9. Income Taxes

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

9. Income Taxes

The income tax expense is summarized as follows:

	Years Ended December 31,
	2016		2015
Current:
Federal	$	61	$	18
State		11		—
		72		18
Deferred:
Federal		1,296		289
State		215		38
		1,511		327
	$	1,583	$	345

A reconciliation of the statutory U.S. income tax rate to the effective income tax rate follows:

	Years Ended December 31,
	2016			2015
Statutory U.S. income tax rate		34.00	%		34.00	%
States taxes, net of federal benefit		2.33	%		1.84	%
Non-deductible item		0.54	%		3.54	%
Change in valuation allowance		1.78	%		0.00	%
Change in net operating loss carryforwards and
tax credits		(1.65	)%		(13.08	)%
Other		0.13	%		(1.33	)%
Effective income tax rate		37.13	%		24.97	%

The components of the deferred income tax assets (liabilities) are as follows:

	Years Ended December 31,
	2016			2015
Deferred tax assets:
Operating loss carryforwards	$	1,035		$	2,263
R&D Tax Credit		1,310			1,195
AMT Tax Credit		364			303
Section 263A costs		502			552
R&D costs		690			861
Amortization		34			33
Asset reserves:
Bad debts		18			18
Inventory allowance		574			601
Accrued expenses:
Non-qualified stock options		86			78
Compensation		261			240
Warranty		415			368
Deferred tax assets		5,289			6,512
Less state valuation allowance		(76	)		—
Less APIC pool allowance		—			(380	)
Total deferred tax assets		5,213			6,132
Deferred tax liabilities:
Depreciation		(626	)		(426	)
Unrealized gain		(1,169	)		(245	)
Total deferred tax liabilities		(1,795	)		(671	)
Net deferred tax assets	$	3,418		$	5,461

As of December 31, 2016, the Company’s net deferred tax asset is primarily composed of net operating loss carryforwards (“NOLs”), research and development costs and tax credits, and a reserve for inventory. The NOLs total $1,629 for federal and $11,899 for state purposes, with expirations starting in 2018. Included in the Company’s NOLs as of December 31, 2015 was approximately $1,009 from the exercise of stock options. The benefit from utilization of this portion of the NOL was realized in 2016, thereby eliminating the prior valuation allowance with no impact to the effective tax rate.

During 2016 and 2015, the Company utilized $3,145 and $1,516, respectively, of its NOLs. The deferred tax asset amounts are based upon management’s conclusions regarding, among other considerations, the Company’s current and anticipated customer base, contracts, and product introductions, certain tax planning strategies, and management’s estimates of future earnings based on information currently available, as well as recent operating results during 2016, 2015, and 2014. GAAP requires that all positive and negative evidence be analyzed to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the deferred tax asset.

Based on the management’s analysis of all available evidence, both positive and negative, the Company’s management has concluded that the Company does not have the ability to generate sufficient taxable income in the necessary period to utilize the entire benefit for the deferred tax asset. Management asserts that it is more likely than not that approximately $76 of the Company’s deferred tax asset will not be realized due to the inability to generate sufficient Florida taxable income in the necessary period to fully utilize its Florida NOLs.

Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax asset may be necessary. If future losses are incurred, it may be necessary to record an additional valuation allowance related to the Company’s net deferred tax asset recorded as of December 31, 2016. It cannot presently be estimated what, if any, changes to the valuation of our deferred tax asset may be deemed appropriate in the future. The 2016 federal and state NOL and tax credit carryforwards could be subject to limitation if, within any three-year period prior to the expiration of the applicable carryforward period, there is a greater than 50% change in ownership of the Company.

For the years ended December 31, 2016 and 2015, the Company incurred $61 and $36, respectively, in alternative minimum tax expense in connection with the federal limitation on alternative NOLs.

As a result of the implementation of FIN 48, the Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review on January 1, 2017, the Company is not aware of any uncertain tax positions that would require additional liabilities or which such classification would be required. The amount of unrecognized tax positions did not change as of December 31, 2016, and the Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.

There were no material amounts of penalties and tax-related interest expenses for the year ended December 31, 2016.

The Company files federal income tax returns, as well as multiple state and local jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its allowances for income taxes reflect the most probable outcome. The Company adjusts these allowances, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The calendar years 2013, 2014 and 2015 are still open to Internal Revenue Service examination under the statute of limitations. The last Internal Revenue Service examination on the Company’s 2007 calendar year was closed with no change.