Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

9. Income Taxes

Significant components of the Company’s deferred income tax assets and liabilities are as follows at December 31:

		September 30,			September 30,
	2011			2010
Deferred income tax assets:
Net operating loss carryforward	$	634,802		$	1,875,491
Deferred warranty revenue		1,674,984			1,820,670
Inventory reserve		1,712,978			136,436
Non-employee stock option expense		312,597			314,824
Non-qualified stock option expense		2,530,214			1,867,643
Capitalized research and development		9,677,167			11,314,412
Alternative minimum tax carryforward		1,657,287			1,636,024
Research and development tax credit		5,088,136			4,147,763
Impairment Loss		902,675			—
Deferred Legal Settlement		1,277,323			—
Uniform capitalization of inventory costs		756,341			504,398
Reserves, accruals, and other		1,148,970			1,259,175
Total deferred income tax assets		27,373,474			24,876,836
Deferred income tax liabilities:
Depreciation		(3,133,145	)		(4,413,386	)
Amortization		(126,659	)		(147,366	)
Section 481(a) adjustment		—			(111,842	)
Total deferred income tax liabilities		(3,259,804	)		(4,672,594	)
Net deferred income tax assets before valuation allowance		24,113,670			20,204,242
Less: Valuation allowance		(1,428,572	)		—
Net deferred income tax assets	$	22,685,098		$	20,204,242

The Company’s net deferred tax assets are presented as follows on the accompanying consolidated balance sheets at December 31:

		September 30,		September 30,
	2011		2010
Current deferred tax assets	$	9,968,929	$	6,284,489
Long-term deferred tax assets		12,716,169		13,919,753
Total	$	22,685,098	$	20,204,242

In 2010, the Company generated a net operating loss carry forward (“NOL”) for financial reporting purposes of $2.5 million after adjustment for a return-to-provision adjustment during Q3 2011. The Company utilized an estimated $1.1 million of its federal NOL for financial reporting purposes during 2011. The federal NOL carry forward for tax purposes at December 31, 2010 was $10.1 million and is estimated to be $9.0 million at December 31, 2011. The Company’s federal NOL carry forward expires beginning in 2024. The Company also has deferred tax assets of $148,000 related to state NOLs which expire at various dates between 2014 and 2025. The Company has federal and state research and development credit carry forwards for financial reporting purposes of $2.3 million and $2.8 million, respectively, which expire at various dates beginning in 2024 for federal purposes and 2019 for state purposes. The Company has a minimum tax credit carryover of $1.6 million which does not expire.

The Company recognizes the income tax benefits associated with certain stock compensation deductions only when such deductions produce a reduction to the company’s actual tax liability. Accordingly, in 2011 and 2010 the Company recognized benefits of $9,800 and $52,000, respectively, for the reduction of state taxes payable, which was recorded as a credit to additional paid-in capital.

In preparing the Company’s consolidated financial statements, management has assessed the likelihood that its deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considers all available evidence, positive and negative; including the Company’s operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining the Company’s provisions for income taxes, its deferred income tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.

Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. Management believes that as of December 31, 2011, based on evaluation and projections of future sales and profitability, a valuation allowance of $1.4 million was necessary for the Arizona R&D credit carry forward as management concluded that it is not more likely than not that all of the R&D credit carry forward amount will be realized before it fully expires in 15 years. The deferred tax asset could be further reduced or the valuation allowance could be changed in the near-term if estimates of future taxable income during the carry forward period change.

Significant components of the provision (benefit) for income taxes are as follows for the years ended December 31:

		September 30,			September 30,			September 30,
	2011			2010			2009
Current:
Federal	$	133,220		$	270,437		$	417,722
State		59,428			71,494			290,215
Total current		192,648			341,931			707,937
Deferred:
Federal		(3,252,769	)		(939,803	)		(427,332	)
State		770,687			(148,574	)		(760,825	)
Total deferred		(2,482,082	)		(1,088,377	)		(1,188,157	)
Tax provision (benefit) recorded as an increase (decrease) in liability for unrecorded tax benefits		(299,441	)		17,061			572,699
Provision (benefit) for income taxes	$	(2,588,875	)	$	(729,385	)	$	92,479

The Company is subject to federal, state and foreign taxes; however, no separate calculation of the foreign provision for deferred tax assets was calculated for the periods presented due to the minimal amount of book income in the Company’s foreign subsidiary and the comparability of the foreign tax rate to the tax rate in the United States. A reconciliation of the Company’s effective income tax rate to the federal statutory rate for the years ended December 31, 2011, 2010 and 2009 is as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
Federal income tax at the statutory rate	$	(3,370,059	)	$	(1,789,837	)	$	31,981
State income taxes, net of federal benefit (i)		(357,226	)		(103,651	)		(502,186	)
Permanent differences (ii)		680,742			870,757			1,097,908
Research and development		(229,694	)		(163,883	)		(990,867	)
Return to provision adjustment (iii)		(458,172	)		265,028			111,652
Change in liability for unrecognized tax benefits		(299,441	)		17,061			572,699
Change in valuation allowance		1,428,572			—			(200,000	)
Other		16,404			175,140			(28,708	)
Provision (benefit) for income taxes	$	(2,588,875	)	$	(729,385	)	$	92,479
Effective tax rate		26.9	%		14.3	%		101.2	%

(i) The 2009 benefit for state income taxes was primarily driven by the utilization of Arizona research and development credits.

(ii) Permanent differences include certain expenses which are not deductible for tax purposes including lobbying fees and stock-based compensation expense related to Incentive Stock Options (“ISOs”).

(iii) The 2010 return to provision adjustment was driven by lower than estimated 2009 research and development tax credits, which reduced the net tax benefit and therefore the effective tax rate. The 2011 return to provision adjustment was driven by higher than estimated 2010 research and development tax credits, which increased the net tax benefit and therefore the effective tax rate.

The Company has completed research and development tax credit studies which identified approximately $6.8 million in tax credits for Federal, Arizona and California income tax purposes related to the 2003 through 2011 tax years, net of the federal benefit on the Arizona and California research and development tax credits. Management has made the determination that it is more likely than not that the full benefit of the research and development tax credit will not be sustained on examination and recorded a liability for unrecognized tax benefits of $1.9 million as of December 31, 2011. In addition, management accrued approximately $106,000 for estimated uncertain tax positions related to certain state income tax liabilities. As of December 31, 2011, management does not expect the amount of the unrecognized tax benefit liability to increase or decrease significantly within the next 12 months. Should the unrecognized tax benefit of $2.0 million be recognized, the Company’s effective tax rate would be favorably impacted.

The following presents a roll forward of our liability for unrecognized tax benefits as of December 31:

		September 30,			September 30,
	2011			2010
Balance, beginning of period	$	2,281,840		$	2,264,779
Increase in previous year tax positions		—			—
Increase in current year tax positions		83,298			58,830
Increase (decrease) related to adjustment of previous estimates of activity		(382,739	)		(41,769	)
Decrease related to settlements with taxing authorities		—			—
Decrease related to lapse of statute of limitations		—			—
Balance, end of period	$	1,982,399		$	2,281,840

Federal income tax returns for 2007 through 2010 remain open to examination by the United States Internal Revenue Service (the “IRS”), while state and local income tax returns for 2003 through 2010 also remain open to examination. The foreign tax returns for 2009 and 2010 also remain open to examination. The Company has been notified it will be subject to examination in the following major jurisdictions for the years specified: California 2007-2010, Washington 2007-2010, Arizona 2007-2011 and Virginia 2008-2011.