(10)

Income Taxes

Loss before income taxes included in the consolidated statements of operations was as follows:


	Year Ended December 31,
	2016		2015		2014
	(in thousands)
United States.	$	(41,466)	$	(43,020)	$	(32,937)
Foreign		(7,561)		(6,341)		689

Loss before income taxes	$	(49,027)	$	(49,361)	$	(32,248)

Income tax (benefit) expense included in the consolidated statements of operations was as follows:


	Year Ended December 31,
	2016		2015		2014
	(in thousands)
Current:
Federal	$	493	$	—	$	—
State and local		61		116		22
Foreign		(656)		261		161

Total current (benefit) expense		(102)		377		183

Deferred:
Federal		98		98		180
State and local		13		11		14
Foreign		(36)		10		2

Total deferred expense		75		119		196

Income tax (benefit) expense	$	(27)	$	496	$	379

The table below reconciles the differences between income taxes computed at the federal statutory rate of 34% and our provision for income taxes:


	Year Ended December 31,
	2016		2015		2014
Expected income tax		34.0%		34.0%		34.0%
State taxes, net of federal benefit		(0.1)		(0.1)		(0.1)
Permanent differences		(1.4)		(3.0)		(0.5)
Federal research and development credit		2.4		0.6		0.8
Foreign rate differential		(3.0)		(3.3)		0.2
Change in valuation allowance		(31.9)		(29.9)		(35.6)
Other		0.1		0.7		—

Total income tax benefit (expense)		0.1%		(1.0)%		(1.2)%

Net deferred tax assets and liabilities, as set forth in the table below, reflect the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws:


	As of December 31,
	2016		2015
	(in thousands)
Deferred tax assets:
Accruals and reserves	$	458	$	300
Net operating loss carryforwards		35,492		37,744
Deferred revenue		16,471		9,971
Amortization		3,356		3,318
Research and development credits		1,775		1,269
Stock-based compensation		4,999		2,436
Other		3,959		3,312

Total deferred tax assets		66,510		58,350

Deferred tax liabilities:
Intangible assets		(534)		(417)
Depreciation		(102)		(51)

Total deferred tax liabilities		(636)		(468)

Less: Valuation allowance		(66,395)		(58,328)

Net deferred tax liabilities	$	(521)	$	(446)

In connection with the global structuring of our intellectual property and international business operations in the fourth quarter of 2016, we transferred certain intellectual property rights to our wholly owned subsidiary in the United Kingdom. Although the transfer of intellectual property rights between consolidated entities did not result in any gain in the consolidated results of operations, we generated a taxable gain in the U.S. that was substantially offset by our existing net operating loss carryforwards. However, we recorded $0.2 million of current U.S. federal income taxes related to Alternative Minimum Tax (AMT). This amount is offset by a current foreign income tax benefit due to refundable tax credits that arose after we completed our research and development studies in Canada, Ireland and the UK.

We recorded a deferred tax provision of $0.1 million for 2016, 2015 and 2014 relating to tax amortization of goodwill with a corresponding increase to the deferred tax liability. As of December 31, 2016, we have evaluated the need for a valuation allowance on deferred tax assets. In assessing whether the deferred tax assets are realized, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to our history of generating losses in the U.S. and Ireland, we continue to record a full valuation allowance against our U.S. and Ireland deferred tax assets. As of December 31, 2016, we expect to generate losses in the United Kingdom for the foreseeable future. Therefore, in addition to the U.S. and Ireland, a full valuation allowance has been recorded against all deferred tax assets in the United Kingdom. If we achieve future profitability, a significant portion of these deferred tax assets could be available to offset future income taxes.

The valuation allowance increased by $8.1 million for the year ended December 31, 2016, due primarily to additional operating losses generated during the year.

We have not provided for U.S. income taxes on the undistributed earnings of our non-U.S. subsidiaries, as we plan to permanently reinvest these amounts.

As of December 31, 2016, we had federal and state net operating loss carryforwards of $93.8 million and $69.2 million, respectively. The federal and state net operating loss carryforward expire at various dates beginning in 2023. As of December 31, 2016, we had foreign net operating loss carryforwards of $25.6 million that can be carried forward indefinitely. Of these amounts, $8.8 million relate to stock-based compensation tax deductions greater than compensation recognized for financial reporting purposes (APIC NOLs). As a result, the APIC NOLs are included in the net operating loss carryforwards, however, are not reflected in deferred tax assets as of December 31, 2016 and 2015. The APIC NOLs will be credited to additional paid-in capital if and when such deductions reduce taxes payable as determined based on a “with-and-without” approach.

We also had federal and state research and development credit carryforwards of $1.4 million and $0.5 million as of December 31, 2016, respectively. These credit carryforwards expire at various dates beginning in 2023.

We believe that a change of ownership within the meaning of Section 382 and 383 of the Internal Revenue Code of 1986, as amended, occurred in 2011. Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes, such as research and development credits, to offset its post-change income may be limited. As a result, our U.S. federal net operating loss and research and development credit utilization will be limited to an amount equal to the market capitalization at the time of the ownership change multiplied by the federal long-term tax exempt rate. We do not believe that any of our net operating losses or research and development credits will expire as a result of this limitation.

We file income tax returns in all jurisdictions in which we operate. We have established reserves to provide for additional income taxes that management believes will more likely or not be due in future years. The reserves have been established based upon our assessment as to the potential exposure. Changes in our reserves for unrecognized income tax benefits are as follows:


	Amount
	(in thousands)
Balance at December 31, 2014	$	35
Additions based on current year tax positions		106

Balance at December 31, 2015		141
Additions based on prior year tax positions		247

Balance at December 31, 2016	$	388

In the normal course of business, we are subject to examination by federal, state, and foreign jurisdictions, where applicable. The statute of limitations for these jurisdictions is generally three to six years. However, to the extent we utilize net operating losses or other similar carryforward attributes such as credits, the statute remains open to the extent of the net operating losses or credits that are utilized. We have no tax returns under examination as of December 31, 2016. We record interest and penalties on any income tax liability as income tax expense. We recorded $0.1 million of interest and penalties in 2016, and recorded nominal interest and penalties in 2015. We believe it is reasonably possible that our gross unrecognized tax benefits could decrease (whether by payment, release or a combination of both) in the next 12 months by up to $0.3 million.