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K. INCOME TAXES | 12 Months Ended
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Dec. 31, 2016
Income Tax Disclosure [Abstract] |
INCOME TAXES | NOTE K—INCOME TAXES The sources of the Company’s income from operations before income taxes were as follows:
|  | Year ended December 31, |
|  | 2016 |  | 2015 |  | 2014 |
|  | (in thousands) |
Domestic |  | $ | 10,047 |  | $ | 14,062 |  | 1,226 |
Foreign |  |  | 10,956 |  |  | (2,894) |  | 3,256 |
Total income before income taxes |  | $ | 21,003 |  | $ | 11,168 |  | 4,482 |
The provision for income tax expense for the years ended December 31, was as follows:
|  | 2016 |  | 2015 |  | 2014 |
Current: |  | (in thousands) |
Federal |  | $ | (15) |  | $ | 168 |  | $ | 193 |
State |  |  | 256 |  |  | 207 |  |  | 6 |
Foreign |  |  | 962 |  |  | — |  |  | — |
Total |  | $ | 1,203 |  | $ | 375 |  | $ | 199 |
Deferred: |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (10,794) |  | $ | — |  | $ | — |
State |  |  | (130) |  |  | — |  |  | — |
Foreign |  |  | (510) |  |  | — |  |  | — |
Total |  | $ | (11,434) |  | $ | — |  | $ | — |
Income tax (benefit) expense |  | $ | (10,231) |  | $ | 375 |  | $ | 199 |
Deferred income tax assets and liabilities result principally from net operating losses, different methods of recognizing depreciation, reserve for doubtful accounts, inventory reserves for obsolescence and accrued vacation, together with timing differences between book and tax reporting. At December 31, the net deferred tax assets and liabilities are comprised of the following approximate amounts:
|  | 2016 |  | 2015 |
|  | (in thousands) |
NOL carryforward |  | $ | 12,866 |  | $ | 14,318 |
Inventory reserves |  |  | 869 |  |  | 1,616 |
AMT credit |  |  | 424 |  |  | 347 |
Unrealized gains and losses |  |  | (6) |  |  | 1,549 |
Stock compensation |  |  | 1,453 |  |  | 1,084 |
Fixed assets and intangibles |  |  | (2,777) |  |  | (4,432) |
Other |  |  | 255 |  |  | 244 |
|  |  | 13,084 |  |  | 14,726 |
Less valuation allowance |  |  | (1,663) |  |  | (14,726) |
Deferred tax assets, net |  | $ | 11,421 |  | $ | — |
The valuation allowance was established to reduce the deferred tax asset for the amount that will likely not be realized. This reduction was primarily necessary due to the uncertainty of the Company’s ability to utilize all of the net operating loss carry forwards. The valuation allowance decreased by $13.1 million in 2016 and increased by approximately $2.1 million in 2015. The decrease in 2016 was primarily the result of the removal of our valuation allowance on U.S. and Taiwan deferred income tax assets. The increase in 2015 was primarily the result of current year changes in deferred income tax assets and liabilities, including increases in our net operating loss carryforwards. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. In considering whether or not to continue to maintain the valuation allowance, the Company considers all available positive and negative evidence, including: historical profits and losses, forecasts of future profits or losses, and trends in the industries that the Company serves that may affect its ability to continue to generate profits. Objective evidence, such as historical losses, limits the ability to consider other subjective evidence, such as its projections for future growth. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $1.7 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased or if objective negative evidence is no longer present and additional weight is given to subjective evidence such as its projections for growth. The Company has a U.S. net operating loss carry forward of approximately $37.7 million, which expires between 2025 and 2032. The Company also has U.S. research and development tax credits of $1.5 million, which expire between 2024 and 2036. The Company has a net operating loss carryforward from its China operations of approximately $8.3 million, which expires between 2017 and 2021. Utilization of U.S. net operating losses and tax credit carry forwards are subject to an annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382. During 2015 and 2016, the Company updated its Section 382 analysis resulting in the recognition of additional utilizable net operating losses. Additional ownership changes could result in the expiration of the net operating loss and tax credit carryforward before utilization. The U.S. NOL carryforwards and research and development tax credit carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs and tax credits are presented net of these unrecognized tax benefits. The Company has approximately $1.3 million of windfall tax benefits from previous stock option exercises that have not been recognized as of December 31, 