Note 11. Income Taxes

Net loss before provision (benefit) for income taxes consisted of the following (in thousands):

	Year ended December 31,
	2017			2016			2015
United States	$	(27,820	)	$	(27,908	)	$	(28,870	)
International		1,937			(1,165	)		(4,492	)
Total net loss before provision (benefit) for income taxes	$	(25,883	)	$	(29,073	)	$	(33,362	)

The provision (benefit) for income taxes consisted of the following (in thousands):

	Year ended December 31,
	2017			2016			2015
Current
Federal	$	—		$	—		$	—
State		49			63			71
Foreign		256			209			85
Total current		305			272			156
Deferred
Federal	$	—		$	—		$	(1,312	)
State		—			—			(99	)
Foreign		(47	)		(36	)		(8	)
Total deferred		(47	)		(36	)		(1,419	)
Total income tax provision (benefit)	$	258		$	236		$	(1,263	)

The provision (benefit) for income tax differed from the amounts computed by applying the U.S. federal income tax rate to pretax loss as a result of the following (in thousands):

	Year ended December 31,
	2017			2016			2015
Federal tax benefit at statutory rate	$	(8,800	)	$	(9,885	)	$	(11,343	)
State tax, net of federal provision (benefit)		32			28			(34	)
Research and development credits		(707	)		(745	)		(667	)
Share-based compensation		(18,154	)		960			1,086
Other permanent differences		814			600			325
Change in US federal Tax Rate		40,377			—			—
Foreign tax rate differential		(445	)		(225	)		(80	)
Net operating (gains) losses not recognized		(12,859	)		9,503			10,762
Release of valuation allowance associated with acquisitions		—			—			(1,312	)
Total income tax provision (benefit)	$	258		$	236		$	(1,263	)

The benefit for income taxes for 2015 relates primarily to the release of a valuation allowance of $1.4 million associated with nondeductible intangible assets recorded as part of the Glip acquisition, partially offset by state minimum income tax and income tax on our earnings in foreign jurisdictions. In connection with the acquisition of Glip, a deferred tax liability was established for the book-to-tax basis differences related to the non-goodwill intangible assets. The net deferred tax liability from this acquisition created an additional source of income to realize deferred tax assets. As the Company continues to maintain a full valuation allowance against its deferred tax assets, this additional source of income resulted in the release of the Company’s previously recorded valuation allowance against deferred assets. Consistent with the applicable guidance, the release of the valuation allowance resulting from the acquisition was recorded in the consolidated financial statements outside of acquisition accounting (i.e., recorded as a tax benefit to the consolidated statements of operations).

In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. Undistributed earnings of foreign subsidiaries are immaterial for all periods presented.

The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows (in thousands):

	Year ended December 31,
	2017			2016			2015
Deferred tax assets
Net operating loss and credit carry-forwards	$	73,016		$	59,863		$	54,858
Research and development credits		8,027			6,094			4,712
Sales tax liability		627			1,131			1,337
Share-based compensation		4,955			7,281			6,694
Accrued liabilities		4,881			6,525			6,090
Gross deferred tax assets		91,506			80,894			73,691
Valuation allowance		(89,235	)		(79,319	)		(71,514	)
Total deferred tax assets		2,271			1,575			2,177
Deferred tax liabilities - Acquired intangibles		(344	)		(803	)		(1,164	)
Deferred tax liabilities - Property and equipment		(1,714	)		(606	)		(883	)
Net deferred tax assets	$	213		$	166		$	130

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

The Company has calculated its best estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was approximately $38 million with a corresponding and fully offsetting adjustment to our valuation allowance for the year ended December 31, 2017. The Company does not expect a material impact related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Because the Company is still in the process of analyzing certain provisions of the Act, in accordance with SAB 118, the Company has determined that the adjustment to its deferred taxes was a provisional amount and a reasonable estimate at December 31, 2017. The Tax Act creates a new requirement that certain income (i.e., “GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.

On January 1, 2017, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The adoption of that standard did not have an impact on the Company’s consolidated balance sheet, results of operations, cash flows or statement of stockholders’ equity because the Company has a full valuation allowance on our deferred tax assets. Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method. The previously unrecognized excess tax effects were recorded as a deferred tax asset, which was fully offset by a valuation allowance. Without the valuation allowance, the Company’s deferred tax assets would have increased by $18.0 million.

At December 31, 2017, the Company had net operating loss carry-forwards for federal and state income tax purposes of approximately $276.3 million and $230.8 million, respectively, available to reduce future income subject to income taxes. The federal net operating loss carry-forward will begin to expire in 2023 while the state net operating loss carry-forwards will begin to expire in 2021. The Company also has research credit carry-forwards for federal and California tax purposes of approximately $5.6 million and $6.4 million, respectively, available to reduce future income subject to income taxes. The federal research credit carry-forwards will begin to expire in 2028 and the California research credits carry forward indefinitely. As of December 31, 2016, the Company had federal and state net operating loss carry-forwards of $197.6 million and $137.6 million, respectively, and federal and state research and development tax credit carry-forwards in the amount of $4.7 million and $5.2 million, respectively. The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions.

The Company believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the year ended December 31, 2017, the Company has provided a valuation allowance against the Company’s U.S. and U.K. net deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2017, 2016 and 2015 was an increase of $9.9 million, $7.8 million and $11.1 million, respectively.

The Company has adopted the accounting policy that interest and penalties recognized are classified as part of its income taxes. The following shows the changes in the gross amount of unrecognized tax benefits as of December 31, 2017 (in thousands):

Balance as of December 31, 2014	$	2,615
Gross amount of increases in unrecognized tax benefits for tax positions taken in current year		499
Gross amount of decreases in unrecognized tax benefits for tax positions taken in prior year		(1,217	)
Balance as of December 31, 2015	$	1,897
Gross amount of increases in unrecognized tax benefits for tax positions taken in current year		538
Gross amount of increases in unrecognized tax benefits for tax positions taken in prior year		25
Balance as of December 31, 2016	$	2,460
Gross amount of increases in unrecognized tax benefits for tax positions taken in current year		547
Gross amount of decreases in unrecognized tax benefits for tax positions taken in prior years		(3	)
Balance as of December 31, 2017	$	3,004

The Company does not anticipate that its total unrecognized tax benefits will significantly change due to settlement of examination or the expiration of statute of limitations during the next 12 months.

The Company files U.S. and foreign income tax returns with varying statutes of limitations. Due to the Company’s net carry-over of unused operating losses, all years from 2003 forward remain subject to future examination by tax authorities.