(6) Income Taxes

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

(6) Income Taxes

(6) Income Taxes

Information pertaining to the Company’s loss before income taxes and the applicable provision for income taxes is as follows:

		December 31,
		2012	2011	2010
Loss before income taxes:
	Domestic loss	$ (15,356,162)	$ (24,181,349)	$ (19,944,695)
	Foreign income	1,158,248	2,021,398	2,143,049
	Total loss before income taxes:	(14,197,914)	(22,159,951)	(17,801,646)
Provision (benefit) for income taxes:
Current:
	Federal	$       105,198	$         94,974	$                 -
	State and local	18,747	11,453	145,593
	Foreign	745,812	1,262,339	1,353,252
		869,757	1,368,766	1,498,845
Deferred:
	Federal	$         14,876	$         14,876	$  15,310,413
	State and local	981	981	980,137
	Foreign	(99,207)	(176,291)	(215,420)
		(83,350)	(160,434)	16,075,130
Total provision for income taxes:		$       786,407	$    1,208,332	$  17,573,975

During 2012, the Company recorded a tax provision of $786,407 related to state and local and foreign taxes, and interest related to federal uncertain tax positions. In computing the tax provision, expenses related to certain legal matters were determined to be non-deductible for US income tax purposes.

During 2011, the Company recorded a tax provision of $1,208,332 related to state and local and foreign taxes. In computing the tax provision, expenses related to certain legal matters were determined to be non-deductible for US income tax purposes.

During 2010, the Company recorded a tax provision of $17,573,975 related to state and local and foreign taxes and a deferred provision related to an increase in valuation allowance as the Company concluded during the third quarter of 2010 that its domestic deferred tax assets were no longer realizable on a more-likely-than-not basis.

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

		December 31,
		2012	2011
Deferred Tax Assets:
	Allowance for receivables	$           350,738	$           643,080
	Deferred revenue	3,104,017	2,826,497
	Share-based compensation	10,655,853	9,449,070
	Accrued expenses and other liabilities	669,844	153,732
	Domestic net operating loss carryforwards	16,526,224	11,559,661
	Foreign net operating loss carryforwards	405,818	486,687
	Tax credit carryforwards	654,966	728,902
	AMT tax credit carryforwards	485,817	485,817
	Capital loss carryforwards	80,055	77,240
	Fixed assets	957,107	1,018,976
	Intangibles	3,195,185	3,698,607
	Sub-total	37,085,624	31,128,269
	Valuation allowance	(36,606,643)	(30,732,700)
	Net Deferred Tax Asset	$           478,981	$           395,569
Deferred Tax Liabilities:
	Foreign withholding taxes	(96,360)	-
	Net Deferred Tax Liability	$           (96,360)	$                     -
Net Deferred Tax Assets		$           382,621	$           395,569

During the year ended December 31, 2012, the Company’s conclusion did not change with respect to its domestic deferred tax assets and, therefore, the Company has not recorded any benefit for its net domestic deferred tax assets for the full year 2012. The reversal of the valuation allowance on deferred tax assets at December 31, 2012, would reduce income tax expense. As of December 31, 2012, the Company had federal net operating loss carryforwards of approximately $44.9 million which are set to expire at various dates beginning in  2030 through and 2032, if not utilized. 

During the year ended December 31, 2011, the Company’s conclusion did not change with respect to its domestic deferred tax assets and, therefore, the Company has not recorded any benefit for its net domestic deferred tax assets for the full year 2011. The reversal of the valuation allowance on deferred tax assets at December 31, 2011, would reduce income tax expense. As of December 31, 2011, the Company had federal net operating loss carryforwards of approximately $33.0 million which are set to expire in  2030 and 2031, if not utilized. 

As of December 31, 2012, the Company had approximately $1.1 million of various tax credit carryforwards, of which, approximately $0.6 million related to research and development tax credit carryforwards. The research and development tax credits may be carried forward 20 years for federal tax purposes and are set to expire at various dates beginning in 2021 through 2030, if not utilized. The Company has recorded a full valuation allowance against all such carryforwards as of December 31, 2012.     

The Company has not provided for the United States income or the foreign withholding taxes on the undistributed earnings of its subsidiaries operating outside of the United States, with the exception of China.  It is the Company’s intention to reinvest those earnings permanently, and accordingly, it is not practicable to estimate the amount of tax that might be payable.  

The effective tax rate before income taxes varies from the current statutory federal income tax rate as follows:

			December 31,
			2012	2011	2010
Tax at Federal statutory rate			$       (4,969,270)	$       (7,755,983)	$     (6,230,576)
	Increase (reduction) in income taxes resulting from:
		State and local taxes	(3,130)	(59)	131,563
		Non-deductible expenses	50,070	(25,071)	(36,423)
		Settlement costs	(553,700)	2,625,000	-
		Shared-based payment compensation	-	-	38,042
		Net effect of foreign operations	259,592	530,630	619,953
		Research and development credit	-	-	(515,324)
		Uncertain tax positions	140,625	118,351	28,206
		Change in valuation allowance	5,862,220	5,715,464	23,538,534
			$            786,407	$         1,208,332	17,573,975

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:

	2012	2011
Balance at January 1,	$      5,062,124	$      5,169,348
Increases in tax positions for prior years	-	-
Decreases in tax positions for prior years	-	(128,831)
Increase in tax positions for current year	3,572	21,607
Balance at December 31,	$      5,065,696	$      5,062,124

At December 31, 2012, $2.5 million including interest, if recognized, would reduce the Company’s annual effective tax rate. As of December 31, 2012, the Company had approximately $373,000 of accrued interest and penalties. The Company expects $2.3 million of its unrecognized tax benefits to reverse within the next 12 months.

The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2009 through 2012 tax years generally remain subject to examination by federal and most state tax authorities. In addition to the U.S., the Company’s major taxing jurisdictions include China, Taiwan, Japan, South Korea, France and Germany.