(

) Income Taxes

The Company accounts for income taxes under the liability method. Accordingly, deferred income taxes have been provided for temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.

December 22, 2017,

the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of

2017

(the "Tax Act"). The Tax Act significantly modifies the U.S. corporate income tax system by, among other things, reducing the federal income tax rate from

35%

21%,

limiting certain deductions, including limiting the deductibility of interest expense to

30%

of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization, imposing a mandatory

one

-time deemed repatriation tax on accumulated foreign earnings and creating a territorial tax system that changes the manner in which future foreign earnings are subject to U.S. tax.

The components of income (loss) before taxes are as follows (in thousands):

	Year ended December 31,
	2017			2016
Domestic	$	(7,328	)	$	5,375
Foreign		(4,112	)		969
Total	$	(11,440	)	$	6,344

The components of income tax (benefit) expense are as follows (in thousands):

	Year ended December 31,
	2017			2016
Current:
Federal	$	(184	)	$	0
State		39			222
Foreign		194			79
Total current income tax expense		49			301

Deferred:
Federal		(600	)		0
State		(67	)		0
Foreign		0			0
Total deferred income tax (benefit) expense		(667	)		0
Income tax (benefit) expense, net	$	(618	)	$	301

Income tax (benefit) expense for each year is allocated to continuing operations, discontinued operations, extraordinary items, other comprehensive income, the cumulative effects of accounting changes, and other charges or credits recorded directly to shareholders’ equity. ASC

740

Income Taxes, Intraperiod Tax Allocation, Other Presentation Matters

includes an exception to the general principle of intraperiod tax allocations. The codification source states that the tax effect of pretax income or loss from continuing operations generally should be determined by a computation that considers only the tax effects of items that are included in continuing operations. The exception to that incremental approach is that all items (i.e. other comprehensive income, discontinued operations, etc.) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that benefit should be allocated to continuing operations. That is, when a company has a current period loss from continuing operations, management must consider income recorded in other categories in determining the tax benefit that is allocated to continuing operations. This includes situations in which a company has recorded a full valuation allowance at the beginning and end of the period, and the overall tax provision for the year is zero. The intraperiod tax allocation is performed once the overall tax provision has been computed and allocates that provision to various income statement (continuing operations, discontinued operations), other comprehensive income and balance sheet captions. While the intraperiod tax allocation does

not

change the overall tax provision, it results in a gross-up of the individual components. Additionally, tax jurisdictions must be considered separately; therefore the allocation to the U.S. and Mexico must be looked at separately.

As the Company experienced a net loss from operations in the U.S. for the year ended

December

31,

2017

and other comprehensive income from employee benefit and foreign currency translation adjustments, the Company has allocated income tax expense against the components of other comprehensive income in

2017

using a

38.9%

effective tax rate. Income tax benefit for the year ended

December

31,

2017

includes a benefit of

$667,000

due to the required intraperiod tax allocation. Conversely, other comprehensive income for the year ended

December

31,

2017

includes income tax expense of

$667,000.

The Company files a consolidated federal income tax return which includes all

domestic subsidiaries. State income taxes paid in the U.S. during

2017

and

2016

totaled

$110,000

and

$41,000,

respectively. State income tax refunds received in the U.S. during

2017

totaled

$63,000.

There were

state income tax refunds in

2016.

Foreign income taxes paid during

2017

and

2016

totaled

$486,000

and

$141,000,

respectively. There were

foreign refunds received in

2017

and

2016.

There were

federal taxes paid in

2017

and

2016,

and there were

federal refunds received in

2017

and

2016.

December

31,

2017,

the Company had

$134,962,000

of federal net operating loss carryforwards available to offset future federal taxable income, which will expire in various amounts from

2025

2036.

December

31,

2017,

the Company had

$95,294,000

of state net operating loss carryforwards available to offset future state taxable income, the majority of which relates to Florida and Kentucky. These carryforwards expire in various amounts from

2019

2037.

