Entity information:
INCOME TAXES

The components of loss from continuing operations before income taxes consisted of the following (in thousands):
 
Year ended December 31,
 
2017
 
2016
 
2015
Income (loss) before income taxes:
 
 
 
 
 
United States
$
(55,932
)
 
$
(11,973
)
 
$
(29,595
)
Foreign
2,240

 
557

 
(293
)
 
$
(53,692
)
 
$
(11,416
)
 
$
(29,888
)



The provision (benefit) for income taxes from continuing operations consisted of the following (in thousands):
 
Year ended December 31,
 
2017
 
2016
 
2015
Provision (benefit) for income taxes:
 
 
 
 
 
Current:
 
 
 
 
 
Federal
$
(200
)
 
$
12

 
$
60

State
115

 
24

 
150

Foreign
1,960

 
1,378

 
982

Total current
1,875

 
1,414

 
1,192

Deferred:
 
 
 
 
 
Federal
49,570

 
(301
)
 
(7,069
)
State
(4,833
)
 
(1,007
)
 
4,962

Foreign
(816
)
 
338

 
155

Change in valuation allowance
(64,236
)
 
2,072

 
2,767

Total deferred
(20,315
)
 
1,102

 
815

Total
$
(18,440
)
 
$
2,516

 
$
2,007



A reconciliation of the Company's effective tax rate for continuing operations to the statutory federal rate is as follows:
 
Year ended December 31,
 
2017
 
2016
 
2015
U.S. statutory income tax rate
(35.0
)%
 
(35.0
)%
 
(35.0
)%
State income taxes, net of federal benefit
(1.2
)
 
—

 
—

Foreign income taxes
0.5

 
7.9

 
3.6

Foreign tax audit
—

 
5.2

 
—

Acquisition costs
6.0

 
—

 
—

Foreign deemed dividends
3.8

 
5.0

 
1.7

Stock-based compensation
(26.8
)
 
38.9

 
14.4

Tax credits
33.3

 
(11.6
)
 
(3.3
)
Uncertain tax positions
1.2

 
—

 
—

NOL and credit limitations
18.9

 
—

 
—

Valuation allowance
(29.0
)
 
1.9

 
24.3

Goodwill amortization
1.7

 
6.7

 
2.2

Meals and entertainment
0.5

 
1.4

 
0.8

Tax reform
(8.8
)
 
—

 
—

Other, net
0.6

 
1.6

 
(2.0
)
Effective income tax rate
(34.3
)%
 
22.0
 %
 
6.7
 %



The following is a summary of the significant components of deferred income tax assets and liabilities (in thousands):
 
December 31,
 
2017
 
2016
Assets:
 
 
 
  Net operating loss carryforwards
$
58,624

 
$
77,425

  Research and development tax credits
24,499

 
24,440

  Other tax credits
—

 
230

  Intangible assets
—

 
9,270

  Deferred revenue
5,886

 
3,176

  Accrued expenses
10,786

 
6,699

  Inventory
5,980

 
5,010

  Stock-based compensation
7,452

 
14,295

  Fixed assets
727

 
2,879

  Other temporary differences
1,556

 
13

 
115,510

 
143,437

  Valuation allowance
(89,600
)
 
(141,895
)
    Total deferred tax assets
25,910

 
1,542

Liabilities:
 
 
 
  Purchased intangible assets
(17,092
)
 
(3,047
)
  Unremitted foreign income
(3,171
)
 
—

    Total deferred tax liabilities
(20,263
)
 
(3,047
)
  Total net deferred tax assets
$
5,647

 
$
(1,505
)
 
 
 
 
The deferred tax assets and liabilities based on tax jurisdictions are presented in the Company's consolidated balance sheets as follows:
 
 
 
  Deferred income taxes - noncurrent assets
$
8,434

 
$
1,542

  Deferred income taxes - noncurrent liabilities
(2,787
)
 
(3,047
)
 
$
5,647

 
$
(1,505
)



At December 31, 2017, the Company had cumulative federal and state net operating losses ("NOLs") of $221.5 million. The federal NOL carryforwards expire at various dates from 2020 through 2037. The state NOL carryforwards expire at various dates from 2018 through 2037.

