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):

	2013		2012
United States	$	702	$	(778	)
Foreign		2,107		478
	$	2,809	$	(300	)

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

Current provision (benefit):	2013			2012
Federal	$	124		$	(743	)
State		144			7
Foreign		1,434			1,437
		1,702			701
Deferred provision (benefit):
Federal		(1,883	)		—
State		—			—
Foreign		(184	)		387
		(2,067	)		387
	$	(365	)	$	1,088

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:

	2013			2012
Federal statutory income taxes		35.0	%		35.0	%
State income taxes, net of federal benefit		1.3			2.6
Difference in foreign and United States tax on foreign operations		(11.6	)		(194.0	)
Effect of changes in valuation allowance for net operating loss carryforwards		(55.9	)		(106.2	)
Effect of change in uncertain tax positions (net)		(17.0	)		315.2
Federal Sub-Part F Income from foreign operations		11.8			(170.2	)
Other		23.4			(245.5	)
		(13.0	)%		(363.1	)%

For the years ended December 31, 2013 and 2012, the Company’s effective tax rate was (13.0)% and (363.1)% respectively. For 2013, the 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 the tax benefit recognized based the IRS tax audit settlement, reversal of valuation allowances against net deferred tax assets and differences from foreign operations. Excluding the release of uncertain income tax positions in connection with the settlement of the IRS audit, the effective tax rate for twelve months ended December 31, 2013 would have been 23.5%. 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.

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):

Deferred tax assets:	2013			2012
Current:
Deferred revenue	$	(26	)	$	7
Inventory capitalization		228			429
Inventory reserves		644			457
Accrued expenses		917			935
Other		108			66
Total current deferred tax assets		1,871			1,894
Noncurrent:
Depreciation and amortization		1,834			1,508
Net operating loss⁽¹⁾		5,078			6,255
Deferred royalty		39			119
Non-cash accounting charges related to stock options and warrants		520			491
Accrued expenses		366			409
Other		843			1,117
Total noncurrent deferred tax assets		8,680			9,899
Total deferred tax assets		10,551			11,793
Valuation allowance		(5,264	)		(8,519	)
Total deferred tax assets, net of valuation allowance	$	5,287		$	3,274
Deferred tax liabilities:
Current:
Prepaid expenses	$	396		$	576
Other		5			0
Total current deferred tax liabilities		401			576
Noncurrent:
Internally-developed software		15			37
Depreciation and amortization		2			2
Sub-Part F Income Deferred		2,163			1,830
Other		(52	)		(53	)
Total noncurrent deferred tax liabilities		2,128			1,816
Total deferred tax liabilities	$	2,529		$	2,392

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

Jurisdiction	Gross NOL		Tax Effected NOL		Expiration Years
Canada	$	20		5	2043
Cyprus		25		3	2018
Denmark		2		0	Indefinite
Mexico		9,003		2,701	2020-2023
Norway		743		184	Indefinite
Singapore		54		9	Indefinite
Sweden		576		127	Indefinite
Switzerland		1,490		137	2016-2020
Taiwan		7,268		1,236	2016-2023
Ukraine		725		138	Indefinite
United States (states)		21,499		537	2015-2032

At December 31, 2013 and 2012, the Company’s valuation allowance was $5.3 million and $8.5 million, respectively. The provisions of ASC 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, 2013 and 2012, 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	2013		2012
Mexico	$	2,701	$	2,276
Norway		184		208
Sweden		127		132
Switzerland		38		1,043
Taiwan		1,237		1,192
Ukraine		138		—
United States		839		3,668
Total	$	5,264	$	8,519

At December 31, 2013 and 2012, 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, 2013, 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):

	2013			2012
Current deferred tax assets	$	1,578		$	561
Noncurrent deferred tax assets		1,303			502
Current deferred tax liabilities		(114	)		(179	)
Other long-term liabilities		(9	)		(2	)
Net deferred tax assets	$	2,758		$	882

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, 2013, the Company recorded $0.1 million in current liabilities and $0.7 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2013, the Company had gross tax-affected unrecognized tax benefits of $0.7 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, 2013 and 2012 (in thousands):

	2013			2012
Balance as of January 1	$	3,039		$	3,984
Additions for tax positions related to the current year		436			81
Additions for tax positions of prior years		292			58
Reductions of tax positions of prior years		(3,029	)		(1,084	)
Balance as of December 31	$	738		$	3,039

The examination of our 2005-2009 tax years by the IRS for U.S. federal tax purposes was settled during the second quarter of 2013. In connection with the audit, the IRS and the Company agreed to a net tax deficiency of $0.8 million and the payment of interest accrued through June 30, 2013 of $0.2 million, without any penalties, which was paid during the third quarter of 2013. In connection with the settlement of the audit, the Company reclassified amounts owed to the IRS and previously recorded as uncertain tax positions as taxes payable, resulting in a $1.0 million tax benefit during the year of 2013.

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2013, 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		2009-2013
Canada		2007-2013
Denmark		2010-2013
Japan		2008-2013
Mexico		2011-2013
Norway		2011-2013
Republic of Korea		2008-2013
Singapore		2010-2013
South Africa		2010-2013
Sweden		2011-2013
Switzerland		2010-2013
Taiwan		2008-2013
United Kingdom		2007-2013
United States		2007-2013