Income Taxes

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



	December 31,
	2016			2015			2014
Current:
Federal	$	(117	)	$	948		$	61
State	246			399			(1,294		)
Foreign	84			41			69
Total current provision (benefit)	213			1,388			(1,164		)
Deferred:
Federal	(2,545		)	(4,624		)	(5,267		)
State	(63		)	—			2,488
Foreign	4			18			34
Total deferred benefit	(2,604		)	(4,606		)	(2,745		)
Benefit for income taxes	$	(2,391	)	$	(3,218	)	$	(3,909	)

The Company’s (loss) income before (benefit) provision for income taxes was subject to taxes in the following jurisdictions for the following periods (in thousands):



	December 31,
	2016			2015			2014
United States	$	(16,426	)	$	(9,480	)	$	(11,328	)
Foreign	227			183			345
Loss before benefit for income taxes	$	(16,199	)	$	(9,297	)	$	(10,983	)

Significant components of the Company’s deferred tax assets and deferred tax liabilities as of December 31, 2016 and 2015 are shown below (in thousands).



	December 31,
	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	3,255		$	1,199
Intangible assets	2,351			3,574
Sale-leaseback, net	888			1,224
Allowance for returns and discounts	4,043			4,308
Stock-based compensation	10,963			9,884
Tax credit carryforwards	3,430			2,341
Other, net	4,066			5,200
Total deferred tax assets	28,996			27,730
Valuation allowance for deferred tax assets	(7,774		)	(3,087		)
Total deferred tax assets, net of valuation allowance	21,222			24,643
Deferred tax liabilities:
Convertible Senior Notes	(7,592		)	(9,474		)
Intangible assets	(7,557		)	(9,977		)
Property, plant and equipment	(6,131		)	(7,162		)
Total deferred tax liabilities	(21,280		)	(26,613		)
Net deferred tax liabilities	$	(58	)	$	(1,970	)

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative before-tax loss incurred over the three-year periods ended December 31, 2016 and 2015. Such objective evidence limits the ability to consider other subjective evidence such as the Company's projections for future profitability. On the basis of this evaluation, as of December 31, 2016, the Company had recorded a valuation allowance of $7.8 million, which represents the portion of the deferred tax asset that management could no longer conclude was more likely or not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future based on changes in available evidence and additional weight may be given to subjective evidence such as the Company's projections for profitability. During the year ended December 31, 2016, the allowance increased by $4.7 million.

The Company recognizes excess tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss (“NOL”) carryforwards resulting from excess tax benefits. As of December 31, 2016 and 2015, deferred tax assets do not include $1.8 million and $1.3 million, respectively, of these excess tax benefits from employee stock option exercises that are a component of the Company’s NOL and tax credit carryforwards. Additional paid-in capital will be increased up to an additional $1.8 million if such excess tax benefits are realized. As discussed in Note 1, upon adoption of ASU 2016-09 in the first quarter of 2017, the balance of the unrecognized excess tax benefits will be reversed with the impact recorded to (accumulated deficit) retained earnings, including any change to the valuation allowance as a result of the adoption. Due to the full valuation allowance on the U.S. deferred tax assets as of December 31, 2016, the Company does not expect any impact to the financial statements as a result of this adoption in the first quarter of 2017.

As of December 31, 2016, the Company had federal NOL carryforwards of approximately $8.3 million which will begin to expire in 2018, unless previously utilized. The Company also had state NOLs of approximately $22.8 million which will begin to expire in 2026, unless previously utilized. The Company has federal research credits of $3.7 million which will begin to expire on December 31, 2031, unless previously utilized. Additionally, the Company has federal alternative minimum tax credits of $0.5 million which do not expire. The Company also has gross state research credits of $8.9 million, of which $8.7 million do not expire. The remaining $0.2 million begin to expire in 2027, unless previously utilized.

Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, the Company’s use of its NOL and research credit carryforwards may be limited as a result of cumulative changes in ownership of more than 50% over a three-year period.

The benefit for income taxes reconciles to the amount computed by applying the federal statutory rate to loss before taxes as follows (in thousands):



	Year ended December 31,
	2016		2015		2014
Tax benefit at statutory tax rate	(5,775	)	(3,254	)	(3,844	)
State tax benefit, net of federal tax benefit	(390	)	(235	)	(151	)
Permanent differences	129		157		70
Federal and state research credits—current year	(979	)	(722	)	(765	)
Accrual (release) of uncertain tax positions	43		101		(21	)
Expiration of statutes for uncertain tax positions	—		—		(953	)
Impact of change in federal and state tax rate on revaluing deferred tax assets	(4	)	56		110
Change in valuation allowance	4,687		756		2,331
Acquisition related adjustments	—		—		(485	)
Other	(102	)	(77	)	(201	)
Benefit for income taxes	(2,391	)	(3,218	)	(3,909	)

On December 18, 2015, the Protecting Americans from Tax Hikes Act was signed into law reinstating the federal research and development credit for 2015. Accordingly, we recorded the benefit related to the 2015 federal research and development credit of approximately $0.4 million in the fourth quarter of 2015.

The Company considers earnings of its non-U.S. subsidiaries to be indefinitely reinvested in those operations. As of December 31, 2016, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $0.5 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.

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



	Year ended December 31,
	2016			2015			2014
Beginning balance	$	7,684		$	7,065		$	7,765
Decreases related to prior year tax positions	(10		)	(12		)	(68		)
Increases related to current year tax positions	773			631			642
Decreases due to settlements	—			—			(42		)
Expiration of the statute of limitations for the assessment of taxes	—			—			(1,232		)
Other	$	157		$	—		$	—
Ending balance	$	8,604		$	7,684		$	7,065

As of December 31, 2016 and 2015, the unrecognized tax benefits of $8.6 million and $7.7 million, respectively, of which $6.4 million and $5.6 million, respectively, would reduce the Company’s annual effective tax rate, subject to the valuation allowance. The Company does not anticipate any significant decreases in its unrecognized tax benefits over the next 12 months. The Company's policy is to recognize the interest expense and penalties related to income tax matters as a component of income tax expense. The Company has accrued approximately $0.2 million of interest and penalties associated with uncertain tax positions for each of the years ended December 31, 2016 and 2015. There was no interest expense, net of accrued interest (reversed) in 2016. Interest expense, net of accrued interest (reversed) was approximately $0.1 million, and $(0.2) million in 2015 and 2014, respectively.

The Company is subject to periodic audits by domestic and foreign tax authorities. During 2014, the Company released tax reserves and related interest of approximately $1.0 million, net of federal income tax benefits, related to the expiration of the statute of limitation on assessment for certain state matters.

Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2009 and forward and state tax years 2001 and forward are subject to examination by tax authorities.

The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.