Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

Note 3 – Income Taxes

We provide for income taxes under the liability method in accordance with the FASB’s guidance on accounting for income taxes. The provision for income taxes in the accompanying consolidated statements of operations consists of the following:

Year ended December 31,	2011		2010		2009
Federal:
Current	$	3,588,798	$	210,090	$	(499,655	)
Deferred		-		-		3,852,211
		3,588,798		210,090		3,352,556
State:
Current		515,745		92,505		497,245
Deferred		-		0		577,309
		515,745		92,505		1,074,554
Foreign:
Current		1,420		-		12,138
Deferred		-		-		-
		1,420		-		12,138
Total	$	4,105,963	$	302,595	$	4,439,248

Income (loss) before income tax provision for income taxes consists of the following:

Year ended December 31,	2011			2010			2009
Domestic	$	15,805,107		$	(7,706,018	)	$	(6,509,581	)
Foreign		(4,270,715	)		(766,343	)		489,795
Total	$	11,534,392		$	(8,472,361	)	$	(6,019,786	)

A reconciliation of the federal statutory rate to our effective tax rate is as follows:

Year ended December 31,	2011			2010			2009
Income tax benefit at federal statutory rate		34.0	%		(34.0	%)		(34.0	%)
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit		3.1			(1.5	)		(3.9	)
Federal research credit		(3.0	)		(1.1	)		(5.8	)
Foreign rate differential		0.4			(0.3	)		(0.4	)
Foreign rate differential - valuation allowance		12.2			3.4			(2.1	)
Change in valuation allowance		(13.3	)		32.1			112.1
ASC 740-10 reserves		1.9			(0.3	)		2.8
Permanent items		0.3			5.3			5.1
Provision for income taxes		35.6	%		3.6	%		73.8	%

The components of the net deferred tax asset recognized in the accompanying consolidated balance sheets are as follows:

At December 31,	2011			2010
Deferred Tax Assets
Net operating loss carry forwards	$	1,962,882		$	3,124,816
Nondeductible reserves		1,880,276			1,527,731
Nondeductible accruals		1,527,390			1,701,872
Tax credits		499,099			606,918
Stock-based compensation		2,100,606			2,659,534
Gross Deferred Tax Assets	$	7,970,253		$	9,620,871
Valuation allowance		(7,636,353	)		(9,353,438	)
Net Deferred Tax Assets	$	333,900		$	267,433
Deferred Tax Liabilities
Fixed Assets	$	(333,900	)	$	(267,433	)
Net Deferred Tax Liabilities	$	(333,900	)	$	(267,433	)
Net Deferred Tax Assets	$	-		$	-

Under the FASB’s guidance, we only recognize a deferred tax asset for the future benefit of our tax losses, temporary differences and tax credit carry forwards to the extent that it is more likely than not that these assets will be realized. In 2011 and 2010, we incurred operating losses in foreign jurisdictions.  We believe that it is more likely than not that the associated tax asset will not be utilized. Therefore, we have established and maintained a full valuation allowance in 2011 and 2010 on this deferred tax asset.

In 2011, we generated U.S. operating income that is partially offset with previously reserved net operating loss carryforwards, resulting in a $4.1 million U.S. federal and state tax expense for the year ended December 31, 2011.  The company does not have any remaining federal net operating loss carryforwards to offset against tax expense, but continues to have other net deferred tax assets.  In 2011 and 2010, we recorded a valuation allowance against our U.S. deferred tax assets. In evaluating the ability to recover these deferred tax assets, we considered all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies.  We do not believe it is more likely than not that the net deferred tax assets will be realized.

In addition to the tax assets described above, we have deferred tax assets totaling approximately $18.5 million, related to excess tax deductions from the exercise of employee stock options. Recognition of these assets would occur upon utilization of these deferred tax assets to reduce taxes payable and would result in a credit to additional paid-in capital within stockholders’ equity. For 2011, 2010, and 2009, the impact to paid-in capital resulting from the exercise and expiration of employee stock options was $3.2 million, $0.2 million, and $0.4 million, respectively.

At December 31, 2011, we had available, subject to review and possible adjustment by the Internal Revenue Service, federal net operating loss and tax credit carry forwards of approximately $39.1 million and $4.3 million, respectively, to be used to offset future taxable income. We also have state net operating loss and tax credit carryforwards of approximately $7.1 million and $2.0 million, respectively, to be used to offset future taxable income.  These net operating loss carry forwards and tax credits are primarily attributable to the excess tax deductions from the exercise of employees’ stock options and will expire through 2031. We also have $5.3 million of foreign net operating loss carry forwards.

At the adoption date of the FASB’s guidance on accounting for uncertainty in income taxes on January 1, 2007, we had $2.2 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. At December 31, 2011, we have $3.1 million of unrecognized tax benefits, including related accrued interest, all of which would affect our effective tax rate, if recognized.

A reconciliation of our total gross unrecognized tax benefits for the years ended December 31, 2011 and 2010 is below.

At December 31,	2011			2010
Balance at beginning of year	$	2,762,432		$	3,032,220
Tax positions related to current year:
Increase related to positions taken in current year		173,800			146,811
Increases related to positions taken during prior year		94,069			-
Decrease related to positions take during prior year		-			(98,923	)
Decrease related to settlements		-			(12,415	)
Decrease resulting from statute expiration		(127,758	)		(305,261	)
Balance at end of year	$	2,902,543		$	2,762,432

We establish reserves for uncertain tax positions based on management’s assessment of exposure associated with tax deductions, permanent tax differences and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserve.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2011 and 2010, we had approximately $180,000 and $140,000 of accrued interest and penalties related to uncertain tax positions, respectively.

The tax years 2007-2011 remain open to examination by the major taxing jurisdictions to which we are subject. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.