Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  


The following table presents the current and deferred provision (benefit) for income taxes for the years ended December 31 (in thousands):


      September 30,       September 30,       September 30,  
    2011     2010     2009  




  $ —       $ (19   $ (50


    16       4       —    


    20       (3     57  









      36       (18     7  













    66       55       41  


    (16     16       56  


    3       5       15  









      53       76       112  









    $ 89     $ 58     $ 119  










The provision for income taxes differs from the amount that would result from applying the federal statutory rate as follows for the years ended December 31:


      September 30,       September 30,       September 30,  
    2011     2010     2009  

Statutory regular federal income tax rate

    (34.0 )%      (34.0 )%      (34.0 )% 

Change in valuation allowance

    (2.3 )%      30.4     69.8

Tax return to prior year provision adjustments

    2.0     2.7     (9.6 )% 

Expiration of federal net operating losses

    20.2     6.4     47.5

Reduction of net operating loss attributes

    (2.3 )%      (1.3 )%      0.3

State tax benefit (net of federal benefit)

    18.1     (6.9 )%      (47.5 )% 

Research credits

    (3.0 )%      (0.6 )%      (1.8 )% 

Foreign amounts with no tax benefit

    (0.2 )%      0.1     (21.7 )% 

Non-deductible expenses

    3.8     0.8     2.3

Stock option expenses with no tax benefit

    —         3 .8     —    


    (0.1 )%      (0.9 )%      (1.1 )% 











    2.2     0.5     4.2










The components of the deferred income tax assets and liabilities as of December 31 (in thousands):


      September 30,       September 30,  
    2011     2010  

Capitalized intangible assets for tax purposes

  $ 576     $ 1,045  

Reserves not currently deductible

    2,450       2,629  

Deferred revenue

    —         204  

Stock options

    1,959       1,630  

State Taxes

    41       —    

Income tax credits

    1,322       1,174  


    906       833  

Property and equipment

    357       434  

Other comprehensive income

    144       129  

Unrealized gain on foreign currency

    99       74  

Net operating losses

    26,075       26,176  








      September 30,       September 30,  
    2011     2010  

Total deferred tax assets

    33,929       34,328  

Valuation allowance

    (33,784     (34,250







Net deferred tax assets

    145       78  

Capitalized intangible assets

    (630     (544

State tax

    —         (1


    (101     (66







Total deferred tax liabilities

    (731     (611







Net deferred tax liabilities

  $ (586   $ (533







Based upon the Company’s operating losses incurred for the three years ended December 31, 2011, and the available evidence, the Company has established a valuation allowance against its net deferred tax assets in the amount of $33.8 million as of December 31, 2011, excluding a portion of the foreign operations totaling $8,000 and $11,000 at December 31, 2011 and 2010, respectively. Management considered factors such as the Company’s earnings history, future projected earnings and tax planning strategies. If sufficient evidence of the Company’s ability to generate sufficient future taxable income tax benefits becomes apparent, the valuation allowance may be reduced, thereby resulting in tax benefits in the statement of operations and additional paid-in-capital. Management evaluates the potential realization of the Company’s deferred tax assets and assesses the need for reducing the valuation allowance periodically.

As of December 31, 2011, the Company had net operating loss (“NOL”) carryforwards for federal and state purposes of approximately $68.0 million and $42.8 million, respectively, which begin to expire in 2012. The utilization of NOL and credit carryforwards may be limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. IRC Section 382 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. During the year ended December 31, 2006, the Company completed an analysis to determine the potential applicability of any annual limitations imposed by IRC Section 382. Based on the analysis, management determined that there was no significant IRC Section 382 limitation. As of December 31, 2011, the Company had research and development tax credit carryforwards for federal and state purposes of approximately $786,000 and $475,000, respectively, which will begin to expire in 2018 for federal purposes and will carryforward indefinitely for state purposes. An updated analysis may be required at the time the Company begins utilizing any of its net operating losses to determine if there is an IRC Section 382 limitation.

In addition to the NOL carryforwards included in the deferred tax asset and liability schedule are excess tax deductions relating to stock options that have not been realized. When the benefit of the NOLs containing these excess tax deductions are realized, the benefit will not affect earnings, but rather additional paid-in-capital. As of December 31, 2011, the cumulative unrealized excess tax deductions amounted to approximately $6.6 million. These amounts have been excluded from the Company’s NOL carryforwards. To the extent that such excess tax deductions are realized in the future by virtue of reducing income taxes payable, the Company would expect additional paid-in-capital to increase by approximately $2.7 million. The Company follows the appropriate ordering rules to determine when such NOLs have been realized.

The following table summarizes the activity related to the Company’s unrecognized tax benefits during the year ended December 31, 2011 (in thousands):


      September 30,  

Balance at December 31, 2010

  $  1,225  

Additions for tax positions related to the current year


Lapse of statute of limitations





Balance at December 31, 2011

  $ 1,066  




Included in the payable at December 31, 2011, are $91,000 of tax positions, which if recognized, would increase the Company’s annual effective tax rate. As of December 31, 2011, the Company has recorded a liability for potential penalties and interest of $18,000 and $28,000, respectively. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

The federal and state NOL and credit carryforwards per the income tax returns filed in prior years included uncertain tax positions taken and are larger than the NOL and credit carryforwards recognized for financial statement purposes.


The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2006 through 2010 tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2004 through 2010 tax years remain subject to examination by their respective tax authorities.

U.S. income taxes or withholding taxes were provided for all the distributed earnings for the Company’s foreign subsidiaries as of December 31, 2011. There were no undistributed earnings from foreign subsidiaries as of December 31, 2011. The Company has restructured its international operations and intends to reinvest any earnings until such time a decision is made to liquidate the foreign operations.

During 2009, California lawmakers approved the state budget (Assembly Bill X3115), which included a number of corporate income and franchise tax changes that could have a significant impact on corporate taxpayers. These include a single-sales apportionment factor election and a market-based sourcing rule. These new tax provisions are effective in the 2011 tax year and may impact the measurement of state deferred taxes since it affects future state income apportionment methodology. As of December 31, 2011, due to the uncertainty in profitability, the Company has not committed to utilizing the single sales factor during the reversal period of deductible temporary differences. Should the Company decide to make an election in the future years using a single sales factor and the market-based sourcing rule, the Company may need to adjust the state rate used to tax effect its deferred tax assets/liabilities and record any impact to the financial statements in the period such a decision is made.