INCOME TAXES

The components of loss before income tax expense (benefit) for the years ended September 30, 2014, 2013 and 2012 were as follows:



	September 30,
	2014			2013			2012
	(in thousands)
(Loss) income before income taxes:
Domestic	$	(18,871	)	$	(23,646	)	$	(3,406	)
Foreign	1,137			1,020			2,120
	$	(17,734	)	$	(22,626	)	$	(1,286	)

Income tax expense (benefit) consists of the following for the years ended September 30, 2014, 2013 and 2012:



	September 30,
	2014			2013			2012
	(in thousands)
Income tax expense (benefit):
Current:
Federal	$	(27	)	$	—		$	(188	)
State	71			54			41
Foreign	312			(758		)	1,510
Total current	356			(704		)	1,363
Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(15		)	156			(1,537		)
Total deferred	(15		)	156			(1,537		)
Total income tax expense (benefit):	$	341		$	(548	)	$	(174	)

A reconciliation of the income tax expense (benefit) by applying the statutory United States federal income tax rate to loss before income tax expense (benefit) is as follows:



	September 30,
	2014					2013					2012
	$			%		$			%		$			%
	(in thousands, except for percentages)
Federal income tax benefit at statutory rate	$	(6,030	)	34.0	%	$	(7,693	)	34.0	%	$	(437	)	34.0	%
State tax benefit net of federal benefit	(242		)	1.4	%	(536		)	2.4	%	(13		)	1.0	%
Foreign taxes	(68		)	0.4	%	(1,156		)	5.1	%	1,102			(85.7	)%
Tax credits	—			—	%	(438		)	1.9	%	(1,230		)	95.6	%
Nondeductible expenses	650			(3.7	)%	771			(3.4	)%	1,015			(78.9	)%
Other	—			—	%	87			(0.4	)%	(100		)	7.9	%
Change in valuation allowance	6,131			(34.6	)%	7,164			(31.7	)%	(1,147		)	89.2	%
Rate change/other adjustments on deferred taxes	(100		)	0.6	%	1,253			(5.5	)%	636			(49.5	)%
Income tax expense (benefit)	$	341		(1.9	)%	$	(548	)	2.4	%	$	(174	)	13.6	%

Our effective tax rate was (1.9)% for the fiscal year ended September 30, 2014 compared to 2.4% and 13.6% for the comparable periods in the prior years. Our income tax expense (benefit) is primarily impacted by foreign taxes, certain nondeductible interest and share based expenses. The income tax expense (benefit) is also impacted by the release of a portion of the valuation allowances related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence.

Deferred tax assets and liabilities are recognized for future tax consequences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Significant deferred tax assets and liabilities, consist of the following:



	September 30,
	2014			2013
	(in thousands)
Deferred Tax Assets:
Net operating loss carryforward	$	31,418		$	27,110
Research and development tax credits	10,165			10,574
Deferred income	2,724			2,664
Stock based compensation⁽¹⁾	3,354			12,313
Fixed assets and intangible property	7,293			7,955
Inventories	1,714			2,256
Allowances and reserves	9,436			9,277
Foreign tax credit/AMT credit	88			88
Other	3			11
Total deferred tax assets	66,195			72,248
Deferred Tax Liabilities:
Debt amortization	(11		)	(2,065		)
Total deferred tax liabilities	(11		)	(2,065		)
Net deferred income taxes	66,184			70,183
Valuation allowance⁽¹⁾	(64,788		)	(68,802		)
Net deferred tax assets	$	1,396		$	1,381

(1)

The Company identified an overstatement of its previously disclosed deferred tax asset for stock based compensation and the related valuation allowance in the amount of $9.1 million as of September 30, 2013. The Company evaluated the impact of this error in accordance with SAB No. 99 and concluded that it was not material. Further, the Company maintains a full valuation allowance on all of its U.S. and state deferred tax assets, and there was no impact on the Company's financial position and results of operations. As of September 30, 2014 the Company recorded an adjustment of $9.1 million to decrease both the deferred tax asset for stock based compensation and the related valuation allowance. The previously reported amounts have not been revised.

