9. Income Taxes

The Company’s geographical breakdown of its income (loss) before provision for income taxes is as follows:

	Year Ended March 31,
(in thousands)	2013			2012			2011

Domestic	$	(2,877	)	$	(3,534	)	$	(3,232	)
Foreign	12			85			401
Loss before provision for taxes	$	(2,865	)	$	(3,449	)	$	(2,831	)

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

	Years Ended March 31,
(in thousands)	2013		2012		2011
Current
Federal	$	—	—		$	1
State	—		—		(2		)
Foreign	76		69		56
Total current provision	$	76	$	69	$	55
Deferred
Federal	—		—		—
State	—		—		—
Foreign	1		29		94
Total deferred provision	$	1	$	29	$	94
Total	$	77	$	98	$	149

Reconciliations of the provisions for income taxes at the statutory rates to the Company’s provisions for income taxes are as follows:

	2013		2012		2011
Expected U.S. Federal tax benefit	(34.0	)%	(34.0	)%	(34.0	)%
State taxes	(4.3	)%	(4.3	)%	(4.3	)%
Foreign taxes	2.7	%	2.0	%	5.2	%
Change in valuation allowance	38.8	%	34.1	%	41	%
Research and experimentation credit	(8.3	)%	(3.2	)%	(9.2	)%
Stock-based compensation expense	7.5	%	8.0	%	6.1	%
Other	0.2	%	0.2	%	0.5	%
Actual effective tax rate	2.6	%	2.8	%	5.3	%

Significant components of the Company’s net deferred tax assets are as follows at March 31:

(in thousands)	2013			2012			2011

Deferred tax assets:
Net operating loss carryforwards	$	15,926		$	17,572		$	19,035
Accruals and allowances recognized in different periods	323			373			162
Research and experimentation credit carryforwards	5,438			5,013			4,937
Property and equipment	73			109			138
Stock-based compensation expense	1,225			855			688
Total deferred tax assets	22,985			23,922			24,960
Less valuation allowance	(22,387		)	(23,532		)	(24,519		)
Total deferred assets	598			390			441
Deferred tax liabilities:
Currency translation adjustment	(125		)	(129		)	(137		)
Intangibles	(224		)	—			—
Total deferred tax liabilities	(349		)	(129		)	(137		)
Net deferred tax assets	$	249		$	261		$	304

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, including the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the Company has provided a full valuation allowance against its U.S. and United Kingdom deferred tax assets. The Company’s valuation allowance decreased by $1.2 million, $1.0 million, and $1.2 million in the years ended March 31, 2013, 2012, and 2011, respectively.

The Company recognizes excess income tax benefits from stock option exercises in the additional paid in capital account in stockholders’ equity only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company. There was no such excess income tax benefits recognized for the years ended March 31, 2013, 2012, or 2011.

As of March 31, 2013, the Company had U.S. federal, state, and foreign net operating loss carryforwards of approximately $44.2 million, $12.8 million, and $4.2 million, respectively. Of these amounts, $2.3 million and $1.3 million represent federal and state tax deductions in excess of recognized stock option compensation, respectively, which will be recorded as an adjustment to additional paid-in capital when they reduce taxes payable. If unused, the federal net operating loss carryforwards will begin to expire in 2019, the state net operating loss carryforwards will begin to expire in 2016. Foreign net operating losses may be carried forward indefinitely. Approximately $1.4 million and $1.4 million of the federal and state net operating loss carryforwards, respectively, are subject to an annual limitation of approximately $0.2 million per year.

As of March 31, 2013, the Company had U.S. federal and state tax credit carryforwards of approximately $3.2 million and $3.4 million, respectively. The federal credit will expire beginning in 2019, if not utilized. California state research and development credits can be carried forward indefinitely. With respect to the Company’s foreign subsidiaries in the UK and Germany, the Company intends to permanently reinvest earnings, therefore, no U.S. income or foreign tax withholding has been provided for in deferred income taxes. With respect to the Company’s foreign subsidiary in France, it is treated as a branch for US income tax purposes, which results in its earnings being taxed in the U.S. There is no unrecognized deferred tax liability related to undistributed earnings due to cumulative losses sustained by these foreign subsidiaries.

As of March 31, 2013 and 2012, the Company did not have any gross unrecognized tax benefit. While it is often difficult to predict the final outcome of any particular uncertain tax position, management does not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Years Ended March 31,
	2013		2012			2011
Balance at April 1	$	—	$	103,000		$	119,000
Additions based on tax positions taken during a prior period	—		—			—
Reductions based on tax positions taken during a prior period	—		—			(16,000		)
Additions based on tax positions taken during the current period	—		—			—
Reductions based on settlements with taxing authorities	—		(103,000		)	—
Balance at March 31	$	—	$	—		$	103,000

The Company files consolidated and separate income tax return in the U.S. federal jurisdiction and in certain state jurisdictions as well as foreign jurisdictions including France, Germany, and the United Kingdom. The Company is subject to income tax examinations for fiscal years after 2009 for France, fiscal years after 2008 for Germany, and fiscal years after 2006 for the United Kingdom. As a result of net operating loss carryforwards, the Company is subject to audit for fiscal years 1999 and forward for federal purposes and 2001 and forward for California purposes.

Recently enacted tax laws may also affect the tax provision on the company’s financial statements. On February 20, 2009, the State of California passed a new law to allow taxpayers to make an election to adopt a single sales factor apportionment formula starting with the 2011 taxable year. As of March 31, 2013, the Company has not considered changing its sales factor apportionment in California. However, California Proposition 30 passed in November 2012, requiring mandatory single sales factor apportionment for tax years beginning on or after January 1, 2013. Therefore, the Company will be required to use single sales factor apportionment for California purposes for the tax year ending March 31, 2014, resulting in potential adjustment to the blended state rate used to calculate the tax effect on its deferred tax assets and liabilities. Management of the Company believes that any related change to the blended state rate will not have a material impact to the Company’s consolidated financial statements.

During the year ended March 31, 2012, the German tax authorities closed a tax audit of the Company’s subsidiary in Germany for the fiscal years 2005 to 2007, which resulted in a net tax expense of approximately $82,000.