Income Taxes

The Company accounts for income taxes pursuant to the provisions of ASC 740, Income Taxes, which requires an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted statutory tax rates in effect at the balance sheet date. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty exists regarding the realizability of the deferred tax assets.

Income before provision for income tax expense (benefit) consisted of the following (in thousands):

	Fiscal Year Ended October 31,
	2011			2010			2009
Region:
United States	$	(1,973	)	$	(1,261	)	$	(1,015	)
International	2,957			3,382			5,292
	$	984		$	2,121		$	4,277


Note 13.	Income Taxes (Continued)

The provision for income tax expense (benefit) consisted of the following (in thousands):

	Fiscal Year Ended October 31,
	2011			2010		2009
Current:
Federal	$	—		$	—	$	—
State	(24		)	4		23
Foreign	242			395		300
Foreign withholding	64			68		54
Total current	282			467		377

Deferred:
Federal	—			—		—
State	—			—		—
Foreign	—			—		(939		)
Total deferred	—			—		(939		)
Total provision for income tax expense (benefit)	$	282		$	467	$	(562	)

The provision for income taxes in Germany included approximately $212,000 and $395,000 for fiscal year 2011 and fiscal year 2010, respectively, attributable to taxable income related to our German operations that were in excess of the allowable utilization of the tax loss carry forwards, and therefore, subject to corporate taxes. The provision for income taxes in Germany also included approximately $30,000 related to uncertain tax positions.

The provision for income tax expense (benefit) differs from the amount estimated by applying the statutory federal income tax rate (35%) to income before taxes as follows (in thousands):



	Fiscal Year Ended October 31,
	2011			2010			2009

Federal tax at statutory rate	$	344		$	742		$	1,497
State tax at statutory rate, net of federal benefit	(89		)	32			(138		)
Change in valuation allowance	(2,318		)	(2,560		)	(711		)
Foreign tax differential	(161		)	886			(1,299		)
Foreign tax dividend	—			1,361			—
Decrease in net operating loss carry forwards	2,405			—			—
Other	101			6			89
	$	282		$	467		$	(562	)

The components of the net deferred tax asset were as follows (in thousands):



	As of October 31,
	2011			2010
Deferred tax assets:
Net operating loss carry forwards	$	30,116		$	32,543
Tax credit carry forwards	1,930			1,880
Other	453			394
	32,499			34,817
Valuation allowance	(31,601		)	(33,933		)
Net deferred tax asset	$	898		$	884


Note 13.	Income Taxes (Continued)

At October 31, 2011, the Company had federal and state net operating loss carry forwards of $61.5 million and $13.0 million, respectively, and federal and state tax credit carry forwards of $1.5 million and $664,000, respectively. The federal and state net operating loss carry forwards expire on various dates through 2031 including $2.9 million of federal net operating loss carry forwards expiring in 2012. The federal tax credit carry forwards expire on various dates through 2024. The state tax credit can be carried forward indefinitely. Additionally, at October 31, 2011, the Company had German net operating tax loss carry forwards of approximately $24.2 million. The German tax code provides for certain annual statutory limitations related to the use of tax loss carry forward amounts. For each taxable year, the Company may utilize German tax loss carry forwards fully up to the first million euros of taxable income, and thereafter, the tax loss carry forwards are limited to 60% of taxable income. Ultimately, the realization of the deferred tax assets is dependent upon the Company's generation of sufficient future taxable income to enable it to use net operating loss and tax credit carry forwards during those periods in which such carry forwards can be utilized by the Company.

In evaluating Versant's ability to utilize its deferred tax assets, management of the Company considers all available positive and negative evidence, including past operating results in the most recent fiscal years and an assessment of expected future results of operations on a jurisdiction by jurisdiction basis. As of October 31, 2011, the Company had a valuation allowance of approximately $31.6 million recorded against the Company's net deferred tax assets in the U.S. and foreign jurisdictions.

The Company has experienced substantial past tax losses in its U.S. operations. Due to the lack of forecasted future taxable income and the relative size of the Company's Federal and California net operating loss carry forwards, considerable uncertainty exists that the Company will realize these deferred tax assets. Based on this objective evidence, a full valuation allowance has been recorded against the Company's deferred tax assets related to its U.S. operations.

The Company has also experienced substantial past tax losses in its European operations. In its most recent fiscal years, the Company has generated taxable income and begun to utilize its deferred tax assets related to its German net operating loss carry forwards. Management of the Company has forecasted taxable income for its European operations for fiscal year 2012. The global economic downturn has negatively impacted the Company's operating results in all regions. The Company has experienced declining revenues as economic conditions have remained difficult. Given the uncertainty of the macroeconomic environment, future revenues and operating results are difficult to forecast. Therefore, management has concluded it is more likely than not that the Company will realize the benefit of its deferred tax assets related to its German net operating loss carry forwards only to the extent of its expected taxable income in fiscal year 2012.

Significant management judgment is required to determine when, in the future, it will become more likely than not that additional net deferred tax assets will be realized. Management will continue to assess the realizability of the tax benefit available based on actual and forecasted operating results. Management does not anticipate significant changes to its uncertain tax positions through October 31, 2012.

Due to "change in ownership" provisions of the Internal Revenue Code of 1986, the availability of net operating loss and tax credit carry forwards to offset federal taxable income in future periods is subject to an annual limitation. In addition, the State of California has in certain cases suspended the ability to utilize net operating loss carry forwards in the current (and certain past) tax years and could do so again in the future.

A portion of deferred tax assets relating to net operating losses pertains to net operating loss carry forwards resulting from tax deductions upon the exercise of employee stock options of approximately $1.6 million. When recognized, the tax benefit of these loss carry forwards will be accounted for as a credit to additional paid-in capital rather than a reduction of income tax expense.

The Company adopted the provisions of ASC 740, Income Taxes related to uncertain tax positions on November 1, 2007.

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



Balance as of October 31, 2010	$	1,629
Additions for current year tax positions	124
Additions for prior years' tax positions	—
Reductions for prior years' tax positions	(94		)
Balance as of October 31, 2011	$	1,659

If recognized, $1.4 million of these unrecognized tax benefits would affect the effective tax rate.


Note 13.	Income Taxes (Continued)

The Company is subject to U.S. federal income taxes and to income taxes in various states in the U.S. as well as in foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign tax examinations by tax authorities for tax years before 2006. However, with respect to prior tax years no longer subject to examination due to expiration of the statute of limitations, income may nevertheless be recomputed for the purpose of determining the amount of NOL that may be carried over to "open" years.