INCOME TAXES

A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows:



	Year Ended December 31,
	2013		2012		2011
Benefit at U.S. Federal statutory rate	35.00	%	35.00	%	35.00	%
State taxes—deferred	4.79	%	6.73	%	3.98	%
Increase in valuation allowance	(42.91	)%	(39.62	)%	(38.27	)%
Tax credits	1.69	%	—	%	0.13	%
Other	2.12	%	(2.11	)%	(0.84	)%
Provision for income taxes	0.69	%	—	%	—	%

There is no provision for federal income taxes since the Company has incurred net operating losses since inception. During 2013, the Company sold a portion of its unused New Jersey State net operating losses through a program sponsored by the New Jersey Economic Development Authority. Cash proceeds of $0.4 million were received by the Company resulting in a state tax benefit recognized during the year ended December 31, 2013.

Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Federal and state net operating loss carry-forwards	$	114,819		$	89,150
Federal and state research credits	5,149			3,631
Depreciation and amortization	3,248			3,891
Accruals and reserves	1,696			3,388
Deferred revenue	1,707			1,897
Other	3,374			1,997
Total deferred tax assets	129,993			103,954
Deferred tax liabilities:
Convertible notes	(8,507		)	—
	121,486			103,954
Less: valuation allowance for deferred tax assets	(121,486		)	(103,954		)
Net deferred tax assets	$	—		$	—

The Company has significant federal and state net operating loss carryforwards and federal and state research and development tax credit carryforwards. As of December 31, 2013, federal and state net operating losses totaled $286.0 million and $256.4 million, respectively. The Company also had federal and state research and development tax credit carry-forwards of approximately $3.7 million and $2.3 million, respectively. The net operating loss carryforwards and research and development tax credits may expire and not be used. The net operating loss carryforwards will begin expiring in 2026 for federal purposes and 2015 for state purposes if the Company has not used them prior to that time, and the federal tax credits will begin expiring in 2028 unless previously used. The state tax credits carry forward indefinitely. There is significant doubt regarding the Company's ability to utilize its net deferred tax assets and, therefore, the Company has recorded a full valuation allowance. During 2013, the Company recorded a deferred tax liability of $10.1 million in connection with the Notes which was fully offset by a reduction in the tax valuation allowance.

The valuation allowance for deferred tax assets increased by approximately $17.5 million, $20.7 million and $16.6 million during the years ended December 31, 2013, 2012 and 2011, respectively.

NOTE 14—INCOME TAXES (Continued)

The Company's ability to use any net operating loss and credit carryforwards to offset taxable income or tax, respectively, in the future will be limited under Internal Revenue Code Sections 382 and 383 since the Company had a cumulative change in ownership of more than 50% within the three-year period. Such an ownership change was triggered by the cumulative ownership changes arising as a result of the completion of the initial public offering and other financing transactions. Because of the ownership change, the Company will be limited regarding the amount of net operating loss carryforwards and research tax credits that it can utilize annually in the future to offset taxable income or tax, respectively. The annual limitation may significantly reduce the utilization of the net operating loss carryforwards and research tax credits before they expire. In addition, California and certain states have suspended use of net operating loss carryforwards for certain taxable years, and other states are considering similar measures. As a result, the Company may incur higher state income tax expense in the future.

The Acquisition was treated as a stock acquisition for tax purposes and, therefore, the acquired intangibles for book purposes are not deductible for income tax purposes. The Company also recorded goodwill relating to contingent payments due under the Acquisition during the years ended December 31, 2013 and 2012, which is not deductible for income tax purposes.

In connection with the adoption of stock-based compensation guidance in 2006, the Company elected to follow the with-and-without approach to determine the sequence in which deductions and net operating loss carryforwards are utilized. Accordingly, no tax benefit related to stock options was recognized in the current year. At December 31, 2013, the Company has approximately $6.5 million of net operating loss carryforwards that relate to stock-based compensation for which future tax benefits will be credited to equity when realized through a reduction of taxes payable.

The Company evaluates its uncertain tax positions in a two-step process. The Company first determines whether it is more-likely-than-not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

The Company did not have a liability related to unrecognized tax benefits as of December 31, 2013 and 2012 due to operating losses but has reduced its deferred tax assets by $0.4 million at December 31, 2013 and 2012. Further, because the Company has recorded a full valuation allowance on its net deferred assets, the effect of implementing ASC 740 has been a reduction of the allowance by the amount above. A reconciliation of the beginning and ending amount of gross unrecognized tax benefit is as follows:



	Year Ended December 31,
	2013		2012
Balance at beginning of year	$	420	$	420
Increases related to tax positions taken during the current year	—		—
Increases related to tax positions taken during a prior period	—		—
Balance at end of year	$	420	$	420

The Company recognizes interest and penalties related to unrecognized tax benefits as tax expense. No interest or penalties were accrued for 2013, 2012 or 2011. The Company is currently open for audit by the United States Internal Revenue Service, or IRS, and state tax jurisdictions for 2007 through 2013. However, the IRS or state may still examine and adjust a net operating loss arising from a closed year to the extent it is utilized in an open tax year. The American Tax Relief Act of 2012, enacted on January 2, 2013, retroactively reinstated the research and development tax credit for 2012. The Company reported credits of approximately $0.2 million for federal income tax purposes in the first quarter of 2013 related to 2012.