Income Taxes

Loss before income taxes for the years ended December 31, 2017, 2016 and 2015 is comprised of the following (in thousands):



	Year Ended December 31,
	2017			2016			2015
Domestic	$	(40,034	)	$	(51,265	)	$	(48,965	)
Foreign	(5,592		)	(8,922		)	(3,148		)
Loss before income taxes	$	(45,626	)	$	(60,187	)	$	(52,113	)

The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 is comprised of the following (in thousands):



	Year Ended December 31,
	2017			2016		2015
Current:
Federal	$	(760	)	$	—	$	—
State	104			—		(6		)
Foreign	551			185		81
Total current	(105		)	185		75
Deferred:
Federal	(117		)	156		—
State	—			—		—
Foreign	436			40		106
Total deferred	319			196		106
Provision for income taxes	$	214		$	381	$	181

The Company’s net deferred tax liabilities consist of the following (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Accrued expenses	$	1,921		$	2,881
Provision for excess and obsolete inventory	2,577			4,913
Depreciation and amortization	4,610			9,655
Net operating loss and tax credit carryforwards	86,966			105,143
Share-based compensation	1,034			2,203
Unrecognized tax benefits	1,108			1,510
Deferred tax assets	98,216			126,305
Deferred tax liabilities:
Convertible Notes	(4,353		)	(9,535		)
Purchased intangible assets	(6,280		)	(6,790		)
Deferred tax liabilities	(10,633		)	(16,325		)
Valuation allowance	(92,844		)	(114,419		)
Net deferred tax liabilities	$	(5,261	)	$	(4,439	)

The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company’s estimate of future tax effects attributable to temporary differences and carryforwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

After a review of the four sources of taxable income described above and after being in a three year cumulative loss position at the end of 2015, the Company recognized a full valuation allowance against all of its U.S.-based and against some of the Company’s foreign-based entities’ deferred tax assets.

At December 31, 2017 and 2016, the Company recognized valuation allowances of $16.4 million and $19.3 million, respectively, related to its deferred tax assets created in those respective years. As a result, no net income tax benefits resulted in the Company’s statements of operations from the operating losses created during those years.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act, among other things, reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, changes rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, eliminates the corporate alternative minimum tax (“AMT”) and changes how existing AMT credits can be realized, creates the base erosion anti-abuse tax (BEAT), a new minimum tax, and creates a new limitation on deductible interest expense.

The SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period, which should not extend beyond one year from the Tax Act’s enactment date, for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items under ASC 740 and the tax laws that were in effect immediately prior to enactment. The items for which the Company was able to determine a reasonable estimate did not have a material impact on income tax expense.

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. For certain deferred tax assets, the Company has recorded a decrease of approximately $38.8 million, with a corresponding adjustment to valuation allowance for the year ended December 31, 2017. The re-measurement of the Company’s indefinite-lived deferred tax liabilities resulted in an immaterial deferred income tax benefit.

The aggregate income tax benefit recorded by the Company in 2017 as a result of the Tax Act’s impact on its net deferred tax liabilities and the change in how AMT carryforwards are treated and monetized was approximately $1.0 million.

The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our 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. The Company has initially determined that it will not owe a Transition Tax since it estimates that it has deficit E&P for its foreign subsidiaries that are subject to the tax. However, the Company is continuing to gather additional information to refine its computation.

The Company must assess whether its valuation allowance analyses are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, Global Intangible Low-Taxed Income (GILTI) inclusions, new interest expense disallowances). Since, as discussed herein, the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional.

The provision for income taxes reconciles to the amount computed by applying the statutory federal income tax rate of 34% in 2017, 2016 and 2015 to loss before income taxes as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Federal tax benefit, at statutory rate	$	(15,513	)	$	(20,463	)	$	(17,718	)
State benefit, net of federal benefit	(211		)	(293		)	(280		)
Foreign tax rate difference	336			681			222
Change in tax rate of net deferred tax assets	(38,772		)	—			—
Valuation allowances offsetting tax rate change	38,772			—			—
Valuation allowance against future tax benefits	16,364			19,341			15,389
Research and development credits	(244		)	(1,010		)	(796		)
Share-based compensation	876			418			752
Change in state apportionment	—			—			2,561
Effect of Tax Act	(971		)	—			—
Other	(423		)	1,707			51
Provision for income taxes	$	214		$	381		$	181

At December 31, 2017, the Company had U.S. federal net operating loss carryforwards of approximately $351.4 million, which begin to expire in 2021, unless previously utilized, California net operating loss carryforwards of approximately $38.1 million, which begin to expire in 2027, unless previously utilized, and foreign net operating losses for its active foreign subsidiaries of approximately $38.6 million, which generally have no expiration date. At December 31, 2017, the Company had California research and development tax credit carryforwards of approximately $10.4 million, which have no expiration date, and federal research and development tax credit carryforwards of approximately $8.8 million, which begin to expire in 2021, unless previously utilized.

Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a rolling three-year period. The analysis was performed for the period through December 20, 2017. The analysis did not identify any events of cumulative change in ownership during the review period. The Company will continue monitoring any future changes in stock ownership.

The Company entered into a Rights Agreement on January 22, 2018 (the “Rights Agreement”), subsequent to the balance sheet date, with Computershare Trust Company, N.A., a federally chartered trust company, as rights agent. The Rights Agreement is intended to discourage acquisitions of the Company’s common stock which could result in a cumulative change in ownership of more than 50% within a rolling three-year period, thereby preserving the Company’s current ability to utilize net operating loss carryforwards to offset future income tax obligations; however, there is no assurance that the Rights Agreement will prevent a cumulative change in ownership.

It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes on U.S. income taxes which may become payable if undistributed earnings of the foreign subsidiary were paid as dividends to the Company.

The Company follows the accounting guidance related to financial statement recognition, measurement and disclosure of uncertain tax positions. The Company recognizes the impact of an uncertain income tax position on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. No income tax benefit was recognized during the years ended December 31, 2017 and 2016. At December 31, 2017 and 2016, the Company did not have interest expense related to uncertain tax positions or a liability for unrecognized tax benefits. The Company does not expect changes to its uncertain tax position in the next twelve months.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):



Balance at December 31, 2014	$	35,643
Increases related to current and prior year tax positions	160
Balance at December 31, 2015	35,803
Increases related to current and prior year tax positions	488
Balance at December 31, 2016	36,291
Increases related to current and prior year tax positions	291
Balance at December 31, 2017	$	36,582

There are no tax benefits that, if recognized, would affect the effective tax rate that are included in the balances of unrecognized tax benefits at December 31, 2017.

The Company and its subsidiaries file U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The Company’s tax returns are subject to examination by federal, state and foreign taxing authorities. The Company’s federal and state tax returns are subject to examination for the years beginning in 2014 and 2013, respectively. Net operating loss carryforwards arising prior to these years are also open to examination, if and when utilized. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. However, because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company’s current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open years.