10.	Income Taxes

A reconciliation of the statutory U.S. federal tax rate and effective tax rates is as follows:

	2011			2010			2009
Federal statutory taxes		34.0	%		34.0	%		34.0	%
State income taxes, net of federal tax benefit		4.1	%		4.5	%		3.9	%
Foreign taxes less than the domestic rate		(0.8	%)		(0.1	%)		0.0	%
Permanent differences		(0.3	%)		(0.2	%)		(0.2	%)
Change in valuation allowance		(48.0	%)		(38.2	%)		(37.9	%)
Other		3.9	%		0.0	%		0.2	%
		(7.1	%)		0.0	%		0.0	%

Deferred income taxes are recorded based upon differences between the financial reporting and income tax basis of assets and liabilities. The following deferred income taxes are recorded:

	2011			2010
Deferred tax assets:
Federal net operating loss carryforward	$	27,595		$	22,590
State loss carryforward		3,382			2,462
Goodwill		–			523
Other intangible assets		1,188			1,236
Allowance for bad debts		1,050			662
Stock-based compensation		874			616
Accrued expenses		111			143
Inventory		88			78
Other		425			125
Total gross deferred tax assets		34,713			28,435
Deferred tax liabilities:
Fixed assets		(140	)		(305	)
Goodwill		(961	)		–
Total gross deferred tax liabilities		(1,101	)		(305	)
Valuation allowance		(34,573	)		(28,130	)
Total net deferred liability	$	(961	)	$	-

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income, and tax planning strategies in making this assessment. Accordingly, we have provided valuation allowances to fully offset the net deferred tax assets at December 31, 2011 and 2010. The $6,443 and $4,755 net increase in the valuation allowance for 2011 and 2010, respectively, primarily reflects the net increase in the federal and state loss carryfoward deferred tax assets.

We have approximately $81,163 in U.S. federal net operating loss carryforwards that expire between 2025 through 2031, approximately $2,634 in Canadian federal and provincial net operating loss carryforwards that expire between 2030 through 2031 and approximately $74,261 in state loss carryforwards that begin to expire in 2012. Section 382 of the U.S. Internal Revenue Code imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We believe that an annual limit will be imposed by Section 382, however we expect to fully utilize its net operating loss carryforwards during their respective carryforward periods.

We have no unrecognized tax benefits and there are no uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next 12 months.