Income Taxes

In order to determine the quarterly provision for income taxes, we use an estimated annual effective tax rate (“ETR”), which is based on expected annual income and statutory tax rates in the various jurisdictions. However, to the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, we determine the quarterly provision for income taxes based on actual year-to-date income (loss). Certain significant or unusual items are separately recognized as discrete items in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

As a result of cumulative losses in recent years primarily due to incremental costs associated with the console transition, acquisition costs and initial investments in the HyperSound business, the Company concluded that a full valuation allowance is required on its U.S. net deferred tax assets. There is no valuation allowance on our foreign net deferred tax assets.

The following table presents our income tax expense (benefit) and effective income tax rate:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(in thousands)
Income tax benefit	$	(304	)	$	(3,148	)	$	(207	)	$	(6,516	)
Effective income tax rate	0.7		%	24.1		%	0.4		%	24.1		%

Income tax benefit for the three and six months ended June 30, 2016 was $0.3 million at an effective tax rate of 0.7% and $0.2 million at an effective tax rate of 0.4%, respectively. The effective tax rate was primarily impacted by the full valuation allowance on domestic earnings, foreign entity tax benefits and certain state tax expense.

Income tax benefit for the three and six months ended June 30, 2015 was $3.1 million at an effective tax rate of 24.1% and $6.5 million at an effective tax rate of 24.1%, respectively. The effective tax rate was impacted by differences in book and tax treatment of transaction costs, interest on the Series B Redeemable Preferred Stock and foreign entity taxable loss.

At December 31, 2015, the Company had $44.6 million of net operating loss carryforwards and $20.6 million of state net operating loss carryforwards, which will begin to expire in 2029. An ownership change occurred on January 15, 2014 as a result of the Merger, and $12.7 million of federal net operating losses included in the above are pre-change losses subject to Section 382. Based on the estimated Section 382 limitation and the net operating loss carryforward period, the Company believes that the pre-ownership change net operating losses can be fully utilized in future years if there is sufficient taxable income in such carryforward period.

The Company is subject to income taxes domestically and in various foreign jurisdictions. Significant judgment is required in evaluating uncertain tax positions and determining its provision for income taxes.

The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold, and establishes tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in the condensed consolidated statement of operations. As of June 30, 2016, the Company had uncertain tax positions of $2.3 million, inclusive of $0.8 million of interest and penalties.

The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The federal tax years open under the statute of limitations are 2012 through 2014, and the state tax years open under the statute of limitations are 2011 through 2014.