NOTE 11 — INCOME TAXES

The components of income/(loss) before income taxes by tax jurisdiction were as follows:



	Year Ended December 31,
	2016		2015		2014
United States	$	(87,085)	$	(7,819)	$	5,283
Foreign		(656)		775		(4,690)
Income/(loss) before income taxes	$	(87,741)	$	(7,044)	$	593

The components of income tax benefit/(expense) were as follows:


	Year Ended December 31,
Current:	2016		2015		2014
Federal	$	127	$	(24)	$	(5)
State		(6)		(5)		(5)
Foreign		(86)		(183)		656
		35		(212)		646

Deferred:
Federal		328		—		6,821
Foreign		(62)		71		88
		266		71		6,909

Total:
Federal		455		(24)		6,816
State		(6)		(5)		(5)
Foreign		(148)		(112)		744
	$	301	$	(141)	$	7,555

The difference between the actual rate and the federal statutory rate was as follows:


	Year Ended December 31,
	2016		2015		2014
Tax at federal statutory rate	34.0	%	34.0	%	34.0	%
State tax, net of federal benefit	—		(0.1)		0.8
Foreign rate differential	(0.1)		1.0		56.6
Research and development credit	0.9		15.9		(133.9)
Warrants	—		—		67.7
Withholding taxes	0.2		0.3		(10.5)
Stock-based compensation	(2.9)		(8.7)		224.9
Non-deductible intercompany bad debt	—		—		3.9
FIN 48 interest and release	(0.1)		1.8		(219.4)
Other	(0.1)		(0.2)		59.6
Deemed dividend from foreign liquidation	(1.4)		—		—
Valuation allowance	(30.2)		(46.1)		(1,357.7)
Effective tax rate	0.3	%	(2.1)	%	(1,274.0)	%

During 2016, the Company recorded a net release of its valuation allowance of $328 as a result of the acquisition of Crowdstar Inc. in November 2016.

Deferred tax assets and liabilities consist of the following:


	December 31, 2016						December 31, 2015
	US		Foreign		Total		US		Foreign		Total
Deferred tax assets:
Fixed assets	$	191	$	40	$	231	$	—	$	1,156	$	1,156
Net operating loss carryforwards		55,850		526		56,376		37,907		9,493		47,400
Accruals, reserves and other		12,006		97		12,103		4,811		129		4,940
Foreign tax credit		6,460		—		6,460		6,615		—		6,615
Stock-based compensation		3,830		—		3,830		4,866		—		4,866
Research and development credit		11,190		—		11,190		9,292		—		9,292
Other		2,011		—		2,011		121		17		138
Total deferred tax assets	$	91,538	$	663	$	92,201	$	63,612	$	10,795	$	74,407
Deferred tax liabilities:
Fixed assets	$	—	$	(1)	$	(1)	$	(290)	$	—	$	(290)
Intangible assets		(4,441)		(6)		(4,447)		(4,471)		(54)		(4,525)
Other		—		—		—		—		(16)		(16)
Net deferred tax assets		87,097		656		87,753		58,851		10,725		69,576
Less valuation allowance		(87,097)		(464)		(87,561)		(58,851)		(10,470)		(69,321)
Net deferred tax assets	$	—	$	192	$	192	$	—	$	255	$	255

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This update requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified statement of financial position. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early application is permitted as of the beginning of the interim or annual reporting period. The Company adopted ASU 2015-17 on a prospective basis as of December 31, 2015. The adoption of ASU 2015-17 did not have a material impact on the Company’s consolidated financial statements.

The Company has not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries, excluding China, because their earnings are intended to be reinvested indefinitely. No deferred tax asset was recognized since the Company does not believe the deferred tax asset will be realized in the foreseeable future. The amount of accumulated foreign earnings of the Company’s foreign subsidiaries totaled $913 as of December 31, 2016. If the Company's foreign earnings were repatriated, additional tax expense might result. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings attributable to foreign subsidiaries is not practicable.