2016. This amount will not be recognized until such time the deduction would reduce our U.S. income taxes payable. The Company used ASC 740 ordering when determining when excess tax benefits had been realized. Effective January 1, 2017, the Company will adopt new guidance (ASU 2016-09) and will record excess tax benefits or tax deficiencies from stock based compensation to the consolidated statement of income within the provision for income taxes rather than in the consolidated balance sheet within additional paid-in capital. However, the Company expects to recognize approximately $1.3 million of windfall tax benefits as a cumulative effect adjustment to opening retained earnings in the first quarter of 2017 upon adoption of ASU 2016-09. See Note B “New Accounting Standards” for additional information. A reconciliation of the U.S. federal income tax rate of 35% for the years ended December 31, to the Company’s effective income tax rate follows:
|  | 2016 |  | 2015 |  | 2014 |
|  | (in thousands) |
Expected taxes |  | $ | 7,351 |  | $ | 3,797 |  | $ | 1,524 |
Non-deductible/non-taxable items |  |  | 565 |  |  | 157 |  |  | 138 |
Foreign rate differences |  |  | (654) |  |  | (1,267) |  |  | 295 |
Foreign permanent differences |  |  | (1,005) |  |  | — |  |  | — |
Increase (decrease) in valuation allowance |  |  | (13,063) |  |  | 2,052 |  |  | (1,729) |
Section 382 limitation |  |  | (3,065) |  |  | (4,382) |  |  | — |
Changes in tax laws or rates |  |  | (361) |  |  | — |  |  | — |
Other, net |  |  | 1 |  |  | 18 |  |  | (29) |
Tax (benefit) expense |  | $ | (10,231) |  | $ | 375 |  | $ | 199 |
Foreign permanent differences includes the effects of this deduction, along with the effects of other foreign permanent differences and intercompany transactions. The Company’s wholly owned subsidiary, Prime World is a tax-exempt entity under the Income Tax Code of the British Virgin Islands. The Company’s wholly owned subsidiary, Global Technology, Inc., has enjoyed preferential tax concessions in China as a national high-tech enterprise. In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises. Global Technology, Inc. was recognized as a National high-tech enterprise in 2008 and was entitled to a 15% tax rate for a three year period from November 2008 to November 2014. Global Technology, Inc. renewed its National high-tech enterprise certificate and was therefore extended its three-year tax preferential status from November 2014 to September 2017. Effective January 1, 2016, China expanded the scope of the National high-tech enterprise to include additional deductions for qualifying research and development. In general, it is the Company’s practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2016, the Company had not made a provision for U.S. or additional foreign withholding taxes on approximately $6.6 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries. As of December 31, 2016, December 31, 2015 and December 31, 2014, the total amount of unrecognized tax benefit was $1.8 million, $1.8 million, and $1.7 million, respectively. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
|  | 2016 |  | 2015 |  | 2014 |
|  | (in thousands) |
Unrecognized tax benefits — January 1 |  | $ | 1,797 |  | $ | 1,659 |  | $ | 2,200 |
Gross increases — tax positions in prior period |  |  | — |  |  | 332 |  |  | 1,659 |
Gross decreases — tax positions in prior period |  |  | — |  |  | (194) |  |  | (2,200) |
Unrecognized tax benefits — December 31 |  | $ | 1,797 |  | $ | 1,797 |  | $ | 1,659 |
As of December 31, 2016 and 2015, the Company had $1.8 million of unrecognized tax benefits related to U.S. tax benefits recognized for prior branch losses and research and development credits, respectively. As of December 31, 2014, the Company had $1.7 million of unrecognized tax benefits related to U.S. tax benefits recognized for prior year branch losses. If recognized, $1.8 million would have an impact on the Company’s effective tax rate. The Company believes that it is reasonably possible that none of its remaining unrecognized tax positions may be recognized by the end of 2017. The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, it has not accrued penalties or interest during 2016 as a result of net operating losses. During 2015, the Company also accrued no penalties or interest. The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company’s open tax years subject to examination in the U.S. federal and state jurisdictions are 2013 through 2015. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward. The Company is subject to examination for tax years 2008 forward for various foreign jurisdictions.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32537-109319 + Details
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