Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Dec. 31, 2012
Income Taxes

7. Income Taxes

The domestic and international components of income (loss) before provision (benefit) from income taxes are presented as follows:


     Years Ended December 31,  
     2012     2011     2010  


   $  (11,918)      $  (13,775)      $  6,465   


     (993     (1,256     (2,722










Income (loss) before taxes

   $ (12,911)      $ (15,031)      $ 3,743   










Income tax provision (benefit) consists of the following:


     Years Ended December 31,  
     2012     2011     2010  




   $ —        $ 236      $ 126   


     —          20        163   


     351        69        22   










Total current

     351        325        311   




     (4,162     (5,183     1,336   


     (2,062     (1,731     (104


     —          685        (685

Change in valuation allowance

     6,214        12,897        (7,229










Total deferred

     (10     6,668        (6,682










Total income tax provision (benefit)

   $ 341      $ 6,993      $ (6,371










The actual income tax provision (benefit) differs from the amount computed using the federal statutory rate as follows:


     Years Ended December 31,  
     2012     2011     2010  

Provision (benefit) at statutory rate

   $ (4,390   $ (5,111   $ 1,273   

State income taxes (net of federal benefit)

     (1,247     24        336   

Research and development credits

     (858     (3,320     (1,078

Foreign rate differential

     445        1,182        262   

Stock compensation

     278        974        959   

Foreign dividend

     —          94        46   

Estimated export compliance fines and penalties

     (255     255        —     

Foreign tax credit

     —          (236     —     

Permanent and other

     154        260        (940

Valuation allowance

     6,214        12,871        (7,229










Total provision (benefit) for income taxes

   $ 341      $ 6,993      $ (6,371











The components of the deferred income tax assets are as follows:


     December 31,  
     2012     2011  

Deferred tax assets:


Net operating loss carryforwards

   $ 8,216      $ 6,155   

Research and development credits

     9,088        8,077   

Accrued expenses and other

     1,970        644   

Stock-based compensation

     3,184        1,685   






     22,458        16,561   

Less valuation allowance

     (22,243     (16,029






     215        532   

Deferred tax liability:


Depreciation and amortization

     (215     (532







Net deferred tax assets

   $ —        $ —     







At December 31, 2012, the Company had federal and state tax net operating loss carryforwards of approximately $24.6 million and $26.7 million, respectively. These amounts include share-based compensation for federal and state of $6.4 million and $3.8 million, that will be recorded to contributed capital when realized. The federal and state tax loss carryforwards will begin to expire in 2026 and 2018, respectively, unless previously utilized.

At December 31, 2012, the Company had federal and state tax credit carryforwards of approximately $5.2 million and $6.8 million, respectively. The federal tax credit carryforward will begin to expire in 2024, unless previously utilized. The state tax credits do not expire. In addition, the Company has federal alternative minimum tax credit carryforwards of $0.2 million that can be carried forward indefinitely.

Pursuant to Internal Revenue Code Section 382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has had two changes of ownership in April and November of 2004 resulting in an annual net operating loss and credit limitation. The annual limitations will not cause a loss of net operating loss or credit carryforwards. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examinations from various taxing authorities.

The Company evaluated its net deferred income taxes, which included an assessment of the cumulative income or loss over the prior three-year period and future periods, to determine if a valuation allowance is required. After considering its recent history of losses and management’s expectations of additional near-term losses, the Company recorded a valuation allowance on its net federal deferred tax assets, with a corresponding charge to its income tax provision of approximately $6.7 million during 2011. During 2012, the Company maintained a valuation allowance against all of its federal and state deferred tax assets as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. The Company will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating positive and negative evidence that may exist.

At December 31, 2012, the Company’s unrecognized tax benefits totaled $3.8 million, $3.1 million of which, if recognized at a time when the valuation allowance no longer exists, would affect the effective tax rate. The Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2012, the Company had no accrual for interest and penalties. The Company does not expect any significant increases or decreases to its unrecognized tax benefits within twelve months.

The following table summarizes the changes to the unrecognized tax benefits during 2012, 2011 and 2010:


Balance as of December 31, 2009

   $ 872   

Additions based on tax positions related to the current year


Additions based on tax positions of prior year





Balance as of December 31, 2010


Additions based on tax positions related to the current year


Additions based on tax positions of prior year





Balance as of December 31, 2011


Additions based on tax positions related to the current year


Additions based on tax positions of prior years


Decreases based on tax positions of prior year





Balance as of December 31, 2012

   $ 3,750   




The Company is subject to federal and California income tax in the United States and is also subject to income tax in certain other foreign tax jurisdictions. At December 31, 2012, the Company is no longer subject to federal, California or foreign income tax examinations for the years before 2009, 2008 and 2007, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount.

The Company is currently under examination by the tax authorities in California for the tax years 2008 and 2009.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted. The Act included several provisions related to corporate income tax including the reinstatement of the credit for qualified research and development. The credit was reinstated for years beginning after January 1, 2012.

The Company is benefitting from a tax holiday in China and is subject to a tax rate of 15% in China, compared to the statutory rate of 25%. This reduced rate is scheduled to increase to the statutory tax rate in 2014. This tax holiday may be extended if certain conditions are met.