Income Taxes

Net loss before income tax benefit attributable to U.S. and international operations, consists of the following:



	Years Ended December 31,
	2011			2010
U.S.	$	(26,062	)	$	(4,384	)
Foreign (Europe)	(2,754		)	—
Net loss before income tax	$	(28,816	)	$	(4,384	)

Income tax expense (benefit) consists of the following:



	Years Ended December 31,
	2011			2010			2009
Current:
Federal	$	(148	)	$	49		$	1
State	27			20			20
Foreign	35			—			—
	(86		)	69			21
Deferred:
Federal	—			(13,634		)	—
State	—			(1,472		)	—
Income tax expense (benefit)	$	(86	)	$	(15,037	)	$	21

Income tax expense (benefit) was computed by applying the U.S. federal statutory rate of 34% to net income (loss) before taxes as follows:



	Years Ended December 31,
	2011			2010			2009
Income tax benefit at federal statutory rate	$	(9,797	)	$	(1,490	)	$	(827	)
State income tax expense (benefit) net of federal benefit	18			(1,458		)	20
Meals and entertainment	264			182			114
Research and development credits	(342		)	(327		)	(117		)
Stock-based compensation	421			684			471
Contingent consideration	3,570			—			—
Foreign tax rate differential	1,025			—			—
Net change in valuation allowance	4,097			(13,974		)	361
Other, net	658			1,346			(1		)
Income tax expense (benefit)	$	(86	)	$	(15,037	)	$	21

Significant components of the Company’s deferred tax assets and (liabilities) are as follows:



	Years Ended December 31,
	2011			2010
Net operating loss carryforwards	$	53,366		$	48,976
Accrued expenses	474			503
Tax credits	8,953			8,673
Bad debt	61			44
Depreciation and amortization	758			672
Inventory	327			85
Capitalized research and development	31			89
Developed technology and trademark	(15,319		)	(15,855		)
Trademarks and tradenames	(1,029		)	(1,029		)
Deferred compensation	1,343			2,210
Other	150			226
Net deferred tax assets	49,115			44,594
Valuation allowance	(50,144		)	(45,623		)
Net deferred tax liability	$	(1,029	)	$	(1,029	)

The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that the deferred tax assets will not be realized. Due to such uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance of $50.1 million against its deferred tax assets as of December 31, 2011. Realization of the deferred tax assets will be primarily dependent upon the Company's ability to generate sufficient taxable income prior to the expiration of its net operating losses.

At December 31, 2011, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $145.6 million and $105.4 million, respectively. Included in the net operating loss carryfoward balances are federal and state net operating losses of $30.1 million and $29.8 million, respectively, in connection with the Nellix acquisition.

Federal and state net operating loss carryforwards will begin expiring in 2012 and 2013, respectively. The majority of the state net operating losses are attributable to California. In addition, the Company had research and development and other tax credits for federal and state income tax purposes of approximately $4.7 million and $4.2 million, respectively, which will begin to expire in 2020. The California research and development credits do not expire.

The table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at December 31, 2011 and 2010 that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized under GAAP. Those deferred tax assets include federal and state net operating losses. Equity will be increased by $1.3 million, if and when such deferred tax assets are ultimately realized.

Utilization of the Company's net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to an “ownership change” that may have occurred, or that could occur in the future, as defined and required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards, and other tax attributes, that can be utilized annually to offset future taxable income and tax, respectively.

In general, an “ownership change” results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders' subsequent disposition of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition.

The Company intends to complete a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation. If the Company has experienced an ownership change at any time since its formation, utilization of the net operating loss, research and development credit carryforwards, and other tax attributes, would be subject to an annual limitation. In general, the annual limitation, which is determined by first multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term, tax-exempt rate, could further be subject to additional adjustments. Any limitation may result in the expiration of a portion of the net operating loss carryforwards or research and development credit carryforwards before utilization.

Further, until a Section 382 study is completed and any limitation is known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under applicable GAAP. Due to the existence of the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization as a result of a limitation under Section 382 will be removed from the deferred tax assets with a corresponding reduction of the valuation allowance.

The Company has not recognized any additional liability for unrecognized tax benefits. The Company expects any resolution of unrecognized tax benefits, if created, would occur while the full valuation allowance of deferred tax assets is maintained; therefore, the Company does not expect to have any unrecognized tax benefits that, if recognized, would affect its effective tax rate.

In general, the Company is no longer subject to U.S., federal, state, local, or foreign examinations by taxing authorities for years before 2007, however, net operating loss carryforwards utilized in subsequent years continue to be subject to examination by the tax authorities until the year to which the net operating loss is carried forward is no longer subject to examination.