9. INCOME TAXES:

The components of our provision (benefit) from income taxes consisted of the following for the fiscal years ended September 30,

	2014		2015			2016
	(Amounts in thousands)
Current provision:
Federal	$	46	$	209		$	496
State		45		87			73
Total current provision	$	91	$	296		$	569
Deferred provision (benefit):
Federal		—		(22,056	)		11,691
State		—		(5,654	)		(52	)
Total deferred provision (benefit)		—		(27,710	)		11,639
Total income tax provision (benefit)	$	91	$	(27,414	)	$	12,208

Below is a reconciliation of the statutory federal income tax rate to our effective tax rate for the fiscal years ended September 30,

	2014			2015			2016
Federal tax provision (benefit)		35.0	%		35.0	%		35.0	%
State taxes, net of federal effect		4.4	%		3.2	%		3.6	%
Stock based compensation		0.2	%		0.4	%		(0.5	)%
Valuation allowance		(42.5	)%		(171.5	)%		(3.2	)%
Foreign rate differential		3.0	%		0.3	%		0.5	%
Other		0.7	%		1.3	%		(0.3	)%
Effective tax rate		0.8	%		(131.3	)%		35.1	%

Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. The tax effects of these temporary differences representing the components of deferred tax assets as of September 30,

	2015			2016
	(Amounts in thousands)
Deferred tax assets, net:
Inventories	$	1,361		$	1,095
Accrued expenses		911			919
Depreciation and amortization		5,152			1,497
Stock based compensation		3,776			3,566
Tax loss carryforwards		17,450			13,879
Other		585			573
Long-term deferred tax assets		29,235			21,529
Valuation allowance		(1,718	)		(454	)
Net long-term deferred tax assets	$	27,517		$	21,075

Pursuant to ASC 740, we must consider all positive and negative evidence regarding the realization of deferred tax assets. ASC 740 provides for four possible sources of taxable income to realize deferred tax assets: 1) taxable income in prior carryback years, 2) reversals of existing deferred tax liabilities, 3) tax planning strategies and 4) projected future taxable income. As of September 30, 2016, we have no available taxable income in prior carryback years, limited reversals of existing deferred tax liabilities or prudent and feasible tax planning strategies. Therefore, the recoverability of our deferred tax assets is dependent upon generating future taxable income.

Since the fourth quarter of fiscal 2008, the Company had maintained a full valuation allowance against its deferred tax assets, having determined it was more likely than not that the deferred tax assets would not be realized. The determination of releasing valuation allowances against deferred tax assets is made, in part, pursuant to our assessment as to whether it is more likely than not that we will generate sufficient future taxable income against which benefits of the deferred tax assets may or may not be realized. Significant judgment is required in making estimates regarding our ability to generate income in future periods.

In the fourth quarter of fiscal 2015, we reached the conclusion that it was appropriate to release our valuation allowance against the majority of our deferred tax assets due to the sustained positive operating performance of our operations throughout the entire fiscal year and the projection of future taxable income. Additionally, we maintained a cumulative three year income position throughout fiscal year 2015, reached six consecutive quarters of positive pre-tax operating earnings, and experienced a continued recovery in industry and general economic conditions, all of which were positive factors that overcame prior negative evidence. We also considered forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. As a result, we recorded a $27.5 million net reversal of substantially all of our deferred tax asset valuation allowance in the fourth quarter of fiscal year 2015 after determining it was more likely than not that certain deferred tax assets would be realized. A portion of our valuation allowance was retained against our state net operating losses deferred tax asset, due to differences between state and federal tax laws.

In the fourth quarter of fiscal 2016, we reached the conclusion that it was appropriate to release the majority of our valuation allowance against our state net operating loss deferred tax assets due to our operating performance in fiscal 2016 being greater than projected at fiscal 2015 year end. We considered forecasts of future operating results and the utilization of net operating losses within the statutory mandated carryforward periods and determined it was more likely than not that the majority of our state net operating loss deferred tax assets would be realized. As a result of the release of a portion of our deferred tax asset valuation allowance, we recorded approximately $1.1 million reduction in our income tax provision. A portion of the valuation allowance was retained based on particular jurisdictions. Specifically, states with a shorter statutory carryforward periods and states where our economic presence, as defined by the jurisdiction’s tax laws, has been reduced.

As of September 30, 2016, we had federal net operating loss (NOL) carryforwards for federal income tax purposes of $21.0 million that will begin to expire in 2031 which excludes benefits for share based payments of $14.6 million. State NOL carryforwards for state income tax purposes will expire at various dates through 2032.

Under ASC 740, the impact of uncertain tax positions taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained. As of September 30, 2015 and 2016, we had approximately $244,000 and $254,000, respectively, of gross unrecognized tax benefits, of which approximately $154,000 and $154,000, respectively, if recognized, would impact the effective tax rate before considering a change in valuation allowance.

The reconciliation of the total amount recorded for unrecognized tax benefits at the beginning and end of the fiscal years ended September 30, 2015 and 2016 is as follows:

	2015		2016
	(Amounts in thousands)
Unrecognized tax benefits at the beginning of the year	$	234	$	244
Increases in tax positions for prior years		10		10
Unrecognized tax benefits as of September 30,	$	244	$	254

Consistent with our prior practices, we recognize interest and penalties related to uncertain tax positions as a component of income tax expense. As of September 30, 2015 and 2016, interest and penalties represented approximately $120,000 and $130,000, respectively, of the gross unrecognized tax benefits.

We are subject to tax by both federal and state taxing authorities. Until the respective statutes of limitations expire, we are subject to income tax audits in the jurisdictions in which we operate. We are no longer subject to U.S. Federal tax assessments for fiscal years prior to 2012, and we are not subject to assessments prior to the 2011 fiscal year for the majority of the State jurisdictions.

We do not expect a change to the total amount of unrecognized tax benefits in the next 12 months based on examinations by tax authorities, the expiration of statutes of limitations, or potential settlements of outstanding positions.