The Company accounts
for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.
The following table presents domestic and foreign components of loss before income taxes for the periods presented (in thousands):
| | | | |
| | | | | | | | | | |
| Domestic | | $ | (8,507 | ) | | $ | (17,604 | ) | | $ | (9,899 | ) |
| Foreign | | | 766 | | | | 1,159 | | | | 930 | |
| Total | | $ | (7,741 | ) | | $ | (16,445 | ) | | $ | (8,969 | ) |
The components of income tax (expense) benefit are as follows (in thousands):
| | | | |
| | | | | | | | | | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | 21 | |
| State | | | 42 | | | | (29 | ) | | | 270 | |
| Foreign | | | (253 | ) | | | (524 | ) | | | (403 | ) |
| Total | | | (211 | ) | | | (553 | ) | | | (112 | ) |
| Deferred: | | | | | | | | | | | | |
| Federal | | | 221 | | | | 221 | | | | 221 | |
| State | | | 11 | | | | 12 | | | | 105 | |
| Foreign | | | (1 | ) | | | 20 | | | | 10 | |
| Total | | | 231 | | | | 253 | | | | 336 | |
| Total income tax (expense) benefit | | $ | 20 | | | $ | (300 | ) | | $ | 224 | |
The primary difference
s between the effective tax rates and the federal statutory tax rate relates to the valuation allowances on the Company's net operating losses, state income taxes, foreign tax rate differences and non-deductible stock-based compensation expense. The following table presents a reconciliation of the statutory federal rate and the Company's effective tax rate for the periods presented:
| | | | |
| | | | | | | | | | |
| Tax at federal statutory rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % |
| State, net of federal effect | | | 0.5 | | | | (0.1 | ) | | | 4.2 | |
| Foreign taxes | | | (4.2 | ) | | | (2.8 | ) | | | (4.4 | ) |
| Foreign rate differential | | | 3.4 | | | | 2.4 | | | | 3.5 | |
| Stock-based compensation | | | (3.8 | ) | | | (4.6 | ) | | | (9.7 | ) |
| Change in valuation allowance | | | (31.9 | ) | | | (31.7 | ) | | | (28.8 | ) |
Other non-deductible expenses | | | (0.3 | ) | | | (0.2 | ) | | | (0.6 | ) |
| Other | | | 2.6 | | | | 1.2 | | | | 4.3 | |
| Effective tax rate | | | 0.3 | % | | | (1.8 | | | | 2.5 | % |
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):
| | | | |
| | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Accruals and reserves | | $ | 1,714 | | | $ | 1,955 | |
| Net operating loss carryforwards | | | 10,396 | | | | 8,547 | |
| Tax credit carryforwards | | | 1,521 | | | | 1,697 | |
| Stock-based compensation | | | 3,324 | | | | 1,969 | |
| Foreign taxes | | | 53 | | | | 54 | |
| Total deferred tax assets | | | 17,008 | | | | 14,222 | |
| | | | | | | | | |
| Fixed assets | | | (1,988 | ) | | | (1,799 | ) |
| State taxes | | | 7 | | | | (607 | ) |
| Purchased intangible assets | | | — | | | | (232 | ) |
| Total deferred tax liabilities | | | (1,981 | ) | | | (2,638 | ) |
| | | | | | | | | |
| Valuation allowance | | | (14,974 | ) | | | (11,762 | ) |
| Total net deferred tax liabilities | | $ | 53 | | | $ | (178 | ) |
A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. As of
December
31,
2016
and
2015,
a full valuation allowance on domestic deferred tax assets was placed due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The Company’s valuation allowance as of
December
31,
2016
and
2015
was attributable to the uncertainty of realizing future tax benefits from U.S. net operating losses, foreign timing differences and other deferred tax assets. The Company’s valuation allowance increased
$3.2
million,
$2.6
million and
$1.6
million in the years ended
December
31,
2016,
2015
and
2014,
respectively.
As of
December
31,
201
6,
the Company has U.S. federal net operating loss carryforwards of approximately
$27.2
million, expiring beginning in
2025.
As of
December
31,
2016,
the Company has U.S. state and local net operating loss carryforwards of approximately
$20.7
million, expiring beginning in
2017.
As of
December
31,
201
6,
the Company has federal research and development tax credits of approximately
$1.0
million, which expire beginning in
2025.
As of
December
31,
2016,
the Company has state research and development tax credits of approximately
$1.1
million, and other tax credits of approximately
$0.3
million, both of which carry forward indefinitely.
Internal Revenue Code section
382
places a limitation (the “Section
382
Limitation”) on the amount of taxable income that can be offset by net operating carryforwards after a change in control of a loss corporation. Generally, after a change in control, a loss corporation cannot deduct operating loss carryovers in excess of the Section
382
Limitation. Management has determined that any limitation imposed by Section
382
will not have significant impact on the utilization of its net operating loss and credit carryforwards against taxable income in future periods.
U.S. income and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on undistributed earnings of foreign subsidiaries. The Company intends to reinvest theses earnings indefinitely outside the United States. If these ear
nings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant subsidiaries were sold or otherwise transferred, the Company
may
be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes; however, the determination of such amount is not practicable. As of
December
31,
2016,
the cumulative amount of earnings upon which U.S. income taxes have not been provided for is approximately
$2.3
million.
A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended
December
31,
2016,
2015
and
2014
consist of the following (in thousands):
| | | | |
| | | | | | | | | | |
Unrecognized benefit – beginning of period | | $ | 580 | | | $ | 459 | | | $ | 358 | |
Gross increases – current year tax positions | | | 130 | | | | 121 | | | | 101 | |
Gross decreases – prior year tax positions | | | (76 | ) | | | — | | | | — | |
Unrecognized benefit – end of period | | $ | 634 | | | $ | 580 | | | $ | 459 | |
The entire amount of any unrecognized tax benefits would impact the Company
’s effective tax rate if recognized.
Accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial. The Company files income tax returns in the United States, various states and certain foreign jurisdictions. The tax periods
20
12
through
2015
remain open in most jurisdictions. In addition, any tax losses and research and development credit carryforwards that were generated in prior years and carried forward
may
also be subject to examination by respective taxing authorities. The Company is not currently under examination by income tax authorities in federal, state or other foreign jurisdictions.