10. Income Taxes

The components of the pretax loss from operations for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):


	Year Ended December 31,
	2012			2011			2010
U.S. Domestic	$	(3,310	)	$	(14,400	)	$	(8,428	)
Foreign		(13,308	)		(12,288	)		(8,059	)

Pretax loss from operations	$	(16,618	)	$	(26,688	)	$	(16,487	)

The components of the (benefit) provision for income taxes are presented in the following table (in thousands):


	Year Ended December 31,
	2012			2011			2010
Current:
Federal	$	107		$	4		$	4
State		24			222			158
Foreign		2,083			(388	)		(271	)

Total current (benefit) provision		2,214			(162	)		(109	)

Deferred:
Federal		137			163			162
State		29			8			(30	)
Foreign		(3,539	)		(4,516	)		(2,077	)

Total deferred benefit		(3,373	)		(4,345	)		(1,945	)

Total benefit	$	(1,159	)	$	(4,507	)	$	(2,054	)

The (benefit) provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:


	December 31,
	2012			2011			2010
Federal statutory rate		(35.0	)%		(35.0	)%		(35.0	)%
Adjustments for tax effects of:
State taxes, net		(0.0	)%		(0.7	)%		(0.8	)%
Stock-based compensation		(0.5	)%		1.8	%		4.4	%
Foreign taxes		(0.1	)%		3.6	%		3.1	%
Tax credits		(0.7	)%		(1.2	)%		(3.4	)%
Deemed foreign dividend		0.2	%		10.3	%		—
Transaction costs		—			—			8.0	%
Permanent adjustments		5.0	%		0.8	%		3.4	%
Tax rate adjustment		0.7	%		(0.5	)%		4.4	%
Uncertain tax positions		14.9	%		(1.5	)%		0.8	%
Other		3.3	%		(3.1	)%		(1.0	)%
Valuation allowance		5.2	%		8.7	%		3.6	%

		(7.0	)%		(16.8	)%		(12.5	)%

The 2012 benefit for income taxes primarily consists of benefits associated with the Company’s French operations and the reversal of the valuation allowance against the Japanese deferred tax assets partially offset by an increase in uncertain tax positions associated with the European operations and an increase in the goodwill deferred tax liability.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows (in thousands):


	December 31,
	2012			2011
Deferred tax assets:
Allowances and reserves	$	1,088		$	978
Accrued expenses		648			532
Inventory reserves		7,839			6,648
Net operating loss carryforwards		28,786			26,989
Stock-based compensation		1,866			669
Legal settlement		4,156			6,670
Income tax credit carryforwards		1,276			1,277

		45,659			43,763
Valuation allowance		(36,031	)		(35,211	)

Total deferred tax assets, net of valuation allowance		9,628			8,552
Deferred tax liabilities:
Property and equipment		926			494
Intangible assets		6,910			9,790
Goodwill		1,011			845

Total deferred tax liabilities		8,847			11,129

Net deferred tax assets (liabilities)	$	781		$	(2,577	)

The realization of deferred tax assets may be dependent on the Company’s ability to generate sufficient income in future years in the associated jurisdiction to which the deferred tax assets relate. As of December 31, 2012, a valuation allowance of $36.1 million has been established against the net deferred tax assets as realization is uncertain. The net deferred tax assets primarily consist of Japanese deferred tax assets partially offset by a deferred tax liability associated with goodwill. Deferred tax liabilities associated with tax deductible goodwill cannot be considered a source of income to support the realization of deferred tax assets because the reversal of these deferred tax liabilities is considered indefinite. At December 31, 2012, such amounts represent $1.0 million.

