NOTE 11 — INCOME TAXES

The components of loss before income taxes by tax jurisdiction were as follows:


	Year Ended December 31,
	2012			2011			2010
United States	$	(6,745	)	$	(25,159	)	$	(14,527	)
Foreign		(15,708	)		4,672			1,813

Loss before income taxes	$	(22,453	)	$	(20,487	)	$	(12,714	)

The components of income tax provision were as follows:


	Year Ended December 31,
	2012			2011			2010
Current:
Federal	$	—		$	—		$	—
State		(4	)		(2	)		(3	)
Foreign		913			(2,698	)		(1,311	)

		909			(2,700	)		(1,314	)

Deferred:
Federal		497			1,452			—
State		64			211			—
Foreign		524			423			605

		1,085			2,086			605

Total:
Federal		497			1,452			—
State		60			209			(3	)
Foreign		1,437			(2,275	)		(706	)

	$	1,994		$	(614	)	$	(709	)

The difference between the actual rate and the federal statutory rate was as follows:


	Year Ended December 31,
	2012			2011			2010
Tax at federal statutory rate		34.0	%		34.0	%		34.0	%
State tax, net of federal benefit		0.3			1.0			—
Foreign rate differential		(0.6	)		1.4			0.4
Research and development credit		—			2.1			1.5
Acquired in-process research and development		—			—			0.3
United Kingdom research and development refund		—			—			1.1
Withholding taxes		(0.3	)		(0.1	)		(3.7	)
Goodwill impairment		(5.5	)		—			—
Stock-based compensation		(2.7	)		(1.3	)		(1.0	)
Non-deductible intercompany bad debt		(16.5	)		—			—
FIN 48 interest and release		10.0			(0.4	)		(1.8	)
Other		(0.7	)		(0.4	)		1.7
Valuation allowance		(9.1	)		(39.3	)		(38.1	)

Effective tax rate		8.9	%		(3.0	)%		(5.6	)%

During 2012, the Company’s United Kingdom subsidiary recognized an intercompany bad debt expense of approximately $10,870 that is non-tax deductible for United Kingdom tax purposes.

Deferred tax assets and liabilities consist of the following:


	December 31, 2012									December 31, 2011
	US			Foreign			Total			US			Foreign			Total
Deferred tax assets:
Fixed assets	$	571		$	1,501		$	2,072		$	644		$	1,587		$	2,231
Net operating loss carryforwards		32,795			12,207			45,002			31,318			13,677			44,995
Accruals, reserves and other		3,605			121			3,726			4,821			96			4,917
Foreign tax credit		6,086			—			6,086			5,767			—			5,767
Stock-based compensation		2,723			58			2,781			1,748			65			1,813
Research and development credit		2,839			—			2,839			3,143			—			3,143
Other		2,873			11			2,884			2,573			12			2,585

Total deferred tax assets	$	51,492		$	13,898		$	65,390		$	50,014		$	15,437		$	65,451
Deferred tax liabilities:
Macrospace, MIG and iFone intangible assets	$	—		$	(498	)	$	(498	)	$	—		$	(931	)	$	(931	)
GameSpy intangible assets		(506	)		—			(506	)		—			—			—
Blammo intangible assets		—			(261	)		(261	)		—			(429	)		(429	)
Griptonite intangible assets		(949	)		—			(949	)		(2,149	)		—			(2,149	)
Fixed assets		—			—			—			—			—			—
Other		—			(9	)		(9	)		—			(10	)		(10	)

Net deferred tax assets		50,037			13,130			63,167			47,865			14,067			61,932

Less valuation allowance		(50,037	)		(13,674	)		(63,711	)		(47,865	)		(15,150	)		(63,015	)

Net deferred tax liability	$	—		$	(544	)	$	(544	)	$	—		$	(1,083	)	$	(1,083	)

