(

)

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. On

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,
	2018			2017
Domestic	$	(5,331	)	$	(7,328	)
Foreign		1,621			(4,112	)
Total	$	(3,710	)	$	(11,440	)

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

	Year ended December 31,
	2018			2017
Current:
Federal	$	0		$	(184	)
State		2			39
Foreign		302			194
Total current income tax expense		304			49
Deferred:
Federal		(191	)		(600	)
State		(21	)		(67	)
Foreign		(297	)		0
Total deferred income tax (benefit) expense		(509	)		(667	)

Income tax (benefit) expense, net	$	(205	)	$	(618	)

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,

2018

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

2018

using a

23.3%

effective tax rate. Income tax benefit for the year ended

December

31,

2018

includes a benefit of

$212,000

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

December

31,

2018

includes income tax expense of

$212,000.

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

2018

and

2017

totaled

$33,000

and

$110,000,

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

2018

and

2017

totaled

$12,000

and

$63,000,

respectively. Foreign income taxes paid during

2018

and

2017

totaled

$109,000

and

$486,000,

respectively. There were

foreign refunds received in

2018

and

2017.

There were

federal taxes paid in

2018

and

2017,

and there were

federal refunds received in

2018

and

2017.

December

31,

2018,

the Company had

$137,764,000

of federal net operating loss carryforwards available to offset future federal taxable income. The pre-

2018

federal net operating loss carryforwards expire in various amounts from

2026

2037.

Federal net operating loss carryforwards generated in

2018

and forward will have an unlimited carryforward period as part of the Tax Act. The indefinite lived net operating loss carryforwards as of

December 31, 2018

are approximately

$3,186,000.

December

31,

2018,

the Company had

$5,869,000

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

2026

2038.

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,
	2018			2017
Federal tax expense at the statutory rate	$	(779	)	$	(4,004	)
Current year permanent differences		82			239
State income taxes, net of federal tax impact		(118	)		(262	)
Federal tax reform – deferred rate change		0			19,395
State deferred rate change		0			239
Foreign repatriation, net of foreign tax credits		0			(544	)
Effect of tax rates of foreign subsidiaries		154			203
Currency translation effect on temporary differences		189			(372	)
Change in valuation allowance		358			(15,230	)
State NOL carryforwards, stock compensation and other items		(91	)		(282	)
Income tax (benefit) expense, net	$	(205	)	$	(618	)

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 U.S. deferred tax assets and a portion of its non-U.S. 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 a portion of its non-U.S. tax benefits.

In addition, we remeasured certain net deferred tax assets and liabilities in

2017

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

$19,395,000,

however, this impact has been offset due to our valuation allowance. The Tax Act also provides that undistributed and previously untaxed post-

1986

foreign earnings will be deemed distributed in

2017.

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

$4,434,000

and

$4,942,000

as of

December

31,

2018

and

2017,

respectively.

Deferred income tax assets and liabilities are as follows (in thousands):

	December 31,
	2018			2017
Deferred tax assets:
Compensation and benefit accruals	$	450		$	585
Inventory valuation		759			739
Federal and state net operating loss carryforwards		33,567			32,646
Deferred revenue		90			296
Accounts receivable allowance		11			34
Depreciation		39			0
Defined benefit pension plan		573			802
Foreign deferred revenue and other provisions		4,434			4,942
Other		874			917
Total		40,797			40,961
Domestic valuation allowance		(36,363	)		(35,387	)
Foreign valuation allowance		(4,137	)		(4,942	)
Total deferred tax assets		297			632
Deferred tax liabilities:
Depreciation		0			(632	)
Total deferred tax liabilities		0			(632	)
Net deferred tax asset	$	297		$	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, 2018

and

2017

was

$200,000.

There were

changes to the unrecognized tax benefit balance during the years ended

December

31,

2018

and

2017.

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

December

31,

2018

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,

2018

and

2017,

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

2015

through

2017,

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