Note 7 - Income Taxes

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 7—INCOME TAXES

The Company files income tax returns in the U.S. federal and various state and local jurisdictions and foreign jurisdictions. The Company’s loss before provision for income taxes consisted of the following (in thousands):

	Year Ended December 31,
	2014			2013			2012
U.S.	$	(10,592	)	$	(4,919	)	$	(6,767	)
Foreign		199			118			437
Loss before income taxes	$	(10,393	)	$	(4,801	)	$	(6,330	)

The components of the provision for income taxes are as follows (in thousands):

	Year Ended December 31,
	2014			2013			2012
Current:
Federal	$	(7	)	$	(329	)	$	(13	)
State		19			7			(56	)
Foreign		110			159			366
		122			(163	)		297
Deferred:
Federal		32			33			(12	)
State		—			—			—
Foreign		65			76			(67	)
		97			109			(79	)
Tax (benefit) provision	$	219		$	(54	)	$	218

The Company’s deferred tax asset consists of the following (in thousands):

	December 31,
	2014			2013
Net operating loss	$	12,138		$	11,014
Stock-based compensation		3,884			3,806
Other accruals and reserves		4,735			3,686
Credits		3,808			3,121
Foreign		295			360
Accrued warranty		417			441
Depreciation and amortization		998			224
Other		66			470
Deferred tax asset before valuation allowance		26,341			23,122
Valuation allowance		(26,046	)		(22,762	)
Deferred tax asset after valuation allowance		295			360
Deferred tax liability on goodwill		(71	)		(39	)
Net deferred tax asset	$	224		$	321

The Company’s deferred tax asset balance is reported in the following captions in the Consolidated Balance Sheets (in thousands):

	December 31,
	2014			2013
Deferred tax asset (current portion)	$	26		$	31
Deferred tax asset, net of current portion		269			329
Accrued liabilities (non-current deferred tax liability)		(71	)		(39	)
Net deferred tax asset after valuation allowance	$	224		$	321

The differences between the U.S. federal statutory income tax rates to the Company’s effective tax rate are as follows:

	Year Ended December 31,
	2014			2013			2012
U.S. federal statutory income tax rate		34.00	%		35.00	%		35.00	%
State tax rate, net of federal benefit		1.62			1.57			3.28
Benefit for research and development credit		7.24			19.91			3.40
Foreign rate differential		(1.04	)		(4.53	)		(1.49	)
Changes in unrecognized tax benefits		(0.53	)		2.60			1.06
Foreign income inclusion		—			—			(0.05	)
Income tax refund		0.08			0.19			1.07
Stock-based compensation		(5.56	)		(34.33	)		(21.31	)
Meals and entertainment		(1.11	)		(2.10	)		(1.68	)
Tax effect of other comprehensive income		—			—			0.28
Valuation allowance		(36.58	)		(17.82	)		(21.15	)
Other		(0.22	)		0.63			(1.86	)
Effective tax rate		(2.10	)%		1.12	%		(3.45	)%

The Company recognizes deferred tax assets for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. The Company records a valuation allowance to reduce the deferred tax assets to their estimated realizable value, when it is more likely than not that it will not be able to generate sufficient future taxable income to realize the net carrying value. The Company has recorded a full valuation allowance against its U.S. federal and state deferred tax assets due to its history of operating losses. In the years ended December 31, 2014, 2013 and 2012, there was a net increase in the valuation allowance of $3.3 million, $0.9 million, and $1.4 million, respectively.

As of December 31, 2014, the Company had cumulative net operating loss carry-forwards for federal and state income tax reporting purposes of approximately $34.3 million and $10.4 million, respectively. The federal net operating loss carry-forwards expire through the year 2034 and the state net operating loss carry-forwards expire at various dates through the year 2033. The Company maintained a valuation allowance against these net operating loss carry-forwards as of December 31, 2014.

As of December 31, 2014, the Company had research and development tax credits for federal and state income tax purposes of approximately $4.2 million and $5.1 million, respectively. The federal research and development tax credits expire through the year 2034. The state research and development credits can be carried forward indefinitely, except for $284,000, which will expire at various dates through the year 2020. The Company maintained a valuation allowance against these tax credits as of December 31, 2014.

Included in the net operating loss and research and development tax credit carryforwards are approximately $4.2 million of excess tax benefits from employee stock option exercises, for which the Company has not recorded a deferred tax asset. When such excess tax benefits are ultimately realized, the Company will record the deferred tax asset and the credit to additional paid in capital.

Utilization of U.S. net operating losses and tax credit carryforwards may be limited by “ownership change” rules, as defined in Section 382 of the Internal Revenue Code. Similar rules may apply under state tax laws. The Company has not conducted a study to-date to assess whether a limitation would apply under Section 382 of the Internal Revenue Code as and when it starts utilizing its net operating losses and tax credits. The Company will continue to monitor activities in the future. In the event the Company previously experienced an ownership change, or should experience an ownership change in the future, the amount of net operating losses and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.

Undistributed earnings of the Company’s foreign subsidiaries at both December 31, 2014 and 2013 were approximately $2.6 million, are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes has been provided thereon. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability would be reduced by any foreign income taxes previously paid on these earnings. Because of the availability of U.S. foreign tax credits, the determination of the unrecognized deferred tax liability on these earnings is not practicable.

Uncertain Tax Positions

The Company establishes reserves for uncertain tax positions based on the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company has provided taxes and related interest and penalties due for potential adjustments that may result from examinations of open U.S. Federal, state and foreign tax years. If the Company ultimately determines that payment of these amounts are not more-likely-than-not, the Company will reverse the liability and recognize a tax benefit during the period in which the Company makes the determination. The Company will record an additional charge in the Company’s provision for taxes in the period in which the Company determines that the recorded tax liability is less than the Company expects the ultimate assessment to be. The Company’s policy is to include interest and penalties related to gross unrecognized tax benefits within the provision for income taxes.

The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2004 through 2014 tax years generally remain subject to examination by U.S., federal and California state tax authorities due to the Company’s net operating loss and credit carryforwards. For significant foreign jurisdictions, the 2009 through 2014 tax years generally remain subject to examination by their respective tax authorities.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits in December 31, 2012 to December 31, 2014 (in thousands):

	Year Ended December 31,
	2014		2013			2012
Balance at beginning of year	$	535	$	536		$	583
Increases related to prior year tax positions		—		36			—
Increases related to current year tax positions		62		116			29
Decreases related to lapsing of statute of limitations		—		(153	)		(76	)
Balance at end of year	$	597	$	535		$	536

The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate at December 31, 2014 and 2013, were approximately $33,000. As of December 31, 2014 and 2013, the Company had accrued approximately $41,000 and $37,000 for payment of interest, respectively. Interest included in the provision for income taxes was not significant in all the periods presented. The Company has not accrued any penalties related to its uncertain tax positions as it believes that it is more likely than not that there will not be any assessment of penalties. The Company expects that the amount of unrecognized tax benefits will not materially change within the next 12 months.