The Company adopted ASU 2016-09 in 2017, which amended the tax accounting for stock-based compensation. Of the federal NOL at December 31, 2016, $150.8 million was attributable to stock option deductions. As of December 31, 2017, the financial reporting NOL and tax NOL were in alignment. At December 31, 2016, the Company's federal NOL carryforwards for tax return purposes were $14.0 million greater than its recognized federal NOL for financial reporting purposes, primarily due to excess tax benefits (stock-based compensation deductions in excess of financial reporting compensation costs) not recognized for financial statement purposes until realized. Prior to the adoption of ASU 2016-09, the tax benefit of this loss would be recognized for financial statement purposes in the period in which the tax benefit reduces income taxes payable, which will not be recognized until the Company recognizes a reduction in taxes payable from all other NOL carryforwards. In addition, the Company had $0.7 million of deferred taxes as of December 31, 2017 related to stock-based compensation expense recognized for financial reporting purposes that is not deductible for tax purposes until options are exercised or shares vest. The ultimate realization of the benefit related to stock options is directly associated with the price of the Company's common stock. Employees will not exercise the underlying options unless the current market price exceeds the option exercise price.

The Company also has available federal and state research and development credit carryforwards of $24.5 million that expire at various dates from 2018 through 2037.

Under the provisions of the Internal Revenue Code, the net operating losses and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating losses and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as a similar state provision. The Company incurred a change in ownership as defined in the Internal Revenue Code, and as a result, expects that approximately $31 million of federal and state net operating loss carryforwards and approximately $21 million of research and development tax credits will expire unused. There was no impact to the financial statements due to the Company's full valuation allowance against these assets.

During 2017, the valuation allowance against the deferred tax asset related to net operating losses in Canada was reversed, amounting to a tax benefit approximating $2 million. It had become apparent that the entity had been sufficiently profitable in each of the last three years plus the current year to recognize the deferred tax asset related to the net operating loss carryovers. The valuation allowance was reversed due to the objective verifiable evidence provided by the most recent history of positive income generated by Sonus Canada. The loss carryovers will also be utilized due to the impact of the amalgamation of Sonus Canada into GENBAND Canada. While the Company is recognizing the deferred tax asset related to the net operating losses carried over, it is still carrying a valuation allowance, at 100%, against the SRED credit carryovers associated with the development activity performed in Canada. The newly combined entity has determined that it has excess credit carryover and the objective verifiable evidence is negative in that these credits will likely expire unused.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: reducing the U.S. federal corporate tax rate from 35% to 21%; requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings (the Global Intangible Low-taxed Income ("GILTI")) of controlled foreign corporations; eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized; creating the base erosion anti-abuse tax ("BEAT"); creating a new limitation on deductible interest expense; (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; providing a tax deduction for foreign derived intangible income ("FDII") ; and changing rules related to deductibility of compensation for certain officers.

The impact of certain effects of the Tax Act has been recognized in the period in which the new legislation was enacted per guidance in Staff Accounting Bulletin 118, which allows for a measurement period to complete the accounting for certain elements of the tax reform. The Company has not yet completed a full evaluation of the impact of the Tax Act on its financial statements; however, it has provided a reasonable estimate for the impact related to remeasured deferred tax assets based on the new federal income tax rate of 21%. The Company has also provided for the provisional impact related to the Tax Act's change to the federal NOL and AMT carryovers. The total estimated impact of $4.8 million is reflected in income from continuing operations, and increased the tax benefit for the year ended December 31, 2017. The Company will continue to make and refine its calculations as additional analysis is completed. The Company cannot predict with certainty how the Tax Act will affect the Company's financial position or results of operations.

The Tax Act reduces the corporate tax rate to 21% effective January 1, 2018. Consequently, the Company has recorded a decrease related to net deferred tax assets of $36.5 million and a decrease to the valuation allowance of $38.4 million, with a corresponding provisional net income tax benefit of $1.9 million for the year ended December 31, 2017.

The Tax Act changed the NOL carryover rules and created a new limitation on their use. NOLs created after December 31, 2017 may be carried forwarded indefinitely but are limited to 80% of taxable income in any year. As a result of this change, the Company believes it is appropriate to offset some of its indefinite-lived deferred tax liabilities against its deferred tax assets, and as a result, recognized a $2.8 million estimated benefit in the year ended December 31, 2017.

