Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
Our loss before provision for income taxes was as follows (in thousands): 
 
Years Ended December 31,
 
2012
 
2011
 
2010
United States
$
(30,743
)
 
$
(17,474
)
 
$
(7,837
)
Foreign
156

 
1,165

 
(320
)
Loss before provision for income taxes
$
(30,587
)
 
$
(16,309
)
 
$
(8,157
)

The tax provision for the years ended December 31, 2012, 2011 and 2010 consists primarily of taxes attributable to foreign operations. The components of the provision for income taxes are as follows (in thousands): 
 
Years Ended December 31,
 
2012
 
2011
 
2010
Current provision (benefit):
 
 
 
 
 
Federal
$

 
$
3

 
$
289

State
7

 
7

 
2

Foreign
178

 
82

 
(17
)
Total current provision
$
185

 
$
92

 
$
274

Deferred provision (benefit):
 
 
 
 
 
Federal
$
(62
)
 
$

 
$
(122
)
State
(7
)
 

 
(26
)
Foreign
154

 
149

 
258

Total deferred provision
$
85

 
$
149

 
$
110

Total provision for income taxes
$
270

 
$
241

 
$
384


Reconciliation of the provision for income taxes calculated at the statutory rate to our provision for income taxes is as follows (in thousands): 
 
Years Ended December 31,
 
2012
 
2011
 
2010
Tax benefit at federal statutory rate
$
(10,399
)
 
$
(5,708
)
 
$
(2,858
)
State taxes
(1,063
)
 
(1,421
)
 
(245
)
Research and development credits

 
(83
)
 
56

Foreign operations taxed at different rates
7

 
(252
)
 
117

Stock-based compensation
312

 
1,241

 
1,020

Other nondeductible items
204

 
650

 
630

Change in federal statutory rate
1,493

 

 

Change in valuation allowance
9,716

 
5,814

 
1,664

Provision for income taxes
$
270

 
$
241

 
$
384


Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
Significant components of our deferred tax assets and liabilities are as follows (in thousands): 
 
December 31,
 
2012
 
2011
Deferred tax assets:
 
 
 
Federal, state and foreign net operating loss carryforwards
$
54,923

 
$
45,595

Federal and state credits
3,329

 
2,723

Deferred contract revenues
1,297

 
2,066

Stock compensation
4,464

 
5,327

Accrued compensation
2,090

 
3,224

Fixed assets
1,746

 
1,295

Acquired intangible assets
3,556

 
3,128

Unrealized gain/loss
166

 

Other
141

 
(3
)
Total deferred tax assets:
71,712

 
63,355

Deferred tax liabilities:
 
 
 
Other

 
(53
)
Total deferred tax liabilities:

 
(53
)
Valuation allowance
(71,692
)
 
(63,128
)
Net deferred tax assets
$
20

 
$
174


The tax benefit of NOL, temporary differences and credit carryforwards are recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. Because of our history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not more likely than not to be realized and, accordingly, has provided a valuation allowance. Accordingly, the net deferred tax assets in the United States, Hungary and Singapore have been fully reserved by a valuation allowance. The net valuation allowance increased by $8.6 million, $5.8 million and $1.6 million during the years ended December 31, 2012, 2011 and 2010, respectively. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.
The following table sets forth our federal, state and foreign NOL carryforwards and federal research and development tax credits as of December 31, 2012 (in thousands): 
 
December 31, 2012
 
Amount
 
Expiration
Years
Net operating losses, federal
$
152,323

 
 2022-2031
Net operating losses, state
123,395

 
 2015-2031
Tax credits, federal
3,876

 
 2022-2031
Tax credits, state
4,750

 
 Do not expire
Net operating losses, foreign
12,916

 
 Various
Tax credits, foreign
$
16

 
 Various

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 Taxpayer Relief Act extends the research credit for two years to December 31, 2013. The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011. As a result of the retroactive extension, we expect to recognize a deferred tax asset of approximately $0.4 million for qualifying amounts incurred in 2012 which will be fully offset by a valuation allowance. The deferred tax asset and corresponding valuation allowance will be recognized in the period of enactment, which is the first quarter of 2013.
Current federal and California tax laws include substantial restrictions on the utilization of NOLs and tax credit carryforwards in the event of an ownership change of a corporation. Accordingly, our ability to utilize NOLs and tax credit carryforwards may be limited as a result of such ownership changes. Such a limitation could result in the expiration of carryforwards before they are utilized.
Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as discontinued operations and other comprehensive income. An exception is provided in ASC Topic 740, Income Taxes, when there is aggregate income from categories other than continuing operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expenses recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including gain from available-for-sale securities recorded as a component of other comprehensive income, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets. As a result, for the year ended December 31, 2012, the Company recorded a tax expense of $69,000 in other comprehensive income related to the gain on available-for-sale securities, and recorded a corresponding tax benefit of $69,000 in continuing operations.
The Company has not provided for United States federal and state income taxes on all of the non-United States subsidiaries’ undistributed earnings as of December 31, 2012, because such earnings are intended to be indefinitely reinvested. As of December 31, 2012, cumulative un-remitted foreign earnings that are considered to be permanently invested outside the United States and on which no United States taxes have been provided were approximately $1.0 million. The residual United States tax liability, if such amounts were remitted, would be nominal.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): 
 
December 31,
 
2012
 
2011
 
2010
Balance at beginning of year
$
6,611

 
$
6,492

 
$
5,899

Additions based on tax positions related to current year
718

 
470

 
593

Additions to tax provision of prior years
316

 
4

 

Reductions to tax provision of prior years
(29
)
 
(262
)
 

Lapse of the applicable statute of limitations
(187
)
 
(93
)
 

Balance at end of year
$
7,429

 
$
6,611

 
$
6,492


We recognize interest and penalties in income tax expense. Total interest and penalties recognized in the consolidated statement of operations was $11,000, $39,000 and $75,000 respectively in 2012, 2011 and 2010. Total penalties and interest recognized in the balance sheet was $250,000 and $239,000 respectively in 2012 and 2011. The total unrecognized tax benefits that, if recognized currently, would impact our effective tax rate were $1.5 million and $1.4 million as of December 31, 2012 and 2011, respectively. We expect $54,000 of unrecognized tax benefits to be recognized within the next 12 months. We are not subject to examination by United States federal or state tax authorities for years prior to 2002 and foreign tax authorities for years prior to 2006.