The Company has not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries because these earnings are intended to be reinvested indefinitely. No deferred tax asset was recognized since the Company does not believe the deferred tax asset will reverse in the foreseeable future. The amount of accumulated foreign earnings of the Company’s foreign subsidiaries total $2,536 as of December 31, 2012. If the Company’s foreign earnings were repatriated, additional tax expense might result. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings attributable to foreign subsidiaries is not practicable. The Company recorded a release of its valuation allowance of $562 and $1,702 during 2012 and 2011. This release is associated with the acquisitions of GameSpy in August 2012 and Griptonite in August 2011. Pursuant to ASC 805-740, changes in the Company’s valuation allowance that stem from a business combination should be recognized as an element of the Company’s deferred income tax expense or benefit. In accordance with ASC 740 and based on all available evidence on a jurisdictional basis, the Company believes that, it is more likely than not that its deferred tax assets will not be utilized, and has recorded a full valuation allowance against its net deferred tax assets in each of its jurisdictions except for one entity in China. The Company assesses on a periodic basis the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income or losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If it is not more likely than not that the Company expects to recover its deferred tax assets, the Company will increase its provision for taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. The available negative evidence at December 31, 2012 included historical and projected future operating losses. As a result, the Company concluded that an additional valuation allowance of $696, net of the described releases, was required to reflect the gross increase in its deferred tax assets prior to valuation allowance during 2012. As of December 31, 2012, the Company considered it more likely than not that its deferred tax assets would not be realized with their respective carryforward periods.

At December 31, 2012, the Company has net operating loss carryforwards of approximately $86,265 and $78,694 for federal and state tax purposes, respectively. These carryforwards will expire from 2013 to 2032. In addition, the Company has research and development tax credit carryforwards of approximately $2,839 for federal income tax purposes and $3,369 for California tax purposes. The federal research and development tax credit carryforwards will begin to expire in 2022. The California state research credit will carry forward indefinitely. The Company has approximately $6,078 of foreign tax credits that will begin to expire in 2017, and approximately $12 of state alternative minimum tax credits that will carryforward indefinitely. The Company’s ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382.

In addition, at December 31, 2012, the Company has net operating loss carryforwards of approximately $49,829 for United Kingdom tax purposes that are all limited and can only offset a portion of the annual combined profits in the United Kingdom until the net operating losses are fully utilized.

A reconciliation of the total amounts of unrecognized tax benefits was as follows:


	Year Ended December 31,
	2012			2011
Beginning balance	$	4,034		$	3,326
Reductions of tax positions taken during previous years		(631	)		(82	)
Additions based on uncertain tax positions related to the current period		410			740
Additions based on uncertain tax positions related to prior periods		813			50

Ending balance	$	4,626		$	4,034

The total unrecognized tax benefits as of December 31, 2012 and 2011 include approximately $3,104 and $2,694, respectively of unrecognized tax benefits that have been netted against deferred tax assets. As of December 31, 2012, approximately $817 of unrecognized tax benefits, if recognized, would impact the Company’s effective tax rate. A portion of this amount, if recognized, would adjust the Company’s deferred tax assets which are subject to valuation allowance. As of December 31, 2011, approximately $19 of unrecognized tax benefits, if recognized, would impact the Company’s effective tax rate. In addition, as of December 31, 2012, the liability for uncertain tax positions decreased by approximately $631 due to the release of uncertain tax positions in the second quarter of 2012, as certain statutes of limitation in foreign jurisdictions in which the Company does business expired. Furthermore, as of December 31, 2012, the liability for uncertain tax positions increased by approximately $813 due to utilization of net operating losses related to prior periods in one of the Company’s foreign jurisdictions in the fourth quarter of 2012. At December 31, 2012, the Company anticipated that the liability for uncertain tax positions, excluding interest and penalties, could decrease by approximately $1,516 within the next twelve months due to the expiration of certain statutes of limitation in foreign jurisdictions in which the Company does business.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company has accrued $2,348 of interest and penalties on uncertain tax positions as of December 31, 2012, as compared to $3,935 as of December 31, 2011. Approximately $182, $248 and $239 of accrued interest and penalty expense related to estimated obligations for unrecognized tax benefits was recognized during 2012, 2011 and 2010 respectively. During 2012, the Company released $1,798 of interest and penalties on uncertain tax positions due to the expiration of certain statutes of limitation in foreign jurisdictions in which the Company does business.

The Company is subject to taxation in the United States and various foreign jurisdictions. The material jurisdictions subject to examination by tax authorities are primarily the State of California, United States, United Kingdom Canada and China. The Company’s federal and California tax returns are open by statute for tax years 2002 and forward and could be subject to examination by the tax authorities. The statute of limitations for the Company’s 2010 and 2011 tax returns for the various entities in the United Kingdom will close in 2013. The Company’s China income tax returns are open by statute for tax years 2007 and forward.