Note 7. Income Taxes

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Text Block]

7.             INCOME TAXES

The components of deferred income taxes are as follows (in thousands):

	September 30, 2012		December 31, 2011
Deferred tax assets:
Net operating loss carryforwards	$	17,242	$	16,728
Inventory		1,740		1,736
Other liabilities		2,579		2,229
Fixed assets		447		452
Other temporary differences		688		625
		22,696		21,770
Deferred tax valuation allowance		3,268		3,268
	$	19,428	$	18,502

In accordance with accounting standards, the Company has not recorded a deferred tax asset related to the settlement of share-based awards in the accompanying consolidated financial statements because it will not result in the reduction of income taxes payable, due to the existence of net operating loss carryforwards. The cumulative amount of unrecognized tax benefits associated with these awards was approximately $0.9 million at September 30, 2012, and if the Company is able to utilize this benefit in the future it would result in a credit to additional paid in capital.

At September 30, 2012, the Company had U.S. federal net operating loss carryforwards ("NOLs") of approximately $50 million expiring between the years 2012 through 2031. Approximately $7.5 million of the NOLs are set to expire in 2012 if not utilized. The remaining amount of NOLs of approximately $42.5 million are not scheduled to expire until 2018 and beyond. Based on management's current estimate of book income and the uncertainty of the timing of future taxable income, it was determined that it is more likely than not that the Company will not be able to generate enough taxable income in the respective carry forward periods to realize all of its NOLs. Consequently, in the third quarter of 2011, the Company recorded a $2.7 million valuation allowance related to the $7.5 million of the NOLs that are set to expire in 2012, based on management's expectation that the NOLs may not be realized. While the Company believes its estimates and assumptions are reasonable, if the Company does not generate enough taxable income to fully realize the balance of net operating loss carryforwards, additional valuation allowances or tax provisions may be required.

The components of the provision for income tax (expense) benefit are as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Current:
State and foreign	$	(4	)	$	(9	)	$	(27	)	$	(27	)
Deferred:
State		13			6			44			20
Federal		293			123			882			409
		306			129			926			429
Valuation allowance		-			(2,724	)		-			(2,724	)
Income tax (expense) benefit	$	302		$	(2,604	)	$	899		$	(2,322	)

The difference between the Company's effective income tax rate and the federal statutory rate is primarily due to the amount of expense associated with its share-based payment arrangements and the portion thereof that will give rise to tax deductions.

The Company files U.S. federal income tax returns as well as income tax returns in various states and one foreign jurisdiction. The Company may be subject to examination by the Internal Revenue Service ("IRS") for calendar years 2009 through 2011 under the normal statute of limitations. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the IRS. Generally, for state tax purposes, the Company's 2008 through 2011 tax years remain open for examination by tax authorities under four year statutes of limitations, however, certain state statutes of limitations may remain open for six to ten years.