VOCERA COMMUNICATIONS, INC.

Income taxes

The components of loss before income taxes are as follows:



	Years ended December 31,
(in thousands)	2017			2016			2015
United States	$	(14,250	)	$	(17,365	)	$	(17,041	)
International	792			627			408
Total loss before income taxes	$	(13,458	)	$	(16,738	)	$	(16,633	)

The components of the provision for income taxes are as follows:



	Years ended December 31,
(in thousands)	2017			2016			2015
Current
Federal	$	(10	)	$	—		$	—
State	54			36			36
Foreign	324			194			275
	368			230			311
Deferred
Federal	311			334			162
State	119			26			13
Foreign	(39		)	(61		)	(13		)
	391			299			162
Total income tax provision	$	759		$	529		$	473

The Company had an effective tax rate of (5.6)%, (3.2)% and (2.8)% for the years ended December 31, 2017, 2016 and 2015, respectively.

Reconciliation of the provision for income taxes at the statutory rate to the Company’s provision for income tax is as follows:



	Years ended December 31,
(in thousands)	2017			2016			2015
U.S. federal (tax benefit) provision at statutory rate	$	(4,576	)	$	(5,691	)	$	(5,654	)
State (tax benefit) income taxes, net of federal benefit	(437		)	(574		)	(548		)
Foreign income taxes at rates other than the US rate	(21		)	(94		)	119
Stock-based compensation	(8,373		)	581			187
Change in valuation allowance	(6,023		)	6,657			6,764
Non-deductible executive compensation	1,624			—			—
Rate differential impact on Tax Cuts and Jobs Act	18,975			—			—
Research and development credits	(602		)	(449		)	(537		)
Other	192			99			142
Total	$	759		$	529		$	473

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:



	December 31,
(in thousands)	2017			2016
Deferred tax assets
Net operating loss carryforward	$	27,289		$	24,239
Research and development credits	5,826			4,705
Depreciation and amortization	2,082			1,845
Reserves and accruals	10,242			11,721
Total deferred tax assets	45,439			42,510
Valuation allowance	(45,255		)	(42,339		)
Net deferred tax assets	184			171
Deferred tax liabilities	(1,437		)	(1,026		)
Net deferred tax liabilities	$	(1,253	)	$	(855	)

The Company's deferred tax liabilities are primarily related to tax deductible goodwill. The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the history of losses the Company has generated in the past, the Company believes that it is not more likely than not that all of the deferred tax assets in the U.S. and Canada can be realized as of December 31, 2017; accordingly, the Company has recorded a full valuation allowance on its deferred tax assets.

On December 22, 2017, the Tax Cuts and Jobs Act (P.L. 115-97) was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction in the corporate income tax rate, the Company has revalued its net deferred tax liability at December 31, 2017. This resulted in a reduction in the value of the Company's net deferred tax asset of approximately $19.0 million, which is offset by the change in valuation allowance of $19.7 million. This resulted in a deferred tax benefit of $0.7 million recorded in the statement of operations in the three months ending December 31, 2017.

The Company’s valuation allowance increased by $2.9 million and $6.4 million for the years ended December 31, 2017 and 2016, respectively. The change in the 2017 valuation allowance was primarily due to the addition of current year loss carryforwards and federal rate reduction. The change in the 2016 valuation allowance was primarily due to the addition of current year loss carryforwards.

At December 31, 2017, the Company had $113.9 million and $56.5 million, respectively, of federal and state net operating loss carryforwards.

In addition, the Company has federal research and development tax credits carryforwards of approximately $3.1 million and state research and development tax credit carryforwards of approximately $4.8 million. The federal credit carryforwards begin expiring 2026 and the state credits carry forward indefinitely. The Internal Revenue Code (IRC) contains provisions which limit the amount of net operating loss (NOL) and research credit carryforwards that can be used in any given year if a significant change in ownership has occurred. As of December 31, 2017, $11.5 million of the Company's NOL carryovers and $0.5 million of credit carryovers are subject to an annual $0.6 million limitation, of which $5.3 million NOLs would be available to offset future taxable income in the twenty-year carryforward period.

The following table displays by contributing factor the changes in the valuation allowance for deferred tax assets since January 1, 2015:



	Years Ended December 31,
(in thousands)	2017			2016			2015
Balance at the beginning of the period	$	42,339		$	35,964		$	30,072
Net operating loss carryforwards generated (utilization)	3,050			2,786			2,263
R&D tax credit increase	1,121			277			1,068
Depreciation and amortization increase	237			938			257
Reserves and accruals increase (decrease)	(1,479		)	2,494			2,327
Deferred tax assets decrease (increase)	(13		)	(120		)	(23		)
Balance at the end of the period	$	45,255		$	42,339		$	35,964

The following table reflects changes in the unrecognized tax benefits since January 1, 2016:



	Years ended December 31,
(in thousands)	2017		2016
Gross amount of unrecognized tax benefits as of the beginning of the period	$	1,458	$	1,339
Decreases related to prior year tax provisions	—		(30		)
Increases related to current year tax provisions	215		149
Gross amount of unrecognized tax benefits as of the end of the period	$	1,673	$	1,458

As a result of the Company’s historical losses and related valuation allowances, the Company has recorded substantially all of the uncertain tax amounts above as reductions to deferred tax assets which are subject to a full valuation allowance in its consolidated balance sheet with an insignificant portion recorded in other long-term liabilities. The Company recognizes interest and penalties relating to uncertain tax positions in income tax expense. As the Company is not currently under examination, it is reasonable to assume that the balance of gross unrecognized tax benefits will likely not change in the next twelve months.

The Company files income tax returns in the United States on a federal basis and in various states. The Company is not currently under any international or any United States federal, state and local income tax examinations for any taxable years. All of the Company’s net operating losses and research credit carryforwards prior to 2017 are subject to tax authority adjustment and all years after 2010 are still subject to the tax authority examinations.

The 2017 tax reform legislation provides for a one-time “deemed repatriation” of accumulated foreign earnings for the year ended December 31, 2017. The Company does not expect to pay U.S. federal cash taxes on the deemed repatriation due to its historical net operating loss for tax purposes. The Company does not expect that the future foreign earnings will be subject to U.S. federal income tax since the Company intends to continue reinvesting such earnings outside the U.S. indefinitely.