15. Income Taxes

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


	Years Ended January 31,
	2014			2013			2011
United States	$	(3,068	)	$	(355	)	$	2,797
Foreign		1,439			1,230			635

(Loss) income before income taxes	$	(1,629	)	$	875		$	3,432

The Company’s effective tax rate varies from the U.S. federal statutory rate follows:


	Years Ended January 31,
	2014			2013			2012
United States federal income tax rate		34.0	%		34.0	%		34.0	%
State taxes, net of federal benefit		0.6	%		2.6	%		0.7	%
Meals and entertainment		(1.6	)%		3.8	%		0.6	%
Stock compensation		(16.1	)%		26.4	%		4.8	%
Executive compensation		(5.1	)%		7.4	%		2.9	%
Non-deductible mark-to-market and interest adjustments		0.0	%		(19.6	)%		2.3	%
United States federal and state credits		30.6	%		(60.2	)%		(15.2	)%
Change in valuation allowance		6.4	%		17.7	%		(355.8	)%
Foreign taxes and rate differential		21.7	%		(17.8	)%		11.9	%
Tax rate changes		(0.3	)%		(1.7	)%		1.2	%
Expiration of tax attributes		(12.7	)%		21.0	%		—
Other		(1.0	)%		(0.8	)%		0.7	%

Total		56.5	%		12.8	%		(311.9	)%

Significant components of the Company’s deferred tax assets and liabilities are as follows:


	January 31,
	2014			2013
Deferred tax assets:
Net operating loss carryforwards	$	9,282		$	9,078
Business credit carryforwards		4,894			3,462
Accrued expenses		789			213
Stock compensation		318			208
Deferred revenue		15			109
Deferred rent		502			694
Other		71			24

Gross deferred tax assets		15,871			13,788
Valuation allowance		(305	)		(409	)

Total deferred tax assets		15,566			13,379

Deferred tax liabilities:
Depreciation		(177	)		(229	)
Other		(79	)		(11	)

Total deferred tax liabilities		(256	)		(240	)

Net deferred tax assets	$	15,310		$	13,139

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


	Years Ended January 31,
	2014			2013			2012
Current:
Federal	$	(944	)	$	(663	)	$	(727	)
State		(28	)		(9	)		(72	)
Foreign		(292	)		(86	)		(777	)

Total current		(1,264	)		(758	)		(1,576	)

Deferred:
Federal		1,908			812			(400	)
State		64			236			137
Foreign		108			(247	)		44
Change in valuation allowance		104			(155	)		12,501

Total deferred		2,184			646			12,282

Total benefit (provision) for income taxes	$	920		$	(112	)	$	10,706

The need to establish valuation allowances for deferred tax assets is assessed periodically by the Company based on the ASC 740, Income Taxes, more-likely-than-not realization threshold criterion. The realizability of the deferred tax assets is evaluated quarterly. At January 31, 2014 and 2013, the Company’s net deferred tax assets totaled $15,310 and $13,139, respectively. The Company reviews all available evidence to evaluate the recoverability of its United States federal, state and foreign deferred tax assets, including net operating losses and research and development tax credits.

Based upon the Company’s cumulative history of earnings before taxes for financial reporting purposes over a 12-quarter period ending on January 31, 2012 and an assessment of the Company’s expected future results of operations as of January 31 2012, the Company determined that it was more likely than not that it would realize most of its United States net operating losses and other deferred tax assets prior to their expiration. As a result, during the fourth quarter of fiscal year 2012, the Company reversed a total of $12,501 of its deferred tax asset valuation allowances. The entire amount of the $12,501 valuation allowance release was recorded as a discrete benefit for income taxes in the Company’s consolidated statement of operations in the fourth quarter of fiscal year 2012.

During fiscal year 2013, the Company reassessed its state tax profile and state apportionment. As a result, the Company recorded a valuation allowance against certain state investment tax credits and R&D credits in the amount of $155. This was due to the fact that as of January 31, 2013, management determined it was more likely than not that these assets would not be realized.