At December 31, 2011, the Company considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based on the review of all positive and negative evidence, including a three year cumulative pre-tax loss, it was concluded that a full valuation allowance should be recorded against all U.S. and foreign net deferred tax assets. At December 31, 2012, the Company continued to believe that a full valuation allowance should be recorded against all U.S. and European net deferred tax assets. However, during 2012, it was determined that the Company was more-likely-than-not to realize its Japanese net deferred tax assets. The Company removed the valuation allowance on the Japanese net deferred tax assets and recognized a tax benefit of $1.4 million. In the event that the Company were to determine that it would not be able to realize all or part of its Japanese net deferred tax assets in the future, it would increase the valuation allowance and recognize a corresponding tax provision in the period in which it made such a determination. Likewise, if the Company later determines that it is more-likely-than-not to realize all or a portion of the U.S. or European net deferred tax assets, it would reverse the previously provided valuation allowance. Although realization is not assured, the Company believes that it is more-likely-than-not that the balance of the deferred tax assets, net of the valuation allowance, as of December 31, 2012 will be realized.

At December 31, 2012, the Company has unrecognized tax benefits of $5.9 million of which $5.4 million will affect the effective tax rate if recognized when the Company no longer has a valuation allowance offsetting its deferred tax assets.

The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 (in thousands):


Balance at December 31, 2009	$	2,116
Additions based on tax positions related to the prior year		39
Additions based on tax positions related to the current year		1,480
Additions based on tax positions related to the acquisition of Scient’x		1,097
Reductions as a result of lapse of applicable statute of limitations		(256	)
Reductions as a result of foreign exchange rates and other		(55	)

Balance at December 31, 2010		4,421
Additions based on tax positions related to the prior year		73
Additions based on tax positions related to the current year		399
Reductions as a result of positions taken		(59	)
Reductions as a result of lapse of applicable statute of limitations		(649	)
Additions as a result of foreign exchange rates and other		12

Balance at December 31, 2011	$	4,197
Additions based on tax positions related to the prior year		987
Additions based on tax positions related to the current year		743
Reductions as a result of lapse of applicable statute of limitations		(58	)
Additions as a result of foreign exchange rates and other		28

Balance at December 31, 2012	$	5,897

The Company believes it is reasonably possible it will not reduce its unrecognized tax benefits within the next 12 months.

The Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities in major jurisdictions for years prior to 2007. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs and tax credits were generated and carried forward, and make adjustments up to the amount of the carryforwards. The Company is not currently under examination by the IRS, Foreign or state and local tax authorities.

During 2012, the French tax authorities completed an exam of the 2008, 2009 and 2010 tax years. The Company agreed to an assessment of $0.6 million to settle the exam. The Company had recognized uncertain tax positions of $0.3 million at December 31, 2011. The additional $0.3 million was recognized as an additional tax provision during 2012.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. As of December 31, 2012, accrued interest and penalties were $0.4 million and this amount primarily relates to the uncertain tax positions of the Scient’x operations and state positions. During 2012, there were increases in the accrued interest and penalties related to the uncertain tax positions of the Scient’x operations.

At December 31, 2012, the Company had federal and state net operating loss carryforwards of $46.4 million and $42.9 million, respectively, expiring at various dates through 2032. At December 31, 2012, the Company had federal and state research and development tax credits of $1.9 million and $2.0 million, respectively. The federal research and development tax credits expire at various dates through 2031, while the state credits do not expire. The Company had foreign net operating loss carryforwards of $41.1 million beginning to expire in 2018. Utilization of the net operating loss and tax credit carryforwards may become subject to annual limitations due to ownership change limitations that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership changes may limit the amount of the net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income. An ownership change occurred during June 2006 in connection with the initial public offering. The annual limitation as a result of that ownership change did not result in the loss or substantial limitation of net operating loss or tax credit carryforwards. There have been no subsequent ownership changes through December 31, 2012.

The Company does not record U.S. income taxes on the undistributed earnings of its foreign subsidiaries based upon the Company’s intention to permanently reinvest undistributed earnings to ensure sufficient working capital and further expansion of existing operations outside the United States. The undistributed earnings of the foreign subsidiaries as of December 31, 2012 are immaterial. In the event the Company is required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences.

The American Taxpayer Relief Act of 2012, which reinstated the United States federal research and development tax credit retroactively from January 1, 2012 through December 31, 2013, was not enacted into law until the first quarter of 2013. Therefore, the deferred tax asset resulting from such reinstatement for 2012 will not be reflected until 2013.