

10.	Income Taxes

The Company’s book income (loss) before income taxes for fiscal 2013 and 2012 were as follows (in thousands):



	Years Ended June 30,
	2013			2012
Domestic	$	(6,826	)	$	(1,183	)
Foreign	(3,519		)	(2,936		)
Total	$	(10,345	)	$	(4,119	)

The Company had no accumulated foreign earnings at June 30, 2013 or June 30, 2012.

The benefit from income taxes consists of the following (in thousands):



	Years Ended June 30,
	2013			2012
Current:
Federal	$	(59	)	$	(8	)
State	22			41
Foreign	(171		)	(429		)
Total current	(208		)	(396		)
Deferred:
Foreign	(112		)	—
Total deferred	(112		)	—
Benefit from income taxes	$	(320	)	$	(396	)

The difference between the provision for (benefit from) income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before provision for (benefit from) income taxes is explained below (in thousands):



	Years Ended June 30,
	2013			2012
Tax at federal statutory rate	$	(3,517	)	$	(1,440	)
State taxes, net of federal benefit	462			112
Foreign taxes differential	432			(36		)
Tax credits	(148		)	(53		)
Non-deductible meals and entertainment	21			25
Stock compensation	325			317
Unrecognized tax benefits	(425		)	(533		)
Imputed intercompany interest	243			282
Adjustments related to prior years	(212		)	1,535
Change in valuation allowance	2,462			(656		)
Other	37			51
Benefit from income taxes	$	(320	)	$	(396	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	Years Ended June 30,
	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	36,872		$	34,168
Tax credit carryforwards	1,994			1,530
Inventory valuation	700			567
Depreciation /amortization	523			975
Other accruals not currently deductible for tax purposes	1,341			1,652
Capitalized research and development expenses	—			39
Other	85			206
Total deferred tax assets	41,515			39,137
Valuation allowance	(41,087		)	(38,627		)
Net deferred tax assets	428			510
Deferred tax liabilities:
Purchased intangibles	(316		)	(510		)
Net deferred tax liabilities	(316		)	(510		)
Total net deferred tax assets	$	112		$	—

For financial reporting purposes, the Company's deferred tax assets have been substantially offset by a valuation allowance due to uncertainties about the Company's ability to generate future taxable income. The change in the valuation allowance was a net increase (decrease) of $2.5 million and $(0.7) million for the periods ended June 30, 2013, and June 30, 2012, respectively.

The accumulated tax benefits associated with employee stock options provide a deferred benefit of approximately $1.6 million which has been fully offset by the valuation allowance. The deferred tax benefit associated with the employee stock options will be credited to additional paid-in capital when realized.

The reversal of previously accrued income taxes reflects management’s reassessment of the appropriate level of tax liabilities for the Company based on the Company’s current level of operating activities and recent filing of its federal, state, and certain international tax returns.

At June 30, 2013, the Company had net operating loss carryforwards for federal income tax purposes of approximately $99.7 million which will expire in 2023 through 2033 if unused. The Company had net operating loss carryforwards for California income tax purposes of approximately $36.1 million which will expire in 2014 through 2033. The Company had net operating loss carryforwards for other state income tax purposes of approximately $13.7 million. These other state net operating loss carryforwards will expire in the years 2022 through 2033 if unused.

The Company also has foreign net operating loss carryforwards of approximately $10.5 million, which have no expiration date.

The Company also had credit carryforwards of approximately $2.8 million for federal income tax purposes, and $5.7 million for state income tax purposes. The federal tax credit and a portion of the state tax credit will expire in 2014 through 2033 if unused.

Utilization of the net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the change in ownership limitations provided in the Internal Revenue Code. The annual limitation may result in the expiration of the net operating losses and credits before utilization.

The Company evaluates if its income tax positions will more than likely not sustain on technical merits if audited by an income tax authority. The more likely than not threshold is assessed assuming that the taxing authority will examine the income tax position having full knowledge of all relevant information. At June 30, 2013 the Company had $7.0 million of unrecognized tax benefits of which $0.2 million, if recognized, would reduce the Company’s effective tax rate.

Adept files income tax returns in the U.S. federal jurisdiction, California and various state and foreign tax jurisdictions in which the Company has a subsidiary or branch operation. The tax years 1999 to 2013 remain open to examination by the U.S. and state tax authorities, and the tax years 2007 to 2013 remain open to examination by the foreign tax authorities or until the statute of limitations lapses in each jurisdiction.

Adept’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of June 30, 2013, the Company had accrued interest or penalties associated with unrecognized tax benefits of approximately $19,000. The Company expects an increase to the estimated amount of the liability associated with its uncertain tax position within the next twelve months of approximately $0.

The following table summarizes the activity related to Adept’s unrecognized tax benefits (in thousands):



	Years Ended June 30,
	2013			2012
Beginning balance	$	8,063		$	8,254
Increases related to prior year tax positions	—			19
Decreases related to prior year tax positions	(617		)	—
Increases related to current year tax positions	82			61
Decreases related to lapse of state limitations	(546		)	(271		)
Ending balance	$	6,982		$	8,063

In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. The Company does not provide for U.S. income taxes on the earnings of foreign subsidiaries as such earnings are to be reinvested indefinitely. As of June 30, 2013, there is no cumulative amount of earnings upon which U.S. income taxes have not been provided.