The following is a reconciliation of income tax (benefit) expense to that computed by applying the federal statutory rate to income (loss) before income taxes (in thousands):

	Year ended December 31,
	2017			2016
Federal tax expense at the statutory rate	$	(4,004	)	$	2,220
Current year permanent differences		239			598
State income taxes, net of federal tax impact		(262	)		528
Federal tax reform – deferred rate change		19,395			0
State deferred rate change		239			0
Foreign repatriation, net of foreign tax credits		(544	)		165
Effect of tax rates of foreign subsidiaries		203			(51	)
Currency translation effect on temporary differences		(372	)		626
Change in valuation allowance		(15,230	)		(6,256	)
State NOL carryforwards, stock compensation and other items		(282	)		2,471
Income tax (benefit) expense, net	$	(618	)	$	301

ASC

740,

Income Taxes

requires that a valuation allowance be established when it is more likely than

not

that all or a portion of a deferred tax asset will

not

be realized. The net cumulative domestic and foreign losses for the current and prior

two

years represents negative evidence under the provisions of ASC

740

requiring the Company to establish a valuation allowance against all deferred tax assets. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. and non-U.S. tax benefits.

In addition, we remeasured certain net deferred tax assets and

liabilities based on the tax rates at which they are expected to reverse in the future. The estimated total impact upon enactment of the Tax Act is

$19,395,000,

however, this impact has been offset due to our valuation allowance. Our analysis could affect the measurement of these balances and give rise to new deferred and other tax assets and liabilities. Since the Tax Act was passed late in the

fourth

quarter of

2017,

and further guidance and accounting interpretation is expected over the next

months, our review is still pending. We expect to complete our analysis of the amounts recorded upon enactment of the Tax Act within the measurement period of

one

year.

The T

ax Act also provides that undistributed and previously untaxed post-

1986

foreign earnings will be deemed distributed in

2017

and be subject to tax at reduced effective rates (Transition Tax). The Company estimates it has a net cumulative deficit in E&P from its foreign subsidiaries and, consequently, will

not

be subject to the Transition Tax. In the event that a final calculation were to result in a nominal Transition Tax, the Company has an NOL in excess of the accumulated E&P of its Mexican subsidiaries as of

December

31,

2017,

therefore it will

not

incur a liability for the deemed repatriation of foreign earnings. Additionally, as of

December

31,

2017,

the Company’s U.S. deferred liability for cumulative undistributed earnings has been eliminated.

The gross deferred tax asset for the Company

’s Mexican subsidiaries was

$4,942,000

and

$3,269,000

as of

December 31, 2017

and

2016,

respectively.

Deferred income tax assets and liabilities are as follows

(in thousands):

	December 31,
	2017			2016
Deferred tax assets:
Compensation and benefit accruals	$	585		$	1,517
Inventory valuation		739			1,481
Federal and state net operating loss carryforwards		32,646			49,298
Deferred revenue		296			63
Accounts receivable allowance		34			153
Defined benefit pension plan		802			1,627
Foreign deferred revenue and other provisions		4,942			3,269
AMT credits		0			185
Other		917			777
Total		40,961			58,370
Domestic valuation allowance		(35,387	)		(52,900	)
Foreign valuation allowance		(4,942	)		(3,269	)
Total deferred tax assets		632			2,201
Deferred tax liabilities:
Foreign subsidiaries – unrepatriated earnings		0			(543	)
Depreciation		(632	)		(1,658	)
Total deferred tax liabilities		(632	)		(2,201	)
Net deferred tax asset	$	0		$	0

The ASC Income Tax topic includes guidance for

the accounting for uncertainty in income taxes recognized in an enterprise’s financials. Specifically, the guidance prescribes a 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 and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The total amount of gross unrecognized tax benefits as of

December 31, 2017

and

2016

was

$200,000

There were

changes to the unrecognized tax benefit balance during the years ended

December

31,

2017

and

2016.

If the Company

’s positions are sustained by the taxing authority, the entire balance at

December

31,

2017

would reduce the Company’s effective tax rate. The Company does

not

expect its unrecognized tax benefits to change significantly over the next

months. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of

December

31,

2017

and

2016,

the Company does

not

have an accrual for the payment of tax-related interest and penalties.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Internal Revenue Service (IRS) is

not

currently examining the Company

’s U.S. income tax returns for

2013

through

2016,

for which the statute has yet to expire. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.