Income Taxes

Income tax expense (benefit) for the years ended December 31, 2017, 2016, and 2015 attributable to (loss) income from operations is presented below.



	Current			Deferred			Total
Year ended December 31, 2017
Federal	$	(41	)	$	6		$	(35	)
State	36			—			36
Foreign	1,857			(762		)	1,095
	$	1,852		$	(756	)	$	1,096
Year ended December 31, 2016
Federal	$	227		$	3,197		$	3,424
State	144			457			601
Foreign	2,770			(1,248		)	1,522
	$	3,141		$	2,406		$	5,547
Year ended December 31, 2015
Federal	$	(555	)	$	(94	)	$	(649	)
State	120			765			885
Foreign	295			(118		)	177
	$	(140	)	$	553		$	413

Actual income tax expense differs from the “expected” income tax (benefit) expense computed by applying the United States Federal statutory income tax rate of 34% to (loss) income before tax expense, as follows:



	Year Ended December 31,
	2017			2016			2015
Income tax (benefit) expense at Federal statutory income tax rate	$	(3,379	)	$	(670	)	$	906
Increase (decrease) in income taxes resulting from:
State income tax expense, net of federal benefit	56			(156		)	(37		)
State research and development, investment credits	(435		)	(363		)	(317		)
Non-deductible meals & entertainment	47			49			33
Non-deductible stock compensation expense	338			216			181
Non-deductible deferred compensation expense	—			116			260
Subpart F income, net of foreign tax credits	1,171			523			61
Foreign branch income	—			52			—
Manufacturing deduction	—			—			(102		)
Nontaxable interest income	—			(162		)	(106		)
Foreign tax rate differential	(902		)	(1,258		)	(792		)
Federal research and development credits	(427		)	(395		)	(348		)
Uncertain tax positions	189			283			(413		)
Provision to tax return adjustments	8			(95		)	80
Change in tax rates	926			14			(313		)
Change in valuation allowance	3,330			7,425			1,392
Foreign research and development incentives	(22		)	(45		)	(59		)
Other	196			13			(13		)
Income tax expense	$	1,096		$	5,547		$	413

(Loss) income before income tax expense determined by tax jurisdiction, are as follows:



	Year Ended December 31,
	2017			2016			2015
United States	$	(13,271	)	$	(7,775	)	$	(570	)
Foreign	3,333			5,805			3,236
Total	$	(9,938	)	$	(1,970	)	$	2,666

Deferred tax assets and liabilities for the periods presented consisted of the following:



	December 31,
	2017			2016
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts	$	540		$	1,104
Inventories	581			792
Operating loss carry-forwards	4,725			3,078
Stock-based compensation expense	696			1,231
Property and equipment, due to difference in depreciation	190			148
Research and development, alternative minimum tax credit carry-forwards	4,338			3,031
Foreign tax credit carry-forwards	2,958			754
State tax credit carry-forwards	2,958			2,277
Warranty reserve	495			822
Accrued expenses	334			432
Gross deferred tax assets	17,815			13,669
Less valuation allowance	(16,014		)	(11,567		)
Total deferred tax assets	1,801			2,102
Deferred tax liabilities:
Purchased intangible assets	(2,705		)	(3,197		)
Property and equipment, due to differences in depreciation	(1,681		)	(2,003		)
Other	(29		)	(11		)
Total deferred tax liabilities	(4,415		)	(5,211		)
Net deferred tax liability	$	(2,614	)	$	(3,109	)
Net deferred tax asset- non-current	$	20		$	24
Net deferred tax liability- non-current	$	(2,634	)	$	(3,133	)

As of December 31, 2017, the Company had federal research and development tax credit carry-forwards in the amount of $4,329 and other general business credits of $9 that expire in years 2026 through 2037. As of December 31, 2017, the Company had foreign tax credit carry-forwards in the amount of $2,958 that expire in years 2026 through 2027. As of December 31, 2017, the Company had state research and development tax credit carry-forwards in the amount of $3,501 that expire in years 2018 through 2024. The Company also had other state tax credit carry-forwards of $243 available to reduce future state tax expense that expire in years 2018 through 2024.

The Company’s ability to utilize these net operating loss carry-forwards and tax credit carry-forwards may be limited in the future if the Company experiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% or greater stockholders change by more than 50% over a three-year period.

As of January 1, 2017, the Company adopted Update No. 2016-09. In accordance with Update No. 2016-09, previously unrecognized excess tax benefits are recognized on a modified retrospective basis. On January 1, 2017, the Company recorded a $1,117 deferred tax asset related to unrecognized excess tax benefits with an offsetting adjustment to retained earnings. As the Company had previously recorded a full valuation allowance on its U.S. deferred tax assets, a corresponding increase to the valuation allowance was recorded with an offsetting adjustment to retained earnings.

In assessing the realizability of its net deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2017, the Company concluded that a net increase of $4,447 of the valuation allowance was appropriate. As part of the Company’s analysis, the Company evaluated, among other factors, its recent history of generating taxable income and its near-term forecasts of future taxable income. The net increase in valuation allowance of $4,447 is composed of expense of $3,330 and an increase of $1,117 related to recording deferred tax assets as a result of the adoption of ASU 2016-09.

