10.                 Income Taxes

Income before income tax provision was generated in the following jurisdictions:

Net deferred tax assets (liabilities) consist of the following:

The valuation allowance for net deferred tax assets as of December 31, 2013 and 2012 was $2,752 and $2,821, respectively. The valuation allowance as of December 31, 2013 and 2012 was related to capital losses of $2,085 and federal and state net operating losses of $667 for 2013, and capital losses of $2,157 and federal and state net operating losses of $644 for 2012. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.

The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which net operating losses and temporary differences are deductible. Management considers the scheduled reversal of deferred tax assets and liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax code. Based on the level of taxable income and projections for future taxable income over the periods for which the net operating losses are available and deferred tax assets are deductible, management believes that it is more-likely-than-not that, in consideration of its recorded valuation allowance, it will realize the benefits of the net operating losses and any other deferred tax assets. The amount of the deferred tax assets considered realizable however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Upon exercise of stock options, the Company recognizes any difference between GAAP compensation expense and compensation expense for income tax purposes as a tax windfall or shortfall. The difference is charged to equity in the case of a windfall. When the exercise results in a windfall and the windfall results in a net operating loss (“NOL”), or the windfall increases an NOL carryforward, no windfall is recognized until the deduction reduces income taxes payable.  For GAAP purposes, the Company has recognized all previously suspended windfall tax benefits because they were utilized on the Company’s 2012 tax return to reduce taxes payable. The Company has recognized all current windfall tax benefits because they will be utilized on the Company’s 2013 tax return to reduce taxes payable.  The benefits were recorded in stockholders’ equity, and as such, do not impact the Company’s effective tax rate.

The expected tax provision calculated at the statutory federal rate differs from the actual provision as follows:

At December 31, 2013, the Company had NOL carryforwards for federal income tax purposes of $35,837 which are available to offset future federal taxable income, if any, and expire through 2031.

Of the $35,837 in NOL carryforwards, due to Internal Revenue Code Section 382 limitations, approximately $1,938 in NOLs will not be utilized.  In addition, as of December 31, 2013, we had NOL carryforwards for state income tax purposes of $29,174, available to reduce future income subject to income taxes.  The state NOL carryforwards expire through 2031.

In addition, the Company has alternative minimum tax credit carryforwards of approximately $75, which are available to reduce future federal regular income taxes, if any, over an indefinite period.

A reconciliation of the beginning and ending amount of unrecognized tax benefit was as follows:

At December 31, 2013, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $1,794.  At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $292 in the next twelve months due to the completion of reviews by tax authorities, the voluntary filing of certain state income taxes and the expiration of certain statutes of limitations.

The Company filed voluntary disclosure agreements with six states during 2013 to limit the exposure to state income taxes in states where the Company had not filed tax returns.  As of December 31, 2013, the Company had not yet received notification that those liabilities will be settled and continues to maintain exposure in those states.  It is management’s belief that these agreements will be settled within the next twelve months.

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2013, 2012 and 2011, income tax expense includes $33, $448 and $14, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $636 and $642 as of December 31, 2013 and 2012, respectively.

The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, a subsidiary of the Company files a tax return in a foreign jurisdiction. The Company’s tax returns for the calendar years ended December 31, 2012, 2011 and 2010 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for the fiscal year ended March 31, 2009, as well as for the calendar years ended December 31, 2012, 2011, 2010 and 2009 remain open to examination by various state revenue services.

Our Indian subsidiary is currently under examination by the India Tax Authority for the fiscal year ended March 31, 2009, 2011 and 2012.  Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheet. It is possible that one or more of these audits may be finalized within the next twelve months.