INCOME TAXES

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income tax benefit from (provisions for) the years ended December 31, 2020 and 2019 consisted of the following (in thousands):

	For the Year Ended December 31,
	2020			2019
Income (loss) before provision for income taxes	$	3,159		$	(19,573)
Benefit from (provision for) income taxes	2,242			(471)
Effective tax rate	(71.0)		%	(2.4)		%

The 2020 and 2019 benefit from (provision for) income taxes resulted primarily from estimated foreign taxes, foreign withholding tax expense and the release of a $2.2 million valuation allowance from one of our foreign entities in 2020.

The components of our income (loss) before benefit from (provision for) income taxes were as follows (in thousands):

	For the Year Ended December 31,
	2020		2019
Domestic	$	(4,602)	$	(17,970)
Foreign	7,761		(1,603)
Total	$	3,159	$	(19,573)

The benefit from (provisions for) income taxes consisted of the following (in thousands):

	For the Year Ended December 31,
	2020		2019
Current:
U.S, federal	—		$	—
States and local	(3)		(3)
Foreign	(114)		(190)
Total current	$	(117)	$	(193)
Deferred:
U.S, federal	—		—
States and local	—		—
Foreign	2,359		(278)
Total deferred	2,359		(278)
Total benefit from (provision for) income taxes	$	2,242	$	(471)

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 (the "Ninth Circuit"). On July 24, 2018, the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court that had found certain Treasury regulations related to stock-based compensation to be invalid. On August 7, 2018, the Ninth Circuit withdrew its July 24, 2018 opinion to allow a reconstituted panel to confer on the decision. This reconstituted panel reconsidered the validity of the cost sharing regulations at issue. The regulations at issue require related entities to share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as “qualified cost-sharing arrangements” and to avoid potential IRS adjustment. On June 7, 2019, the reconstituted panel of the Ninth Circuit upheld the 2018 decision of the Ninth Circuit, concluding stock-based compensation must be included in intercompany cost sharing agreements for the agreements to be classified as “qualified cost-sharing arrangements”. On July 22, 2019, Altera filed a petition for an en banc rehearing with the Ninth Circuit which was denied. On February 10, 2020, Altera filed an appeal with the United States Supreme Court (the “Supreme Court”) for review. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements. On June 22, 2020, the Supreme Court announced that it was denying the petition for certiorari for Altera Corporation & Subsidiaries v. Commissioner, 926 F.3d. 1061 (2019). The denial to hear the case puts an end to the Altera’s Ninth Circuit stock-based compensation challenge. As such, we have made corresponding provisions.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed into law. The CARES Act includes several significant business tax provisions including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions. We analyzed the provisions of the CARES Act and determined there was no net effect on our provision for the year ended December 31, 2020.

On December 22, 2017, the Tax Act was passed into law. Among other changes, the Tax Act reduced the US federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. In addition, the Act introduced the Base Erosion and Anti-Abuse Tax (the “BEAT”), which creates a new tax on certain related-party payments. We concluded that we have not met the threshold requirements of the BEAT. On July 9, 2020, the Internal Revenue Service issued final regulations regarding deductions for global intangible low-taxed income (“GILTI”) and foreign-derived intangible income (“FDII”). On July 9, 2020, the Treasury Department released final regulations ("TD 9901") under IRC Section 250, which allows an annual deduction to a domestic corporation for its foreign-derived intangible income ("FDII") and global intangible low-taxed income ("GILTI") inclusion. The final guidance is not expected to have a material impact on our condensed consolidated financial statements. Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of topics, is expected to be issued. In accordance with ASC 740 Income Taxes ("ASC 740"), we will recognize any effects of the guidance in the period that such guidance is issued.

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 (in thousands);

	December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	9,239	$	4,936
State income taxes	1		1
Deferred revenue	5,426		6,291
Research and development and other credits	8,638		8,282
Reserve and accruals recognized in different periods	1,027		1,128
Capitalized research and development expenses	3,318		3,447
Depreciation and amortization	3,134		3,636
Lease liability	351		806
Total deferred tax assets	31,134		28,527
Valuation allowance	(28,475)		(28,057)
Net deferred tax assets	2,659		470
Deferred tax liabilities:
Right of use lease assets	(344)		(466)
Foreign credits	(14)		(23)
Other deferred tax liabilities	—		(40)
Total deferred tax liabilities	(358)		(529)
Net deferred taxes	$	2,301	$	(59)

We account for deferred taxes under 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 we 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. As of December 31, 2020, based on our assessment of the realizability of our deferred tax assets, we continued to maintain a full valuation allowance against all of our U.S. federal and state net deferred tax assets. The valuation allowance for Ireland

subsidiary was released based on the profitability analysis of the cumulative 12-quarter actual period and the projection for the next 3-year period.

As of December 31, 2020, the net operating loss carryforwards for federal and state income tax purposes were approximately $21.7 million and $53.0 million, respectively. The state net operating losses begin to expire in 2029. The federal net operating losses for tax years after 2017 can be carried forward indefinitely. As of December 31, 2020, we had federal and state tax credit carryforwards of approximately $6.4 million and $2.6 million, respectively, available to offset future tax liabilities. The federal credit carryforwards will expire between 2020 and 2039 and the California tax credits will carryforward indefinitely. In addition, as of December 31, 2020, we have Canadian research and development credit carryforwards of $1.7 million, which will expire at various dates through 2040. 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 our 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, 2020, we conducted an IRC Section 382 analysis with respect to our net operating loss and credit carryforwards and determined there was no limitation. There can be no assurance that future issuances of our securities will not trigger limitations under IRC Section 382 which could limit utilization of these tax attributes.

The reconciliation between the effective federal statutory rate and our effective tax rates are as follows:

	For the Year Ended December 31,
	2020		2019
Federal statutory rate	21.0	%	21.0	%
Foreign withholding	2.0	%	(0.3)	%
Stock-based compensation expense	12.9	%	(11.3)	%
Foreign rate differential	(33.0)	%	(2.6)	%
Prior year true-up items	1.1	%	0.2	%
Tax reserves	(4.0)	%	(2.1)	%
Other	0.1	%	(1.3)	%
FTC conversion true up	(10.3)	%	(5.9)	%
State taxes, net of federal benefit	0.1	%	—	%
Global intangible low-taxed income	21.0	%	—	%
Nondeductible officers compensation	3.5	%	(0.2)	%
Irish corporation restructure	(169.2)	%	—	%
Valuation allowance	83.8	%	0.1	%
Effective tax rate	(71.0)	%	(2.4)	%

Undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for applicable income taxes has been provided thereon. Upon distribution of those earnings, we are subject to withholding taxes payable to various foreign countries. As of December 31, 2020, any foreign withholding taxes on the undistributed earnings of our foreign subsidiaries were immaterial.

We maintain 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 (in thousands):

	For the Year Ended December 31,
	2020		2019
Balance at beginning of year	$	4,826	$	4,611
Gross increases for tax positions of prior years	—		394
Gross increases for tax positions of current year	10		34
Lapse of statute of limitations	(311)		(213)
Balance at end of year	$	4,525	$	4,826

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 our foreign subsidiaries as part of our tax reorganization completed in 2015. We account for interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2020, we accrued no interest or penalties related to uncertain tax positions. As of December 31, 2020, we had no unrecognized tax benefits that would affect our effective tax rate.

Because we have net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine our tax returns for all years from 2001 through the current period.