As of December 31, 2017, the Company has not provided for U.S. deferred income taxes on undistributed earnings of its foreign subsidiaries of approximately $18,328 since these earnings are expected to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company will be subject to additional state income taxes as well as withholding taxes in certain foreign jurisdictions. The amount of taxes attributable to the undistributed earnings is not practicably determinable.

The Company establishes reserves for uncertain tax positions based on management’s assessment of exposure associated with tax deductions, permanent tax differences, and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur that warrant adjustment to the reserve. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The aggregate changes in the total gross amount of unrecognized tax benefits are as follows:



	Year Ended December 31,
	2017			2016			2015
Unrecognized tax benefits as of January 1	$	815		$	983		$	2,487
Gross increase in unrecognized tax benefits - prior year tax positions	52			—			168
Gross increase (decrease) in unrecognized tax benefits due to currency fluctuations - prior year tax positions	43			(131		)	(116		)
Gross increase in unrecognized tax benefits - current year tax positions	111			293			13
Settlements with taxing authorities	—			(330		)	(1,569		)
Lapse of statute of limitations	(15		)	—			—
Unrecognized tax benefits as of December 31	$	1,006		$	815		$	983

All unrecognized tax benefits as of December 31, 2017, 2016 and 2015, if recognized, would result in a reduction of the Company's effective tax rate.

The Company recorded interest and penalties of $67, $40, and $78 in its statement of operations for the years ended December 31, 2017, 2016, and 2015, respectively. Total accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $564, $545, and $468 as of December 31, 2017, 2016, and 2015, respectively.

The timing of any resolution of income tax examinations is highly uncertain, as are the amounts and timing of any settlement payment. These events could cause fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2017 may decrease approximately $235 in the next twelve months as a result of a lapse of statutes of limitation and settlements with taxing authorities.

The Company’s tax jurisdictions include the United States, the United Kingdom, Denmark, Cyprus, Norway, Brazil, Singapore, Belgium, the Netherlands, Hong Kong, Japan, and India. In general, the statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to 2014, and the relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal and state and foreign taxing authorities to the extent of future utilization of net operating losses and research and development tax credits generated in each preceding year.

Tax Reform

The 2017 Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as global intangible low-taxed income (GILTI). These changes are effective beginning in 2018.

The 2017 Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings (the “Transition Toll Tax”).

Changes in tax rates and tax laws are accounted for in the period of enactment. Therefore, during the year ended December 31, 2017, the Company recorded a reduction in our deferred tax assets and corresponding valuation allowance of $1,780 and a net tax benefit of $54 related to the Company's current estimate of the provisions of the 2017 Tax Act.

The Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 118 to provide guidance to companies on how to implement the accounting and disclosure changes as a result of the Tax Act. The SEC staff guidance has recognized that, due to the complexity and timing of the release of the Tax Act, the accounting for this change in the law may be incomplete upon issuance of a company's financial statements for the reporting period in which the Tax Act was enacted. SAB No. 118 states that if a company can determine a reasonable estimate for the effects of the Tax Act then this estimate can be included in the financial statements. The Company has made a preliminary estimate of the Transition Toll Tax and the remeasurement of our deferred tax assets and liabilities as of December 31, 2017. The preliminary estimate is subject to change as we finalize our analysis and as interpretations of the provisions of the 2017 Tax Act continue to develop. The final determination of the Transition Toll Tax and the remeasurement of our deferred tax assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the 2017 Tax Act may require further adjustments and changes in our estimates, which could have a material adverse effect on our business, results of operations, financial position and cash flows.

Transition Toll Tax

The 2017 Tax Act eliminates the deferral of U.S. income tax on historical unrepatriated earnings by imposing the Transition Toll Tax, which is a one-time mandatory deemed repatriation tax on undistributed foreign earnings. The Transition Toll Tax is assessed on the U.S. shareholder's share of the foreign corporation's accumulated foreign earnings that have not previously been taxed. Earnings in the form of cash and cash equivalents will be taxed at a rate of 15.5% and all other earnings will be taxed at a rate of 8.0%.

As of December 31, 2017, the Company has included $7,818 of foreign earnings and profits in U.S. taxable income and included an additional $1,935 of foreign tax credits in deferred assets under the Transition Toll Tax. The Company's valuation allowance on deferred tax assets was reduced by $802 as a result of the Transition Toll Tax.

At December 31, 2017, we considered all of our foreign earnings to be permanently reinvested outside the U.S. as we continue to evaluate the implications of the 2017 Tax Act on the Company.

Effect on Deferred Tax Assets and Liabilities and other Adjustments

Our deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled.

As the Company's U.S. deferred tax assets exceed the balance of its deferred tax liabilities at the date of enactment, the Company has recorded a reduction in deferred tax assets of $926 and a corresponding decrease in the related valuation allowance to reflect the decrease in the U.S. corporate income tax rate and other changes to U.S. tax law.

Status of Assessment

The preliminary estimate of the Transition Toll Tax and remeasurement of deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the 2017 Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the 2017 Tax Act may require further adjustments and changes in our estimates.

The final determination of the Transition Toll Tax and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.