Note 6 - Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

6.  INCOME TAXES

The provision (benefit) for income taxes applicable to operations for each period presented was as follows (in thousands):

	Year ended December 31,
	2012		2011		2010
United States tax provision	$	7	$	7	$	-
Foreign tax provision (benefit)		5		210		(637	)
Total income tax provision (benefit)	$	12	$	217	$	(637	)

The tax effect of temporary differences that give rise to significant components of the deferred tax assets as of December 31, 2012 and 2011, are presented as follows (in thousands):

	Year ended December 31,
	2012			2011
Current deferred tax assets:
Inventories	$	283		$	264
Accounts receivable		6			6
Deferred revenue		130			57
Other accruals		432			287
Total current deferred tax assets	$	851		$	614
Noncurrent deferred tax assets:
Depreciation	$	295		$	229
Other		397			251
Net operating loss carryforwards		15,872			14,862
Total noncurrent deferred tax assets	$	16,564		$	15,342
Valuation allowance for deferred tax assets		(17,415	)		(15,956	)
Deferred tax assets, net of valuation allowance	$	-		$	-

A valuation allowance is established when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized.  A review of all available positive and negative evidence is considered, including current and past performance, the market environment in which the Company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog and other factors.

Concluding that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years.  Cumulative losses weigh heavily in the overall assessment.  The Company continues to maintain a valuation allowance on all of the net deferred tax assets at December 31, 2012 because management believes, after considering all available objective evidence, that the realization of the assets is not reasonably assured.  Until an appropriate level of profitability is sustained, the Company expects to record a full valuation allowance on future tax benefits, except for those that may be generated in foreign jurisdictions.

The differences between the actual income tax provision (benefit) and the amount computed by applying the statutory federal tax rate to the loss before income tax shown in the Consolidated Statements of Operations are as follows (in thousands):

	Year ended December 31,
	2012			2011			2010
Income tax benefit at statutory rate	$	(1,283	)	$	(98	)	$	(3,079	)
Benefit for French research and development tax credit		-			-			(1,125	)
State provision		2			15			-
French permanent items		(84	)		81			118
Foreign income inclusion		(5	)		100			-
Adjustment to deferred tax assets		(66	)		(38	)		(169	)
Other		(11	)		(2	)		5
Change in valuation allowance		1,459			159			3,613
Income tax provision (benefit)	$	12		$	217		$	(637	)

At December 31, 2012, the Company had approximately $46.6 million of federal net operating loss carryforwards, the earliest of which does not expire until 2022.  The federal net operating loss includes $3.6 million related to non-qualified stock option deductions.  The Company also had state net operating losses of $4.5 million.  The valuation allowance recorded on the portion of net operating losses related to stock options will reverse as a credit to shareholders’ equity once management believes that these losses are more likely than not to be realized.  At December 31, 2012, the Company’s French subsidiary has a net research and development tax credit, generated in 2010, of $297,000, classified as a non-current asset on the Company’s consolidated balance sheet.  The Company expects to receive the refund for the research and development tax credit generated for the year ended December 31, 2010 in 2014 or to utilize it to offset future tax payments in advance of the refund.  The Company no longer generates tax credits from French research and development activities as a result of the closure of its French operations at the end of 2010.

The earnings of the Company’s foreign subsidiary are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes have been provided thereon.  Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to foreign tax credits) and withholding taxes, if applicable, payable to foreign countries.

At both December 31, 2012 and 2011, the Company had an uncertain U.S. tax position of approximately $80,000 related to foreign operations.  Due to the net operating loss position in the U.S., the Company would not incur tax, interest or penalty currently or in the near future.  As such, no expense was recorded on the income statement and there is no impact on the Company’s effective tax rate.  The Company does not anticipate any event in the next twelve months that would cause a change to this position.  The Company will recognize any penalties and interest when necessary as tax expense.  The U.S. federal returns for the years ending December 31, 2009 and after are open for IRS examination. The Company’s operations during the year ended December 31, 2002 generated a loss, and the 2002 net operating loss (“NOL”) is still being used by the Company.  The IRS may audit up to the NOL amount generated during the year ended December 31, 2002 until the statute of limitations expiration on open tax years.

The Company is also subject to income tax in France.  At December 31, 2012, the Company had an uncertain tax position of $820,000, of which $722,000 is related to a potential liability, $72,000 is related to possible interest, and $26,000 is related to a potential penalty.  At December 31, 2011, the Company had an uncertain tax position of $784,000, of which $712,000 is related to a potential liability, $46,000 is related to possible interest, and $26,000 is related to a potential penalty.  The uncertain tax position in France is expected to have a favorable impact in the amount of $820,000, resulting in a favorable impact on the effective tax rate.  The Company is under a tax audit in France related to the years ended December 31, 2009, 2010, and 2011; however, it does not anticipate any event, other than the results of this tax audit, in the next twelve months that would cause a change to this position.  As a result of the tax audit, the French income tax returns for the years ended December 31, 2009 and subsequent remain open for examination.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in thousands):

	Unrecognized Tax Benefit
Balance as of January 1, 2011	$	720
Additions based on tax positions - previous years		185
Reductions as a result of lapse of statute limitations		(103	)
Effect of exchange rate changes		(18	)
Balance as of December 31, 2011	$	784
Additions based on tax positions - previous years	$	22
Reductions as a result of lapse of statute limitations		-
Effect of exchange rate changes		14
Balance as of December 31, 2012	$	820