The Company recorded a release of its valuation allowance of $328, $0, and $6,821 during 2016, 2015, and 2014, respectively. The 2016 and 2014 releases were associated with the acquisitions of Crowdstar Inc. in November 2016 and Cie Games in August 2014, respectively. Pursuant to ASC 805-740, changes in the Company’s valuation allowance that stem from a business combination should be recognized as an element of the Company’s deferred income tax expense or benefit. The Company previously recognized a valuation allowance against its net operating loss carryforwards and determined that it should be able to utilize the benefit of those net operating losses against the deferred tax liabilities of Crowdstar Inc. and Cie Games, respectively; therefore, it has partially released its pre-existing valuation allowance.

In accordance with ASC 740 and based on all available evidence on a jurisdictional basis, the Company believes that it is more likely than not that its deferred tax assets will not be utilized and has recorded a full valuation allowance against its net deferred tax assets in each of its jurisdictions except for one entity in China. The Company assesses on a periodic basis the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income or losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If it is not more likely than not that the Company expects to recover its deferred tax assets, the Company will increase its provision for taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. The available negative evidence at December 31, 2016 and 2015 included historical and projected future operating losses. As a result, the Company concluded that an additional valuation allowance of $18,240 and $795, net of the described releases, was required to reflect the change in its deferred tax assets prior to valuation allowance during 2016 and 2015, respectively. As of December 31, 2016 and 2015, the Company considered it more likely than not that its deferred tax assets would not be realized within their respective carryforward periods.

At December 31, 2016, the Company had net operating loss carryforwards of approximately $158,531 and $97,627 for federal and state tax purposes, respectively. These carryforwards will expire at various times between 2017 and 2036. In addition, the Company has research and development tax credit carryforwards of approximately $11,158 for federal income tax purposes and $12,941 for California tax purposes. The federal research and development tax credit carryforwards will begin to expire in 2023. The California state research credit will carry forward indefinitely. The Company has approximately $6,320 of foreign tax credits that will begin to expire in 2017. The Company’s ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382.

A reconciliation of the total amounts of unrecognized tax benefits was as follows:


	Year Ended December 31,
	2016		2015
Beginning balance	$	9,218	$	6,794
Reductions of tax positions taken during previous years		(806)		(304)
Additions based on uncertain tax positions related to the current period		2,590		2,085
Additions based on uncertain tax positions related to prior periods		43		675
Cumulative translation adjustment		(34)		(32)
Ending balance	$	11,011	$	9,218

The total unrecognized tax benefits as of December 31, 2016 and 2015 included approximately $10,590 and $8,678, respectively, of unrecognized tax benefits that have been netted against deferred tax assets. As of December 31, 2016, approximately $421 of unrecognized tax benefits, if recognized, would impact the Company’s effective tax rate. The remaining amount, if recognized, would adjust the Company’s deferred tax assets which are subject to valuation allowance. At December 31, 2016, the Company anticipated that the liability for uncertain tax positions, excluding interest and penalties, could decrease by approximately $126 within the next twelve months due to the expiration of certain statutes of limitation in foreign jurisdictions in which the Company does business.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company has accrued $294 of interest and penalties on uncertain tax positions as of December 31, 2016, as compared to $375 as of December 31, 2015. Approximately $128, $78 and $86 of accrued interest and penalty expense related to estimated obligations for unrecognized tax benefits was recognized during 2016, 2015 and 2014, respectively. During 2016, the Company released $184 of interest and penalties on uncertain tax positions due to the expiration of certain statutes of limitation in foreign jurisdictions in which the Company does business.

The Company is subject to taxation in the United States and various foreign jurisdictions. The material jurisdictions subject to examination by tax authorities are primarily the State of California, the United States, Canada and China. The Company’s federal tax returns are open by statute for tax years 1997 and California tax returns are open by statute for tax years 2003 and forward and could be subject to examination by the tax authorities. The Company’s China income tax returns are open by statute for tax years 2011 and forward.