During fiscal year 2014, the Company updated its assessment of the realizability of the deferred tax assets, considering new state tax credits and expiring state net operating loss carryforwards, and reduced the valuation allowance by $104.

As of January 31, 2014, the Company had United States federal net operating loss carryforwards of $27,118, which will begin to expire in 2017, and state net operating loss carryforwards of $1,195, which will begin to expire in 2015. The Company has an additional $115 of federal and state net operating losses not reflected above (net of tax), that are attributable to stock option exercises, which will be recorded as an increase in additional paid-in capital on the Company’s consolidated balance sheet once they are “realized” in accordance with ASC 718, Compensation—Stock Compensation. As of January 31, 2014, the Company had federal tax credit carryforwards of approximately $4,145, which will begin to expire in 2017, and state tax research and development credit carryforwards of approximately $1,134, which will begin to expire in 2021.

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset its taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of the Company’s net operating loss carryforwards before they expire. The Company performed an analysis as of January 31, 2014, and determined that it had not experienced an ownership change for purposes of Section 382. However, future transactions in the Company’s common stock could trigger an ownership change for purposes of Section 382, which could limit the amount of net operating loss carryforwards and other attributes that could be utilized annually in the future to offset the Company’s taxable income, if any. Any such limitation, whether as the result of sales of common stock by the Company’s existing stockholders or sales of common stock by the Company, could have a material adverse effect on the Company’s results of operations in future years.

The Company considers the indirect effect of income tax benefits from stock-based compensation in arriving at its income tax provision. The Company recognizes windfall tax benefits associated with the exercise of stock options or release of restricted stock units directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by the Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that we had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, the Company follows the “with-and-without” method. Under the with-and-without method, the windfall is considered realized and recognized for financial statement purposes only when an incremental benefit is provided after considering all other tax benefits including the Company’s net operating losses. The with-and-without method results in the windfall from share-based compensation awards always being effectively the last tax benefit to be considered. Consequently, the windfall attributable to share-based compensation will not be considered realized in instances where our net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current year’s taxable income before considering the effects of current-year windfalls.

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company has gross unrecognized tax benefits of $2,167 and $2,259 at January 31, 2014 and 2013, respectively. These amounts represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction of the Company’s effective tax rate.

A tabular roll forward of the Company’s uncertainties in its income tax provision liability is presented below:


	Year Ended January 31
	2014			2013
Gross balance at February 1	$	2,259		$	2,407
Additions based on tax positions related to the current year		218			146
Reductions for tax positions of prior years		(310	)		(294	)

Gross balance at January 31	$	2,167		$	2,259

The Company classifies interest and penalties related to unrecognized tax benefits as income tax expense. These amounts are not reflected in the reconciliation above. The total amount of interest and penalties related to uncertain tax positions and recognized in the balance sheet as of January 31, 2014 and 2013 was $59 and $40, respectively.

The Company does not expect that the unrecognized tax benefit will change significantly within the next twelve months. The Company and one or more of its subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, the Company is no longer subject to federal, state or local examinations for years prior to January 31, 2009. However, carryforward attributes that were generated prior to January 31, 2010 may still be adjusted upon examination by federal, state or local tax authorities if they either have been or will be used in a future period.

The Company’s current intention is to indefinitely reinvest the total amount of its unremitted earnings in the local international jurisdiction, except for instances in which the Company can remit such earnings to the United States without an associated net tax cost. Events that could trigger a tax might include United States acquisitions or other investments funded by cash distributions or loans from a foreign subsidiary. Because of the complexity of United States and foreign tax rules applicable to the distribution of earnings from foreign subsidiaries to United States legal entities, the determination of the unrecognized deferred tax liability on these earnings is not practicable. The Company has not provided for United States taxes on the unremitted earnings of its international subsidiaries of $4,050.