18.Income Taxes

Income (loss) from our operations before income taxes for U.S. and foreign operations was as follows (in thousands):

	2018		2017			2016
U.S.	$	2,228	$	(732	)	$	(5,828	)
Foreign		2,261		1,994			(3,389	)
Total	$	4,489	$	1,262		$	(9,217	)

The income tax (provision) benefit reflected in the statement of income consists of the following (in thousands):

	2018			2017			2016
Current (provision) benefit:
U.S. Federal, State & Other	$	(75	)	$	(127	)	$	(116	)
Foreign		(1,213	)		(727	)		(185	)
Deferred taxes
U.S.		308			—			(11,349	)
Foreign		207			(576	)		(1,246	)
Total (provision) benefit	$	(773	)	$	(1,430	)	$	(12,896	)

The components of deferred taxes were as follows (in thousands):

	2018			2017			2016
Benefit of net operating losses	$	7,334		$	8,787		$	9,268
Tax credit carry-forwards		7,475			5,284			5,451
Deferred revenue		1,668			2,073			1,434
Impaired investment		677			1,054			1,060
Property and intangible assets		61			187			242
Other		1,885			2,161			3,029
Deferred tax asset		19,100			19,546			20,484
Valuation allowance		(17,845	)		(19,099	)		(19,453	)
Total deferred tax assets		1,255			447			1,031
Deferred tax liabilities - basis difference and amortization		(1,917	)		(1,623	)		(1,631	)
Net deferred taxes	$	(662	)	$	(1,176	)	$	(600	)

The reconciliation of income tax rate to effective tax rate was as follows (in thousands):

	2018			2017			2016
Provision at U.S. statutory rate		28.1	%		34.0	%		34.0	%
Net effect of taxes on foreign activities		8.4	%		49.5	%		(5.9	%)
Tax effect of U.S. permanent differences		0.5	%		14.7	%		2.6	%
State taxes and other, net		0.2	%		4.9	%		(1.5	%)
Stock based compensation		1.3	%		56.9	%		0.0	%
Other		(6.2	%)		(1.3	%)		3.8	%
Valuation allowance		(15.1	%)		(45.6	%)		(172.9	%)
Effective tax rate		17.2	%		113.1	%		(139.9	%)

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted by the U.S. The Act implements comprehensive tax legislation which, among other changes, reduces the federal statutory corporate tax rate from 35% to 21% and implements a territorial tax system that eliminates the ability to credit certain foreign taxes. Additionally, in December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period, as defined in SAB 118, ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

As we have a June 30 fiscal year end, the lower income tax rates will be phased in, resulting in a blended rate for fiscal 2018 and a 21% rate for years thereafter. Based on the provisions of the Act, we re-measured our U.S. deferred tax assets and related valuation allowance at the date of enactment. The re-measurement of U.S. deferred tax assets and related valuation allowance at the lower enacted corporate tax rate resulted in a net change of zero.

Furthermore, the new Act repeals the Alternative Minimum Tax (“AMT”) on corporations. Any AMT credit carryforwards can be used to offset regular tax for any tax year and is refundable, subject to limitation in 2018 - 2021. With this change, we expect to be able to use or monetize the AMT credit in the next four years, and therefore, the valuation allowance recorded against the credit was removed. As a result, we recorded a tax benefit in the amount of $279,000 in the second quarter of fiscal 2018.

The Act also imposes a tax on the untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated (the “Transition Tax”). Generally, foreign earnings held in the form of cash and cash equivalents are taxed by the U.S. at a 15.5% rate and the remaining earnings are taxed at an 8% rate. The Transition Tax generally may be paid in installments over an eight-year period. At the date of enactment, we were not in a position to present either a final or provisional estimate with respect to the Transition Tax. As of June 30, we have estimated the impact of the Transition Tax by incorporating assumptions made based upon our current interpretation and analysis to-date of the Act and have determined that our foreign tax credits would completely offset any Transition Tax calculated, and therefore, we do not expect to make any cash payments related to the Transition Tax. The actual impact of the Act may differ from our estimates due to, among other things, further refinement of our calculations as allowed under SAB 118, changes in interpretations and assumptions we have made, guidance that may be issued and actions we may take as a result of the Act.

At June 30, 2018, we had net operating loss carry-forwards for U.S. federal income tax purposes of $25.8 million that expire in the years 2022 through 2036 and tax credit carry-forwards of $7.5 million of which $5.0 million expire in the years 2019 through 2036. Included in the U.S. federal net operating loss carry-forward is $8.3 million from the exercise of employee stock options, the tax benefit of which was recognized on July 1, 2017 in accordance with ASU 2016-09. A corresponding valuation allowance was also recorded.

Our deferred tax assets are substantially represented by the tax benefit of U.S. net operating losses “(NOL’s”), tax credit carry-forwards and the tax benefit of future deductions represented by timing differences for deferred revenue, inventory obsolescence, allowances for bad debts, warranty expenses and unrealized losses on investments. We assess the realizability of the NOL’s and tax credit carry-forwards based on a number of factors including our net operating history, the volatility of our earnings, our accuracy of forecasted earnings for future periods and the general business climate. We also have a deferred tax liability related to the basis difference in the Coord3 intangible assets acquired.

As of the end of our fiscal year 2016, we had been in a three-year cumulative loss position in the U.S., therefore, at that time, we determined that it was not more likely than not that any of our U.S. deferred tax assets would be realized as benefits in the future. Accordingly, we established a full valuation allowance against our U.S. net deferred tax assets as of June 30, 2016 and this valuation allowance remains at June 30, 2018. Additionally, during fiscal years 2016 and 2017, we established full valuation allowances against our Germany, Japan, Singapore and Brazil net deferred tax assets for similar reasons. While our U.S. and Germany locations had pre-tax income during fiscal year 2018, both are still in a three-year cumulative loss position as of June 30, 2018 and we have determined that it is not likely than not that any of our deferred tax assets, except for the U.S. AMT credit, will be realized as benefits in the future. The net change in the total valuation allowance for the fiscal years ended June 30, 2018, 2017 and 2016 was ($1,254,000), ($354,000), and $16,349,000, respectively.

On June 30, 2018 and 2017, we had $73,000 and $120,000 of unrecognized tax benefits that would affect the effective tax rate if recognized absent valuation considerations. Our policy is to classify interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively. As of June 30, 2018, there was no accrued interest or penalties related to uncertain tax positions recorded on our Consolidated Balance Sheets or Consolidated Statements of Operations. For U.S. federal income tax purposes, the tax years 2015 through 2018 remain open to examination by government tax authorities. For German income tax purposes, tax years 2014 through 2018 remain open to examination by government tax authorities. For our China income tax purposes, tax years 2015 through 2018 remain open to examination by government tax authorities generally.

The aggregate changes in the balance of unrecognized tax benefits were as follows (in thousands):

	2018
Balance, at June 30, 2017	$	120
Increases for tax positions related to the current year		-
Decreases for tax positions related to the prior year		(47	)
Balance, at June 30, 2018	$	73