Income Taxes

During the year ended December 31, 2016, the Company began significant operations in certain foreign countries and is, accordingly, subject to tax in those foreign jurisdictions.

Income (Loss) before income tax for the years ended December 31, 2016, 2015 and 2014 consisted of the following (in thousands):



	2016			2015			2014
	(in thousands)
U.S. operations	(9,514		)	6,911			5,424
Foreign operations	(2,184		)	(208		)	—

Global Total	$	(11,698	)	$	6,703		$	5,424

The Company’s current tax expense was $287,000, $35,000 and $173,000 for the years ended December 31, 2016, 2015 and 2014, respectively. The provision for income taxes attributable to continuing operations before income taxes for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):



	2016			2015			2014

Current tax expense (benefit):
Federal	$	26		$	—		$	97
State and local	35			19			76
Foreign	272			28
Total current tax expense	333			47			173
Deferred tax expense:
Federal	—			—			—
State and local	—			—			—
Foreign	(46		)	(12		)
Total deferred tax expense	(46		)	(12		)	—

Total income tax expense	$	287		$	35		$	173

The provision for (benefit from) income taxes differed from the amount of income taxes determined by applying the applicable federal tax rate (34%) to pretax income (loss) from continuing operations as a result of the following (in thousands):



	2016			2015			2014

Expected Statutory expense (benefit)	$	(3,977	)	$	2,244		$	1,844
Change in the fair values of derivative and amortization of debt discount	2,584			(5,597		)	(693		)
Other non-deductible expenses	63			7			3
Change in valuation allowance	590			3,254			(1,031		)
Rate differential - foreign vs. US	822			114			—
State income taxes, net of federal benefit	23			13			50
Federal tax impact of state tax benefit, net	154			—			—
Exchange gain	$	28		$	—		$	—
	$	287		$	35		$	173

Deferred tax assets included in the Consolidated Balance Sheets as of December 31, 2016 and 2015 consisted of the following:



	2016			2015
	(in thousands)
Current Assets:
Allowance for doubtful accounts	$	118		$	6
Inventory reserve	467			157
Accrued expenses	831			1,005
Total current assets	1,416			1,168

Long Term Assets (Liabilities):
Property, plant and equipment	317			348
Intangible assets	(205		)	(256		)
Tax operating loss carry forwards	10,962			11,283
Tax credit carry forwards	254			291
Non-employee stock options	2,302			1,238
Other	(1		)	(7		)
Total Long Term Assets (Liabilities)	13,629			12,897
Gross Deferred Tax Asset (Liability)	15,045			14,065
Less Valuation Allowance	(15,250		)	(14,309		)
Deferred taxes, net	$	(205	)	$	(244	)

The Company evaluates the recoverability of its net deferred tax assets based on its history of operating results, its expectations for the future, and the expiration dates of the net operating loss carry forwards. Based on the preponderance of the evidence, the Company has concluded that it is more likely than not that it will be unable to realize the net deferred tax assets in the immediate future and has established a valuation allowance for all such net deferred tax assets. Accordingly, the Company has provided a valuation allowance of $15.3 million and $14.3 million for the years ended December 31, 2016 and 2015, respectively, on its net deferred tax assets. The valuation allowance increased during the year 2015 by $1.0 million related to changes in deferred tax assets for the year ended December 31, 2016.

Operating loss and tax credit carry forwards as of December 31, 2016 were as follows:



	2016		2015
	(in thousands)
Federal:
Net operating losses (expiring through 2035)	$	31,336	$	32,870
Research tax credits (expiring through 2025)	168		168
Alternative minimum tax credits (available without expiration)	86		70
State:
Net Operating Losses:
Tennessee (expiring in 2030)	529		568
New Jersey (expiring in 2035)	1,764		822
Illinois (expiring in 2035)	222		255
Foreign
Net operating losses (no expiration)	232		10

At December 31, 2016, the Company’s U.S. federal net operating loss carryforwards will expire as follows:



Year	Net Operating Loss (in thousands)
2017 - 2021	$	7,187
2022 - 2026	2,268
2027 - 2031	11,373
2032 and thereafter	10,508

Total	$	31,336

The above excludes net operating losses of $3.3 million which, if realized would be accounted for as additional paid-in capital.

The Company’s ability to use net operating loss carry forwards is subject to substantial limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which limit the utilization of net operating losses upon a more than 50% change in ownership of the Company’s stock that is held by 5% or greater stockholders. The Company examined the application of Section 382 with respect to an ownership change that took place during 2010, as well as the limitation on the application of net operating loss carry forwards. The Company believes that operating losses subsequent to the change date in 2010 (aggregating $15.3 million) are not subject to Section 382 limitations. The Company has estimated that the annual limitation starting in 2010 aggregates from $1.0 million to $2.3 million per year including the effect of amortization of built in gains. The Company's loss carryforwards may be further limited in the future if additional ownership changes occur.

ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” issued by FASB, allows recognition of windfall profits as a tax benefit, either as a reduction of current income tax expense or (as in the case of the Company) a deferred tax asset resulting from an increase in net operating loss carryforwards. The effective date for implementation of this change is for years beginning after December 15, 2016 with a cumulative adjustment to retained earnings as of the beginning of the year of adoption. The Company does not anticipate any adjustment to retained earnings related to the increase in net operating losses since deferred tax assets related to net operating losses are fully reserved. The Company had previously recognized $122,000 of windfall tax benefits in additional paid in capital and will adjust retained earnings by that amount during the first quarter of 2017.

The Company is subject to the provisions of ASC 740-10-25, Income Taxes (ASC 740). ASC 740 prescribes a more likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum 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. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. For federal purposes, post 1998 tax years remain open to examination as a result of net operating loss carryforwards. The Company is currently open to audit by the appropriate state income taxing authorities for tax years 2012 through 2015. The Company has not recorded any liability for uncertain tax positions at December 31, 2016 or December 31, 2015.