Note 12. Income Taxes

The following table presents the domestic and foreign components of loss before provision for income taxes for the periods presented (in thousands):

	For the year ended
	January 31,
	2017			2016			2015
United States	$	(38,926	)	$	(46,850	)	$	(27,541	)
Foreign		2,167			1,029			342
Loss before provision for income taxes	$	(36,759	)	$	(45,821	)	$	(27,199	)

The provision for income taxes is composed of the following (in thousands):

	For the year ended
	January 31,
	2017			2016		2015
Current income taxes:
Federal	$	—		$	—	$	—
State		82			22		17
Foreign		976			308		80
Total current income taxes		1,058			330		97
Deferred income taxes:
Federal		13			5		4
State		1			—		—
Foreign		(224	)		—		—
Total deferred income taxes		(210	)		5		4
Total provision for income taxes	$	848		$	335	$	101

The effective tax rate differs from the federal statutory rate as follows:

	For the year ended
	January 31,
	2017			2016			2015
Federal statutory income tax rate		34.0	%		34.0	%		34.0	%
State tax, net of federal benefit		2.60			2.70			2.70
Change in valuation allowance		(36.20	)		(32.00	)		(35.40	)
Stock-based compensation		(2.70	)		(6.30	)		(0.40	)
Other non-deductible items		(1.80	)		(0.40	)		(1.06	)
Foreign rate differential		(1.40	)		(0.40	)		(0.24	)
Tax credits		3.20			1.70			—
Total		(2.3	)%		(0.7	)%		(0.4	)%

The difference between the U.S. federal statutory tax rate of 34% and the Company’s effective tax rate in all periods presented is primarily due to a full valuation allowance related to the Company’s U.S. and Canada deferred tax assets offset by foreign tax expense on the Company’s profitable foreign operations.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented (in thousands):

	As of January 31,
	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	49,100		$	38,049
Accruals and reserves		1,164			2,196
Stock-based compensation		3,388			1,256
Tax credits		2,233			1,074
Gross deferred tax assets		55,885			42,575
Valuation allowance		(54,615	)		(41,484	)
Total deferred tax assets, net of valuation allowance		1,270			1,091
Deferred tax liabilities:
Fixed assets and intangibles assets		(1,072	)		(1,104	)
Gross deferred tax liabilities		(1,072	)		(1,104	)
Net deferred tax assets (liabilities)	$	198		$	(13	)

A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets. Based on the weight of the available evidence, which includes the Company’s historical operating losses, lack of taxable income, and the accumulated deficit, the Company provided a full valuation allowance against the U.S. and international deferred tax assets resulting from the tax loss and credits carried forward. The valuation allowance increased by $13.1million, $14.6 million and $10.1 million during the years ended January 31, 2017, 2016 and 2015, respectively.

The Company has not provided for U.S. Federal and State income taxes, nor foreign withholding taxes, on the undistributed earnings of its foreign subsidiaries because the Company intends to reinvest such earnings indefinitely.

As of January 31, 2017, the Company had net operating loss carryforwards of approximately $151.1 million and $86.1 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The U.S. federal and California state net operating loss carryforwards will begin to expire in 2026 and 2029, respectively. The federal and state net operating losses include $19.3 million and $11.6 million of excess tax benefit from stock option exercises that will result in increases to additional paid in capital, when realized.

As of January 31, 2017, the Company had research and development credit carryforwards of approximately $3.5 million and $3.6 million available to reduce its future tax liability, if any, for federal and California state income tax purposes, respectively. The federal credit carryforwards begin to expire in 2031. California credit carryforwards have no expiration date. As of January 31, 2017, the Company has U.S. federal foreign tax credits carryforwards of $660,000 that will begin to expire in 2025.

Federal and state laws impose restrictions on the utilization of net operating loss carryforwards and R&D credit carryforwards in the event of a change in ownership of the Company, which constitutes an ‘ownership change’ as defined by Internal Revenue Code Section 382 and 383. The Company experienced an ownership change in the past that does not materially impact the availability of its net operating losses and tax credits. The credit amounts indicated above reflect a reduction of approximately $3.5 million of net operating losses as a result of previous ownership changes that the Company experienced. Nevertheless, should there be ownership change in the future, the Company’s ability to utilize existing carryforwards could be substantially restricted.

The Company accounts for uncertainty in income taxes in accordance with ASC 740. Tax positions are evaluated in a two-step process, whereby the Company first determines whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognized in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The following table summarizes the activity related to unrecognized tax benefits (in thousands):

	For the year ended
	January 31,
	2017		2016		2015
Unrecognized tax benefit—beginning of year	$	3,304	$	2,846	$	—
Gross increases —prior year tax positions		224		6		1,351
Gross increases — current year tax positions		1,913		452		1,495
Unrecognized tax benefit—end of year	$	5,441	$	3,304	$	2,846

All but $122,000 of the unrecognized tax benefits as of January 31, 2017 are accounted for as a reduction in the Company’s deferred tax assets. All of the unrecognized tax benefits as of January 31, 2016 are accounted for as a reduction in the Company deferred tax assets. Due to the Company’s valuation allowance, only $122,000 of the $5.4 million of unrecognized tax benefits would affect the Company’s effective tax rate, if recognized. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. There was immaterial accrued interest and penalties related to unrecognized tax benefits as of January 31, 2017 and 2016.

The Company’s material income tax jurisdictions are the United States (federal) and California. As a result of net operating loss carryforwards, the Company is subject to audits for tax years 2006 and forward for federal purposes and 2009 and forward for California purposes. There are tax years which remain subject to examination in various other jurisdictions that are not material to the Company’s financial statements.