8. INCOME TAXES
The components of income before income taxes were as follows (in thousands):
|
|
Years ended December 31, |
||||||
|
|
2017 |
|
2016 |
||||
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes |
|
|
|
|
|
|
|
|
Domestic |
$ |
2,364 |
|
|
$ |
801 |
|
|
Foreign |
|
(201 |
) |
|
|
(139 |
) |
|
Total |
$ |
2,163 |
|
|
$ |
662 |
|
The components of income tax expense (benefit) were as follows (in thousands):
|
|
Years ended December 31, |
||||||
|
|
2017 |
|
2016 |
||||
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
Federal |
$ |
— |
|
|
$ |
— |
|
|
State |
|
5 |
|
|
|
2 |
|
|
Foreign |
|
60 |
|
|
|
12 |
|
|
|
$ |
65 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
$ |
(3 |
) |
|
$ |
— |
|
|
State |
|
— |
|
|
|
— |
|
|
Foreign |
|
23 |
|
|
|
(39 |
) |
|
|
|
20 |
|
|
|
(39 |
) |
|
Total income tax expense (benefit) |
$ |
85 |
|
|
$ |
(25 |
) |
A reconciliation from the federal statutory income tax provision to our effective tax expense (benefit) is as follows (in thousands):
|
|
Years ended December 31, |
||||||
|
|
2017 |
|
2016 |
||||
|
|
|
|
|
|
|
|
|
|
United States federal tax statutory rate |
$ |
735 |
|
|
$ |
225 |
|
|
State taxes, net of federal benefit |
|
(237 |
) |
|
|
(52 |
) |
|
Valuation allowances against deferred tax assets |
|
(4,798 |
) |
|
|
(58 |
) |
|
Research and development tax credits |
|
22 |
|
|
|
(252 |
) |
|
Foreign provision different than U.S. tax rate |
|
(11 |
) |
|
|
22 |
|
|
Stock option expense |
|
6 |
|
|
|
14 |
|
|
Adjustment of prior year tax credits and refunds |
|
1,231 |
|
|
|
174 |
|
|
Change in deferred tax rate from 35% to 21% |
|
3,146 |
|
|
|
— |
|
|
Other |
|
(9 |
) |
|
|
(98 |
) |
|
Total |
$ |
85 |
|
|
$ |
(25 |
) |
A summary of the deferred tax assets and liabilities is as follows (in thousands):
|
|
Years ended December 31, |
||||||
|
|
2017 |
|
2016 |
||||
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued compensation and benefits |
$ |
49 |
|
|
$ |
28 |
|
|
Inventory reserves |
|
1 |
|
|
|
26 |
|
|
Allowance for doubtful accounts |
|
4 |
|
|
|
5 |
|
|
Warranty reserves |
|
165 |
|
|
|
367 |
|
|
Intangible and other assets |
|
994 |
|
|
|
2,512 |
|
|
Net operating loss carryforwards |
|
3,897 |
|
|
|
6,949 |
|
|
Non-qualified stock option expense |
|
— |
|
|
|
— |
|
|
Property, equipment and other |
|
44 |
|
|
|
156 |
|
|
Research and development credit |
|
2,230 |
|
|
|
2,059 |
|
|
Total deferred tax asset: |
|
7,384 |
|
|
|
12,102 |
|
|
Less: valuation allowance |
|
(7,319 |
) |
|
|
(11,994 |
) |
|
Net deferred tax assets: |
|
65 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaid expenses and other |
|
(27 |
) |
|
|
(50 |
) |
|
Total deferred tax liability: |
|
(27 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset |
$ |
38 |
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017, the Company had sustained a significant accumulated tax loss. The net operating loss (“NOL”) carry forward in the United States, the United Kingdom, Hong Kong, Canada and China as of December 31, 2017 was $16 million, $515,000, $1.5 million, $129,000 and $79,000, respectively. The Company’s management believes that it is not more likely than not the net operating losses will be utilized. Accordingly, as of December 31, 2017, a full valuation allowance is provided, except for the Canadian NOL.
In accordance with Accounting Standards Codification (“ASC”) 740‑30, we have not recognized a deferred tax liability for the undistributed earnings of certain of our foreign operations because those subsidiaries have invested or will invest the undistributed earnings indefinitely. It is impractical for us to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Deferred taxes are recorded for earnings of foreign operations when we determine that such earnings are no longer indefinitely reinvested.
The Company has recognized no material uncertain tax positions as of December 31, 2017. The Company files income tax returns in the U.S federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S federal or state and local income tax examinations by tax authorities for years before 2013. It is difficult to predict the final timing and resolution of any particular uncertain tax position. Based on the Company's assessment of many factors, including past experience and complex judgments about future events, the Company does not currently anticipate significant changes in its uncertain tax positions over the next 12 months.
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation (the "Tax Act"). The Tax Act makes significant changes in U.S. tax law, including a reduction in the U.S. federal corporate income tax rate, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The Tax Act reduced the U.S. corporate tax rate from 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation did not have any income tax expense impact on the Company due to the full valuation allowance. The other provisions of the Tax Act did not have a material impact on the Company's 2017 consolidated financial statements.
With the enactment of the Tax Act, U.S. domestic taxpayers treated as U.S. shareholders of foreign subsidiaries are required to recognize in their 2017 taxation period an inclusion of accumulated earnings of such foreign subsidiaries not previously subject to U.S. taxation. The accumulated earnings with respect to U.S. shareholders pursuant to this provision under Section 965 of the Internal Revenue Code of 1986, as amended, are measured at the greater of two measurement dates, November 2, 2017 or December 31, 2017. Section 965 permits the allocation of accumulated deficits of certain foreign subsidiaries attributable to a U.S. shareholder to offset accumulated earnings of other subsidiaries attributable to such U.S. shareholder. In applying of this provision, the Company's attributable foreign subsidiary losses, most of which have been incurred in recent years, far exceed accumulated earnings within its foreign subsidiaries. Consequently, the Company does not anticipate recognition of additional gross income pursuant to Section 965 in 2017.