Income Taxes

Income tax provisions from continuing operations consisted of the following:



	Year Ended December 31,
	2016			2015			2014
	(In thousands)
Income (loss) from continuing operations before provisions for income taxes	$	(14,509	)	$	4,449		$	6,319
Provision for income taxes from continuing operations	(25,521		)	(1,591		)	(2,196		)
Effective tax rate	(175.9		)%	35.8		%	34.8		%

The 2016 provision for income tax from continuing operations resulted primarily from the application of a full federal valuation allowance against deferred tax assets. The 2015 provision for income tax from continuing operations resulted primarily from the Company’s federal and foreign tax recognized at statutory rates, adjusted for the tax impact of non-deductible permanent items including stock-based compensation expenses and foreign withholding taxes. The 2015 provision for income tax from continuing operations also includes non-cash tax expense based on intercompany profit that resulted from the sale of certain IP rights in 2015, and also includes in increase to the valuation allowance against certain of the Company’s deferred tax assets. The 2014 provision for income tax from continuing operations resulted primarily from the decrease in deferred tax assets and foreign withholding tax expense.

On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment of stock-based compensation expense in an intercompany cost sharing arrangement was issued. In its opinion, the U.S. Tax Court accepted Altera's position of excluding stock-based compensation from its intercompany cost sharing arrangement. On February 19, 2016, the IRS appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit. Although the IRS has appealed the decision, based on the findings of the US Tax Court, the Company has concluded that it is more likely than not that the decision will be upheld and accordingly has excluded stock-based compensation from intercompany charges during the period. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financial statements.

The Company reported pre-tax book income or loss from continuing operations of:



	Year Ended December 31,
	2016			2015			2014
	(In thousands)
Domestic	$	(14,656	)	$	21,160		$	5,867
Foreign	147			(16,711		)	452
Total	$	(14,509	)	$	4,449		$	6,319

The benefit or (provisions) for income taxes from continuing operations consisted of the following:



	Year Ended December 31,
	2016			2015			2014
	(In thousands)
Current:
United States federal	$	(1,649	)	$	(1,426	)	$	(218	)
State and local	859			(12		)	(12		)
Foreign	(442		)	(389		)	(75		)
Total current	$	(1,232	)	$	(1,827	)	$	(305	)
Deferred:
United States federal	(24,261		)	585			(2,137		)
State and local	—			—			—
Foreign	(28		)	(349		)	246
Total deferred	(24,289		)	236			(1,891		)
	$	(25,521	)	$	(1,591	)	$	(2,196	)

In 2016, 2015, and 2014 the Company’s income tax payable was not decreased by the tax benefit related to stock options. The Company includes only the direct tax effects of employee stock incentive plans in calculating this benefit, which is recorded to additional paid-in capital.

Deferred tax assets and liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax losses, and credit carryforwards. Significant components of the net deferred tax assets and liabilities consisted of:



	December 31,
	2016			2015
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	15,337		$	6,824
State income taxes	1			1
Deferred revenue	458			2,505
Research and development and other credits	11,418			10,626
Reserves and accruals recognized in different periods	5,397			6,395
Basis difference in investment	969			967
Capitalized R&D expenses	4,569			4,654
Depreciation and amortization	585			523
Deferred rent	306			243
Other	2			14
Total deferred tax assets	39,042			32,752
Valuation allowance	(38,683		)	(8,119		)
Net deferred tax assets	359			24,633
Foreign credits	(33		)	—
Net deferred tax liabilities	(33		)	—
Net deferred taxes	$	326		$	24,633

The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes” (“ASC 740”) which requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the ASC 740 more-likely-than-not realization ("MLTN") threshold criterion. This assessment considers matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The evaluation of the recoverability of the deferred tax assets requires that the Company weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified.

