Income taxes

The components of (loss) income before income taxes are as follows:



	Years ended December 31,
(in thousands)	2013			2012		2011
United States	$	(10,812	)	$	3,205	$	(2,421	)
International	456			315		227
Total (loss) income before income taxes	$	(10,356	)	$	3,520	$	(2,194	)

The components of the provision for income taxes are as follows:



	Years ended December 31,
(in thousands)	2013			2012		2011
Current
Federal	$	—		$	7	$	25
State	(40		)	512		156
Foreign	74			38		55
	34			557		236
Deferred
Federal	60			60		60
State	4			10		9
Foreign	11			—		(20		)
	75			70		49
Total income tax provision	$	109		$	627	$	285

The Company had an effective tax rate of (1.1)%, 17.8% and (13.0)% for the years ended December 31, 2013, 2012 and 2011, respectively.

Reconciliation of the provision for income taxes at the statutory rate to the Company’s provision for income tax is as follows:



	Years ended December 31,
(in thousands)	2013			2012			2011
U.S. federal (tax benefit) provision at statutory rate	$	(3,567	)	$	1,197		$	(746	)
State (tax benefit) income taxes, net of federal benefit	(338		)	151			109
Foreign income taxes at rates other than the US rate	(28		)	(10		)	(72		)
Stock-based compensation	549			397			340
Change in valuation allowance	3,911			(1,494		)	546
Non-deductible warrant expense	—			625			334
Research and development credits	(527		)	(220		)	(290		)
Other	109			(19		)	64
Total	$	109		$	627		$	285

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented:



	As of December 31,
(in thousands)	2013			2012
Deferred tax assets
Net operating loss carryforward	$	11,873		$	14,270
Research and development credits	2,809			2,637
Depreciation and amortization	288			84
Reserves and accruals	6,060			4,502
Total deferred tax assets	21,030			21,493
Valuation allowance	(21,030		)	(21,193		)
Net deferred tax assets	—			300
Deferred tax liabilities	(216		)	(451		)
Net deferred tax liabilities	$	(216	)	$	(151	)

The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the history of losses the Company has generated in the past, the Company believes that it is not more likely than not that all of the deferred tax assets in the U.S. and Canada can be realized as of December 31, 2013; accordingly, the Company has recorded a full valuation allowance on its deferred tax assets.

The Company’s valuation allowance decreased by $0.2 million and $1.5 million for the years ended December 31, 2013 and 2012, respectively. The changes in the valuation allowances were primarily due to the addition of loss carryforwards.

At December 31, 2013, the Company had $49.6 million and $37.5 million, respectively, of federal and state net operating loss carryforwards. Included in the gross amount, approximately $27.2 million of net operating loss is created by excess stock option deduction. A credit to APIC will be recorded when the excess stock option deduction reduces the income tax payable.

The federal net operating loss carryforward begins expiring in 2015, and the state net operating loss carryforward began expiring in 2014, if not utilized.

In addition, the Company has federal research and development tax credits carryforwards of approximately $1.7 million and state research and development tax credit carryforwards of approximately $2.5 million. The federal credit carryforwards begin expiring 2021 and the state credits carry forward indefinitely. The Internal Revenue Code (IRC) contains provisions which limit the amount of net operating loss (NOL) and research credit carryforwards that can be used in any given year if a significant change in ownership has occurred. During the year, the Company determined that prior changes in ownership as defined under IRC Section 382 had occurred, resulting in a reduction in the Company's NOL and credits carryovers for amounts which will expire unutilized due to these limitations. Accordingly, the Company decreased its deferred tax asset and corresponding valuation allowance by $2.5 million to reflect the reduction of these carryovers. As of December 31, 2013, $12.8 million of the Company's NOL carryovers and $0.5 million of credit carryovers are subject to an annual $0.6 million limitation, of which $7.5 million NOLs would be available to offset future taxable income in the twenty-year carryforward period.

The following table displays by contributing factor the changes in the valuation allowance for deferred tax assets since January 1, 2011:



	Years Ended December 31,
(in thousands)	2013			2012			2011
Balance at the beginning of the period	$	21,193		$	22,687		$	21,588
Net operating loss utilization	(2,397		)	(3,505		)	(884		)
R&D tax credit (decrease) increase	172			272			383
Depreciation and amortization increase (decrease)	204			29			(309		)
Reserves and accruals increase	1,558			1,273			1,581
Deferred tax assets decrease	300			437			328
Balance at the end of the period	$	21,030		$	21,193		$	22,687

The Company adopted the authoritative guidance for "Accounting for Uncertainty of Income Taxes" on January 1, 2009. The following table reflects changes in the unrecognized tax benefits since January 1, 2012:



	Years ended December 31,
(in thousands)	2013			2012
Gross amount of unrecognized tax benefits as of the beginning of the period	$	1,079		$	908
Increases related to prior year tax provisions	30			7
Decreases related to prior year tax provisions	(239		)	—
Increases related to current year tax provisions	222			164
Gross amount of unrecognized tax benefits as of the end of the period	$	1,092		$	1,079

As a result of the Company’s historic losses and related valuation allowances, the Company has recorded the uncertain tax amounts above entirely as reductions to deferred tax assets which are subject to a full valuation allowance in its consolidated balance sheet. The Company recognizes interest and penalties relating to uncertain tax positions in income tax expense. For the years ended December 31, 2013 and 2012, penalties and interest were $26,000 and zero, respectively. As the Company is not currently under examination, it is reasonable to assume that the balance of gross unrecognized tax benefits will likely not change in the next twelve months.

The Company files income tax returns in the United States on a federal basis and in various states. The Company is not currently under any international or any United States federal, state and local income tax examinations for any taxable years. All of the Company’s net operating losses and research credit carryforwards prior to 2013 are subject to tax authority adjustment and all years after 2008 are still subject to the tax authority examinations.

The Company has not provided for U.S. federal and foreign withholding taxes on $0.9 million of the Company’s non-U.S. subsidiaries’ undistributed earnings as of December 31, 2013, since the Company intends to reinvest this amount outside the U.S. indefinitely. The tax impact of repatriating these earnings is not practical to compute.