10. Income Taxes

The consolidated income (loss) before income taxes, by domestic and foreign sources, is as follows:

(in thousands)	Years ended December 31,
	2016				2015
Domestic		$	2,873			$	(4,260	)
Foreign			(1,101	)			26
Total		$	1,772			$	(4,234	)

The provision for income taxes is as follows:

(in thousands)	Years ended December 31,
	2016			2015
Current:
Federal	$	-		$	-
State		6			12
Foreign		221			288
Subtotal		227			300

Deferred:
Federal		127			127
State		19			19
Foreign		(23	)		25
Subtotal		123			171
Total	$	350		$	471

The Company is entitled to a deduction for federal and state tax purposes with respect to employees' stock option activity. As of December 31, 2016, the Company had $5.6 million of unrecognized excess tax deductions related to compensation for stock option exercises which will be recognized when the net operating loss carryforwards are fully utilized and those excess tax benefits result in a reduction to income taxes payable.

The effective income tax rate for the years ended December 31, 2016 and 2015 differed from the statutory federal income tax rate as presented below:

	Effective Tax Rate Percentage (%)
	Years ended December 31,
	2016	2015
Statutory federal income tax rate	34.0%	34.0%
State income taxes, net of federal tax benefit	1.3%	(0.2)%
Effect of foreign operations	8.6%	(3.0)%
Change in valuation allowance	(46.9)%	(33.8)%
Meals and entertainment	7.7%	(3.3)%
Permanent differences	4.5%	(3.6)%
Uncertain tax positions	11.8%	(4.0)%
Other	(1.2)%	2.8%
Effective tax rate	19.8%	(11.1)%

Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A summary of the tax effect of the significant components of the deferred income tax liabilities is as follows:

(in thousands)	As of December 31,
	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	7,868		$	8,732
Capital loss carryforwards		549			549
Accruals		183			662
Reserves		514			719
Alternative minimum tax credit carryforwards		203			166
Stock-based compensation expense		1,224			1,492
Intangibles		391			397
Undistributed earnings of foreign subsidiary		37			-
Other		71			32
Total deferred tax asset		11,040			12,749
Valuation allowance		(10,477	)		(12,082	)
Total deferred tax asset less valuation allowance		563			667

Deferred tax liabilities:
Undistributed earnings of foreign subsidiary		-			(17	)
Software development costs		(382	)		(446	)
Fixed Assets		(161	)		(213	)
Indefinite-lived intangibles		(316	)		(170	)
Other		(27	)		(22	)
Total deferred tax liability		(886	)		(868	)

Net deferred tax liability	$	(323	)	$	(201	)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future income in making this assessment.

Management believes that the Company will achieve profitable operations in future years that will enable the Company to recover the benefit of its deferred tax assets. However, other than for a portion of the deferred tax assets that are related to the Company's Indian subsidiary, the Company presently does not have sufficient objective evidence to substantiate the recovery of the deferred tax assets. Accordingly, the Company has established a full $10.5 million valuation allowance on its U.S., U.K., Swedish, and Chinese deferred tax assets at December 31, 2016.

The Company has a deferred tax liability in the amount of $316,000 and $170,000 at December 31, 2016 and 2015, respectively, relating to the tax amortization of goodwill that cannot be offset by deferred tax assets because the anticipated reversal of the deferred tax liability is outside of the anticipated reversal of the deferred tax assets.

As of December 31, 2016 and 2015, the Company's consolidated cash and cash equivalents totaled $21.7 million and $11.1 million, respectively, including cash and cash equivalents held at non-U.S. entities totaling $4.2 million and $4.1 million, respectively. The Company has foreign operating subsidiaries located in China, United Kingdom, Sweden and India. A deferred tax asset has been recorded with respect to the undistributed earnings in Sweden in the amount of $109,000. The Company has two foreign subsidiaries located in China and United Kingdom with accumulated deficits. The Company has one foreign subsidiary located in India that has undistributed earnings of $644,000 at December 31, 2016. If the Company were to repatriate these earnings it would incur taxes of approximately $331,000. The foreign subsidiaries in China, United Kingdom, and India have undistributed earnings that are considered indefinitely reinvested as of December 31, 2016, to fund the Company's ongoing international operations.

At December 31, 2016, the Company's largest deferred tax asset of $7.9 million primarily relates to a U.S. net operating loss carryforward of $18.6 million which expires in various amounts between 2020 and 2035. The amount of U.S. loss carryforward which can be used by the Company each year is limited due to changes in the Company's ownership which occurred in 2003. Thus, a portion of the Company's loss carryforward may expire unutilized.

Uncertain Tax Positions

Foreign Uncertain Tax Positions

During 2016 and 2015, the Company recorded tax liabilities for certain foreign tax contingencies. During 2016, the Company also determined that South Korea should be included in this inventory. The Company recorded these uncertain tax positions in other current liabilities on the consolidated balance sheets.

The following table outlines the Company's foreign uncertain tax liabilities, including accrued interest and penalties for each jurisdiction:

	China					Ukraine					South Korea
(in thousands)	Tax			Interest and Penalties		Tax			Interest and Penalties		Tax		Interest and Penalties		Total

Balance, January 1, 2015	$	222,000		$	-	$	61,000		$	-	$	-	$	-	$	283,000
Increases		3,000			152,000		-			15,000		-		-		170,000
Decreases		-			-		(40,000	)		-		-		-		(40,000	)
Balance, December 31, 2015	$	225,000		$	152,000	$	21,000		$	15,000	$	-	$	-	$	413,000
Increases		-			57,000		68,000			13,000		129,000		8,000		275,000
Decreases		(23,000	)		-		-			-		-		-		(23,000	)
Balance, December 31, 2016	$	202,000		$	209,000	$	89,000		$	28,000	$	129,000	$	8,000	$	665,000