income tax rate is $568. During the years ended June 30, 2014 and 2013, the Company recognized $106 and $0 related to interest and penalties.

The Company has not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates that are organized as controlled foreign corporations as the Company considers these earnings to be reinvested indefinitely. It is not practicable to estimate the amount of U.S. income taxes that would be incurred in the event the Company was to repatriate the cumulative earnings of non-U.S. controlled foreign corporation affiliates. Deferred taxes will be provided for non-U.S. affiliates when the Company determines that such earnings are no longer indefinitely invested. AFT Hungary is not organized as a controlled foreign corporation.