The Company considered both positive and negative evidence in its fourth quarter of 2016 analysis of the realizability of its deferred tax assets. In performing this analysis, the Company considered recent results of operations, scheduled reversals of deferred tax liabilities, projected future income, and available tax planning strategies. A significant piece of negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2016 (which arose in the Company’s fourth quarter of 2016). When performing the evaluation of the cumulative loss, the Company considered the book loss as reported, as well as permanent differences and one-time gains and losses not indicative of future business activities. The Company determined that the three-year cumulative loss constitutes negative objective evidence, limiting the Company’s ability to consider other evidence, such as the Company’s projections for future growth. As a result, the Company concluded that it would be appropriate to record a non-cash charge of $28.1 million as additional valuation allowance, thereby establishing a full valuation allowance against all of its net federal deferred tax assets. The Company continued to maintain a full valuation allowance on its state and certain of its foreign net deferred tax assets.

As of December 31, 2016, the net operating loss carryforwards for federal and state income tax purposes were approximately $52.1 million and $52.5 million, respectively. The federal net operating losses expire between 2026 and 2036 and the state net operating losses begin to expire in 2028. Included in the Company’s net operating losses, $9.6 million was associated with excess benefits related to stock compensation. The Company also has net operating loss carryforwards from Ireland of $2.9 million that can be carried forward indefinitely and do not expire. As of December 31, 2016, the Company had federal and state tax credit carryforwards of approximately $9.9 million and $1.7 million, respectively, available to offset future tax liabilities. The federal credit carryforwards will expire between 2017 and 2036 and the California tax credits will carryforward indefinitely. In addition, as of December 31, 2016, the Company has Canadian research and development credit carryforwards of $1.5 million, which will expire at various dates through 2036. These operating losses and credit carryforwards have not been reviewed by the relevant tax authorities and could be subject to adjustment upon examinations.

Section 382 of the Internal Revenue Code (“IRC Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses and credit carryforwards if it experiences an “ownership change” as defined by IRC Section 382. Utilization of a portion of the Company’s federal net operating loss carryforward was limited in accordance with IRC Section 382, due to an ownership change that occurred during 1999. This limitation has fully lapsed as of December 31, 2010. As of December 31, 2016, the Company conducted an IRC Section 382 analysis with respect to its net operating loss and credit carryforwards and determined there was no limitation. There can be no assurance that future issuances of the Company’s securities will not trigger limitations under IRC Section 382 which could limit utilization of these tax attributes.

For purposes of the reconciliation between the provision for income taxes at the statutory rate and the effective tax rate, a national U.S. 35% rate is applied as follows:



	2016		2015		2014
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Sale of IP rights to foreign subsidiary	(13.8	)%	22.5	%	—	%
Benefit from foreign losses	—	%	7.8	%	—	%
Foreign withholding	(1.2	)%	0.5	%	3.5	%
Stock compensation expense	(6.6	)%	5.8	%	3.8	%
Meals & entertainment	—	%	0.1	%	0.1	%
Foreign rate differential	(1.2	)%	(24.0	)%	(1.1	)%
Prior year true-up items	(0.3	)%	1.7	%	(0.2	)%
Tax reserves	1.8	%	3.9	%	0.8	%
Loss on foreign share transfer	—	%	5.9	%	—	%
Credits	1.6	%	(35.5	)%	(5.7	)%
State Refunds	3.8	%	—	%	—	%
Other	(1.6	)%	3.9	%	(1.4	)%
Valuation allowance	(193.4	)%	8.2	%	—	%
Effective tax rate	(175.9	)%	35.8	%	34.8	%

Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	2016			2015			2014
	(In thousands)
Balance at beginning of year	$	6,285		$	1,744		$	1,634
Gross increases for tax positions of prior years	—			141			—
Gross decreases for tax positions of prior years	(22		)	(15		)	(4		)
Gross increases for tax positions of current year	111			4,415			114
Settlements	—			—			—
Lapse of statute of limitations	(142		)	—			—
Balance at end of year	$	6,232		$	6,285		$	1,744

The unrecognized tax benefits relate primarily to federal and state research and development credits and intercompany profit on the transfer of certain IP rights to one of the Company’s foreign subsidiaries as part of the Company’s tax reorganization described above. The Company’s policy is to account for interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2016, the Company accrued interest or penalties related to uncertain tax positions in the amount of $2,000. As of December 31, 2016, the total amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized, is $97,000.

Because the Company has net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine the Company’s tax returns for all years from 1998 through the current period.