The Tax Act eliminated the corporate AMT. As a result, the Tax Act made any AMT credit carryovers refundable to the extent not used against the regular tax liability in the 2018 through 2021 tax years. The Company recognized an estimated benefit of $0.1 million in the year ended December 31, 2017 as a result of this change.

The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of certain of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Due to the net E&P deficit of the Company's foreign subsidiaries, the Company does not believe it will incur the Transition Tax and has not recorded a provision Transition Tax obligation.

With regards to the BEAT, the GILTI, the deduction for FDII and other provisions of the Tax Act, the Company will require additional detailed analysis in order to assess its impact.

During 2017 and 2016, the Company performed an analysis to determine if, based on all available evidence, it considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period. As a result of the Company's evaluation, the Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to its cumulative losses and other factors. Accordingly, the Company has maintained a valuation allowance against its domestic deferred tax asset amounting to $73.1 million at December 31, 2017 and $141.9 million at December 31, 2016. A similar analysis and conclusion was made with regard to the valuation allowance on the deferred tax assets of the Company's Ireland subsidiary, acquired as part of the acquisition of GENBAND, resulting in a valuation allowance of $6.2 million at December 31, 2017. In analyzing the deferred tax assets related to the Company's Canada subsidiaries, the Company concluded that it was more likely than not that the Canadian federal Scientific Research and Experimental Development ("SRED") credits would not be realized in a future period. This resulted in a valuation allowance of $10.3 million.

A reconciliation of the Company's unrecognized tax benefits is as follows (in thousands):
 
2017
 
2016
 
2015
Unrecognized tax benefits at January 1
$
8,969

 
$
8,888

 
$
8,875

Increases related to current year tax positions
139

 
36

 
13

Increases related to prior period tax positions
430

 
723

 
—

Increases related to business acquisitions
2,012

 
—

 
—

Decreases related to prior period tax positions
(7,022
)
 
(81
)
 
—

Settlements
—

 
(597
)
 
—

Unrecognized tax benefits at December 31
$
4,528

 
$
8,969

 
$
8,888




The Company recorded liabilities for potential penalties and interest of $0.2 million for the year ended December 31, 2017, $0.1 million for the year ended December 31, 2016 and $13,000 for the year ended December 31, 2015. The Company had cumulative deferred tax liabilities recorded related to interest and penalties of $0.6 million for the year ended December 31, 2017, $0.2 million for the year ended December 31, 2016 and $0.2 million for the year ended December 31, 2015. Some of the unrecognized tax benefit items are expected to reverse in 2018 due to statute of limitation lapses.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. Generally, the tax years 2014 through 2017 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company's federal NOLs generated prior to 2014 could be adjusted on examination even though the year in which the loss was generated is otherwise closed by the statute of limitations.

As of December 31, 2017, the Company had ongoing income tax audits in certain foreign countries. Management believes that an adequate provision has been recorded for any adjustments that may result from tax examinations.

The 2017 acquisition of GENBAND was accounted for as a non-taxable business combination. GENBAND had previously been treated as a partnership for U.S. tax purposes. Consequently, U.S. federal and state deferred taxes were recorded as part of the business combination based on the differences between the tax basis of the acquired assets and assumed liabilities and their reported amounts for financial reporting purposes. The Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to cumulated losses and other factors. The Company recorded a valuation allowance against the acquired deferred tax assets. The Company recorded identifiable intangible assets as part of the purchase accounting for the acquisition. For U.S. tax purposes, the future amortization of these intangibles will be non-deductible, thereby creating income. Since the Company will be filing a consolidated U.S. tax return, the benefit from these identifiable intangible assets will be utilizable. The Company is required to determine its ability to use the tax benefit against the valuation allowance previously established. The Company has determined that it is more likely than not that these benefits will be recognized. As a result, the valuation allowance has been reduced for the assumed net deferred tax liabilities, resulting in an income tax benefit of $16.4 million. This benefit is included as a component of the Company's provision for income taxes for the year ended December 31, 2017.

The 2016 acquisition of Taqua was a taxable purchase of a business under Section 197 of the Internal Revenue Code. The tax amortization related to Taqua goodwill created a deferred tax liability. The 2015 acquisition of the SDN Business was a taxable purchase of a business under Section 197 of the Internal Revenue Code. The tax amortization related to the SDN Business goodwill created a deferred tax liability.