Income Tax Expense

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



	Year Ended December 31,
	2012			2011			2010
U.S.	$	(22,270	)	$	(26,062	)	$	(4,384	)
Foreign	(12,973		)	(2,754		)	—
Net income (loss) before income tax	$	(35,243	)	$	(28,816	)	$	(4,384	)

Income tax expense (benefit) consists of the following:



	Year Ended December 31,
	2012		2011			2010
Current:
Federal	$	30	$	(148	)	$	49
State	176		27			20
Foreign	319		35			—
	525		(86		)	69
Deferred:
Federal	—		—			(13,634		)
State	—		—			(1,472		)
Foreign	$	6	$	—		$	—
Income tax expense (benefit)	$	531	$	(86	)	$	(15,037	)

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



	Year Ended December 31,
	2012			2011			2010
Income tax benefit at federal statutory rate	$	(11,983	)	$	(9,797	)	$	(1,490	)
State income tax expense (benefit) net of federal benefit	116			18			(1,458		)
Meals and entertainment	210			264			182
Research and development credits	—			(342		)	(327		)
Stock-based compensation	382			421			684
Contingent consideration	4,658			3,570			—
Foreign tax rate differential	4,736			1,025			—
Net change in valuation allowance	2,244			4,097			(13,974		)
Other, net	168			658			1,346
Income tax expense (benefit)	$	531		$	(86	)	$	(15,037	)

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



	Year Ended December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	54,389			53,366
Accrued expenses	711			474
Tax credits	8,400			8,953
Bad debt	183			61
Inventory	578			327
Capitalized research and development	—			31
Other	—			150
Depreciation and amortization	—			758
Deferred compensation	2,364			1,343
Deferred tax assets	66,625			65,463
Valuation allowance	(50,866		)	(50,144		)
Total deferred tax assets	15,759			15,319
Deferred tax liabilities:
Developed technology and trademark	$	(15,575	)	$	(15,319	)
Trademarks and tradenames	(1,029		)	(1,029		)
Depreciation and amortization	(101		)	—
Other	(89		)	—
Total deferred tax liabilities	(16,794		)	(16,348		)
Net deferred tax liability	(1,035		)	(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 domestic deferred tax assets will not be realized and that it is more likely than not that the foreign deferred tax assets will be realized. Due to such uncertainties surrounding the realization of the domestic deferred tax assets, the Company maintains a valuation allowance of $(50.9) million against a substantial portion of its deferred tax assets as of December 31, 2012. 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, 2012, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $150.0 million and $117.2 million, respectively.

Federal and state net operating loss carryforwards begin expiring in 2013 and will continue to expire through 2032. The majority of the state net operating losses are attributable to California. In addition, the Company had research and development credits for federal and state income tax purposes of approximately $4.3 million and $2.7 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, 2012 and 2011 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. The Company employs the “with and without” method of accounting for equity compensation excess tax benefits. Therefore, equity will be increased by $5.9 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. Any limitation may result in the expiration of a portion of the net operating loss carryforwards or research and development credit carryforwards before utilization.

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 in the future to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):



	Year Ended December 31, 2012
Balance at January 1, 2012	$	—
Additions for tax positions related to prior periods	122
Reductions	—
Lapse of statute of limitations	—
Balance at December 31, 2012	$	122

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. For the years ended December 31, 2012 and December 31, 2011, the Company accrued $14,000 and $0 respectively, for the payment of interest and penalties.

The undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation; however, net operating losses and unrecognized foreign tax credits would be available to reduce some portion of the U.S. liability.

In general, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by taxing authorities for years before 2008, however, net operating loss and other tax attribute carryforwards utilized in subsequent years continue to be subject to examination by the tax authorities until the year to which the net operating loss and/or other tax attributes are carried forward is no longer subject to examination.