NOTE 8: INCOME TAXES

The components of the Company's income (loss) before income taxes are attributable to the following jurisdictions for the years ended December 31 (in thousands):

		2012			2011
United States	$	(778	)	$	(11,551	)
Foreign		478			(6,327	)
	$	(300	)	$	(17,878	)

The components of the Company's income tax provision (benefit) for the years ended December 31 are as follows (in thousands):

Current provision (benefit):		2012			2011
Federal	$	(743	)	$	2,002
State		7			127
Foreign		1,437			1,197
		701			3,326
Deferred provision (benefit):
Federal		—			(347	)
State		—			18
Foreign		387			(216	)
		387			(545	)
	$	1,088		$	2,781

A reconciliation of the Company's effective income tax rate and the United States federal statutory income tax rate is summarized as follows, for the years ended December 31:

	2012			2011
Federal statutory income taxes		35.0	%		35.0	%
State income taxes, net of federal benefit		2.6			1.1
Difference in foreign and United States tax on foreign operations		(194.0	)		(6.7	)
Effect of changes in valuation allowance for net operating loss carryforwards		(106.2	)		(32.1	)
Effect of change in uncertain tax positions (net)		315.2			(10.5	)
Federal Sub-Part F Income from foreign operations		(170.2	)		(2.9	)
Research and experimentation income tax credits		0.0			0.0
Other		(245.5	)		0.5
		(363.1	)%		(15.6	)%

For the years ended December 31, 2012 and 2011, the Company's effective tax rate was (363.1)% and (15.6)%, respectively. For 2012, the Company had a provision for income tax despite the pre-tax losses primarily because of increases in the valuation allowance for deferred tax assets, increases in uncertain income tax positions, and differences from foreign operations. For 2011, the Company's effective income tax rate was lower than what would be expected if the federal statutory income tax rate were applied to income before taxes primarily because of increases in the valuation allowance for deferred tax assets, increases in uncertain income tax positions, and favorable differences from foreign operations.

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 consisted of the following at December 31 (in thousands):

	2012			2011
Deferred tax assets:
Current:
Deferred revenue	$	7		$	23
Inventory capitalization		429			837
Inventory reserves		457			451
Accrued expenses		935			2,643
Other		66			147
Total current deferred tax assets		1,894			4,101
Noncurrent:
Depreciation and amortization		1,508			1,539
Net operating loss(1)		6,255			5,731
Deferred royalty		119			482
Non-cash accounting charges related to stock options and warrants		491			684
Accrued expenses		409			79
Other		1,117			1,176
Total noncurrent deferred tax assets		9,899			9,691
Total deferred tax assets		11,793			13,792
Valuation allowance		(8,519	)		(9,503	)
Total deferred tax assets, net of valuation allowance	$	3,274		$	4,289
Deferred tax liabilities:
Current:
Prepaid expenses	$	576		$	528
Other		0			18
Total current deferred tax liabilities		576			546
Noncurrent:
Internally-developed software		37			740
Depreciation and amortization		2			—
Sub-Part F Income Deferred		1,830			1,320
Other		(53	)		161
Total noncurrent deferred tax liabilities		1,816			2,221
Total deferred tax liabilities	$	2,392		$	2,767

(1)	The Company's net operating loss will expire as follows (dollar amounts in thousands):

Jurisdiction	Gross NOL		Tax Effected NOL		Expiration Years
Denmark	$	3	$	1	Indefinite
Mexico		7,587		2,276	2020-2021
Norway		743		208	Indefinite
Singapore		59		10	Indefinite
Sweden		502		132	Indefinite
Switzerland		12,448		1,144	2016-2018
Taiwan		7,012		1,192	2016-2021
United States (federal)		1,837		643	2030-2031
United States (states)		25,960		649	2015-2031

At December 31, 2012 and 2011, the Company's valuation allowance was $8.5 million and $9.5 million, respectively. The provisions of Topic 740 require a company to record a valuation allowance when the "more likely than not" criterion for realizing a deferred tax asset cannot be met. A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset. Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified.

The valuation allowances presented below (in millions) at December 31, 2012 and 2011, represented a reserve against the Company's net deferred tax asset the Company believed the "more likely than not" criterion for recognition purposes could not be met.

Country	2012		2011
Mexico	$	2,276	$	1,889
Norway		208		198
Sweden		132		122
Switzerland		1,043		784
Taiwan		1,192		1,074
United States		3,668		5,436
Total	$	8,519	$	9,503

At December 31, 2012 and 2011, the Company did not record a provision for any United States or foreign withholding taxes on its undistributed earnings related to its foreign subsidiaries because it is the intention of the Company to reinvest its undistributed earnings indefinitely in its foreign operations. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. At December 31, 2012, it is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

Deferred tax assets (liabilities) are classified in the accompanying Consolidated Balance Sheets of December 31 as follows (in thousands):

	2012			2011
Current deferred tax assets	$	561		$	936
Noncurrent deferred tax assets		502			772
Current deferred tax liabilities		(179	)		(185	)
Noncurrent deferred tax liabilities		(2	)		(1	)
Net deferred tax assets (liabilities)	$	882		$	1,522

On January 1, 2007, the Company adopted FIN 48, which was codified into Topic 740, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements, uncertain tax positions that it has taken or expects to take on a tax return. Topic 740 requires that a company recognize in its financial statements the impact of tax positions that meet a "more likely than not" threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2012, the Company recorded $2.8 million in current liabilities and $0.2 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2012, the Company had gross tax-affected unrecognized tax benefits of $3.0 million that, if recognized, would impact the effective tax rate. The Company recognizes penalties and interest charges related to unrecognized tax benefits in current tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the years ended December 31, 2012 and 2011 (inthousands):

	2012			2011
Balance as of January 1	$	3,984		$	2,114
Additions for tax positions related to the current year		81			570
Additions for tax positions of prior years		58			1,300
Reductions of tax positions of prior years		(1,084	)		—
Balance as of December 31	$	3,039		$	3 ,984

The Company's 2005-2009 tax years remain subject to examination by the IRS for U.S. federal tax purposes. On May 26, 2011 the IRS issued a Revenue Agent's report ("RAR") detailing proposed adjustments for the tax years under examination. The net tax deficiency associated with the RAR is $8.5 million plus penalties of $1.5 million. On July 8, 2011, the Company filed a protest letter challenging the proposed adjustments contained in the RAR with the Appeals Division of the IRS. On July 26, 2012, the Company participated in a hearing with the Appeals Division of the IRS, and the Company believes the net tax deficiency should approximate amounts previously recorded as uncertain income tax positions for the tax years 2005-2009. Therefore, the Company has made a reduction in its tax positions for tax years after 2009 of approximately $1.1 million. The Company was able to recognize deferred tax assets due to this reduction of prior year tax positions. There are other ongoing audits in various international jurisdictions that are not material to our financial statements.

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2012, the tax years that remained subject to examination by a major tax jurisdiction for the Company's most significant subsidiaries were as follows:

Jurisdiction		Open Years
Australia		2008-2012
Canada		2006-2012
Denmark		2009-2012
Japan		2007-2012
Mexico		2010-2012
Norway		2010-2012
Republic of Korea		2007-2012
Singapore		2009-2012
South Africa		2009-2012
Sweden		2010-2012
Switzerland		2009-2012
Taiwan		2007-2012
United Kingdom		2006-2012
United States		2006-2012