At September 30, 2014, we had approximately $53.9 million, $27.3 million, and $119.2 million of federal, state, and foreign Net Operating Losses (“NOLs”) respectively, that can be used in future tax years. We also have available state research and development tax credit carryforwards of approximately $10.2 million. The federal NOLs and tax credits may be carried forward through 2034; state NOLs may be carried forward through 2034; state tax credits may be carried forward indefinitely; and foreign NOLs have various carryforward provisions in several jurisdictions.

In December 2012, we issued 10.7 million shares of common stock in a public offering which resulted in a Section 382 ownership change. In general, a Section 382 ownership change occurs if there is a cumulative change in our ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. Of our federal NOL amount as of September 30, 2014, $25.4 million is subject to an annual Section 382 limitation of $1.4 million due to the December 2012 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the year ended September 30, 2014, or on our net deferred tax asset as of September 30, 2014.

In June 2013, we issued an additional 18.7 million shares of common stock in a public offering. Based on a preliminary evaluation we do not believe this offering caused another Section 382 ownership change. As additional relevant information becomes available we will update our evaluation. If an additional ownership change did occur or does occur in the future, our ability to utilize our NOL carryforwards and other deferred tax assets to offset future taxable income may be further limited and the value and recoverability of our NOLs and other deferred tax assets could be further diminished.

We analyzed our need to maintain the valuation allowance against our otherwise recognizable deferred tax assets in the federal, state, and foreign jurisdictions and have recorded a total valuation allowance of $64.8 million of as September 30, 2014, which represents a decrease of $4.0 million from the prior fiscal year. Because we have historically experienced net tax losses, the benefits of which resulted in recognized deferred tax assets, we have placed a $55.0 million valuation allowance against all of our otherwise recognizable deferred tax assets in the federal and state jurisdictions. Furthermore, we have also placed a $9.8 million valuation allowance against most of our deferred tax assets in our foreign jurisdictions as we have concluded that it is more likely than not that the majority of our foreign deferred tax assets will not be realized.

Accounting guidance 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. The total amount of gross unrecognized tax benefits was approximately $10.3 million as of September 30, 2014 and approximately $10.6 million as of September 30, 2013. The total amount of gross unrecognized tax benefits decreased by $0.3 million, the majority of which related to state research and development tax credits that have not been utilized.

As of September 30, 2014, approximately $0.2 million of the $10.3 million unrecognized tax benefits related to our state tax liability is recorded in accrued expenses and other current liabilities on the consolidated balance sheets. The remaining $10.1 million, which relates to research and development tax credits that have not been utilized, is reflected as a reduction to the deferred tax asset arising from the research and development tax credits. As of September 30, 2013, approximately $0.2 million of the $10.6 million unrecognized tax benefits, related to our state tax liability, was recorded in accrued expenses and other current liabilities on the consolidated balance sheets. The remaining $10.4 million related to research and development tax credits that have not been utilized, was reflected as a reduction to the deferred tax asset arising from the research and development tax credits.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:



	2014			2013			2012
	(in thousands)
Beginning balance as of September 30:	$	(10,615	)	$	(10,822	)	$	(10,215	)
Gross decreases - tax positions in prior period	290			354			—
Gross increases - current-period tax positions	—			(147		)	(47		)
Gross increases - tax positions in prior period	—			—			(560		)
Ending balance as of September 30:	$	(10,325	)	$	(10,615	)	$	(10,822	)

We recognize accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as income tax expense. As of September 30, 2014, there were no material interest or penalties accrued due to significant net operating losses.

We are subject to taxation in the United States and various state and foreign jurisdictions. The 2010 through 2014 tax years generally remain subject to examination by their respective tax authorities. Effectively, all our tax years in which a tax NOL is carried forward to the present are subject to examination by federal, state and foreign tax authorities. Therefore, we cannot estimate the range of unrecognized tax benefits that may significantly change within the next 12 months.