Income Taxes

12 Months Ended

Dec. 31, 2013

14. Income Taxes

(Loss) income from continuing operations before income taxes include the following components (in thousands):

	Years Ended December 31,
	2013	2012
U.S.-based operations	$ (8,481)	$ (7,872)
Non U.S.-based operations	2,053	(2,189)
(Loss) income from continuing operations before income taxes	$ (6,428)	$ (10,061)

Income tax expense (benefit) attributable to loss from continuing operations is summarized as follows (in thousands):

	Current	Deferred	Total
Year ended December 31, 2013:
U.S. Federal	$ ─	$ ─	$ ─
State and local	16	─	16
Foreign	405	(69)	336
Total	$ 421	$ (69)	$ 352

Year ended December 31, 2012:
U.S. Federal	$ ─	$ ─	$ ─
State and local	16	─	16
Foreign	(212)	(171)	(383)
Total	$ (196)	$ (171)	$ (367)

Income taxes attributable to loss from continuing operations differ from the amounts computed by applying the U.S. federal statutory rate of 34% to loss from continuing operations before income taxes as shown below (in thousands):

	Years Ended December 31,
	2013	2012
Expected tax benefit	$ (2,185)	$ (3,421)
Net tax effects of:
Foreign tax rate differential	(515)	408
State taxes, net of federal benefit	(62)	(529)
Return to provision adjustment	(270)	832
Research and other credits	(139)	(2)
Permanent difference on deemed dividend	1,040	-
Permanent difference on warrants	61	(31)
Other	35	73
Change in deferred tax asset valuation allowance	2,387	2,303
Income tax expense (benefit) from continuing operations	$ 352	$ (367)

Deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2013	2012
Deferred tax assets:
Research and development credits	$ 1,824	$ 1,707
Other credits	378	347
Operating loss carry forwards	12,592	10,562
Inventories	338	469
Allowance for doubtful accounts	118	563
Depreciation	349	246
Deferred research and development expenses for income tax	327	327
Non-cash compensation	957	706
Other	794	536
Total gross deferred tax assets	17,677	15,463
Valuation allowance	(17,293)	(14,906)
Net deferred tax assets	384	557

Deferred tax liabilities
Other identifiable intangible assets	(1,070)	(1,354)
Total gross deferred tax liabilities	(1,070)	(1,354)
Net deferred tax liabilities	$ (686)	$ (797)

The Company had approximately $24.0 million, $64.3 million and $5.5 million of federal, state and foreign income tax net operating loss carryforwards at December 31, 2013, respectively. The foreign net operating losses can be carried forward indefinitely. Future utilization of the federal and state net operating losses and credit carryforwards is subject to a substantial annual limitation due to ownership change limitations as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state limitations.

The Company performed a study to evaluate the status of net operating loss carryforwards as a result of the ownership change from the Merger. The results of the study provided that the merger caused an “ownership change” of the Company as defined for U.S. federal income tax purposes as of the date of the merger. The “ownership change” will significantly limit the use of the Company’s net operating losses and credits in future tax years. Of the $24.0 million federal loss carryforwards approximately $5.4 million of the loss will be subject to an annual limitation of $0.4 million within the next 5 years and $0.2 million for the following 15 years. The federal net operating loss carryforwards will expire in fiscal year 2033. As a result of the “ownership change” the federal research and development credits have been limited and based on the limitation the Company does not anticipate being able to use any of these credits that existed as of the date of the Merger in future tax years. Of the $64.3 million of state net operating loss carryforwards approximately $1.1 million of the loss will be subject to an annual limitation of $0.1 for the next 20 years. The state net operating loss carryforwards will expire in fiscal year 2033. The Company has state research and development credits of $2.6 million. Since the state credits have an indefinite life, the Company did not write them off even though it is also limited under Section 383. The Company has a full valuation allowance against the related deferred tax assets as it is more likely than not that they will not be realized by the Company.

In assessing the potential realization of deferred tax assets, consideration is given to whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. In addition, the utilization of net operating loss carryforwards may be limited due to restrictions imposed under applicable federal and state tax laws due to a change in ownership. Based upon the level of historical operating losses and future projections, management believes it is more likely than not that the Company will not realize the deferred tax assets.

The Company has not recognized a deferred tax liability on undistributed earnings of its foreign subsidiaries, because these earnings are intended to be permanently reinvested. The amount of the unrecognized deferred tax liability depends on judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time of any such distributions. Therefore, the Company believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to its undistributed earnings; however, these undistributed earnings are immaterial. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted and income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance.

The following changes occurred in the amount of unrecognized tax benefits including related interest and penalties (in thousands):

	Years Ended December 31,
	2013	2012
Balance at beginning of year	$ 452	$ 529
Additions for current year tax provisions	91	41
Reduction for prior year tax provisions	─	(118)
Balance at end of year	$ 543	$ 452

If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate.

As of December 31, 2013 and 2012, the Company had $0.2 million accrued for payment of interest and penalties related to unrecognized tax benefits.

The Company operates in multiple tax jurisdictions, both within and outside of the United States. Although the timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next twelve months. The following tax years remain open to examination by the major domestic taxing jurisdictions to which it is subject:

	Open Tax Years
United States – Federal	2010 – 2013
United States – State	2009 – 2013
Canada	2008 – 2013
Sweden	2011 – 2013
United Kingdom	2009 – 2013

- 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.

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