Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. The legislation significantly changes U.S. tax law by, among other things, reducing the US federal corporate tax rate from 35% to 21%, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Pursuant to the SEC’s Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), given the amount and complexity of the changes in the tax law resulting from the tax legislation, the Company has not finalized the accounting for the income tax effects of the tax legislation. This includes the provisional amounts recorded related to the transition tax and the remeasurement of deferred taxes. The impact of the tax legislation may differ from this estimate, during the one-year measurement period due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the tax legislation.

The Company has remeasured its U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company recorded a provisional decrease related to its deferred tax assets and liabilities of $34.7 million with a corresponding adjustment to its valuation allowance for the year ended December 31, 2017. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As the Company’s deferred tax asset is offset by a full valuation allowance, this change in rates had no impact on the Company’s financial position or results of operations.

The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. 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 its relevant subsidiaries. The Company recorded a provisional amount of additional U.S. taxable income of $8.4 million, which did not result in additional tax expense due to its net operating losses. However, the Company is continuing to gather additional information to more precisely compute the amount of the transition tax. As the Company has significant net operating losses, any change to this provisional amount would have no impact on the Company’s financial position or results of operations.

For financial reporting purposes, loss before income taxes includes the following components (in thousands):



	Years Ended December 31,
	2017			2016			2015
United States	$	(49,167	)	$	(38,319	)	$	(35,074	)
Foreign	9,695			18,759			17,344
Total	$	(39,472	)	$	(19,560	)	$	(17,730	)

The provision for income taxes based on loss before income taxes is as follows (in thousands):



	Years Ended December 31,
	2017			2016			2015
Federal:
Current	$	—		$	—		$	—
Deferred	18,646			(11,360		)	(4,297		)
	18,646			(11,360		)	(4,297		)
State:
Current	5			7			6
Deferred	231			923			62
	236			930			68
Foreign:
Current	3,155			3,742			4,930
Deferred	(1,418		)	561			8
	1,737			4,303			4,938
(Decrease) increase in valuation allowance	(16,962		)	10,272			3,894
Tax provision	$	3,657		$	4,145		$	4,603

The provision for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate to loss before income taxes. The primary components of such difference are as follows (in thousands):



	Years Ended December 31,
	2017			2016			2015
Taxes at federal statutory rate	$	(13,420	)	$	(6,650	)	$	(6,028	)
State taxes, net of federal benefit	(236		)	(208		)	(236		)
Effect of tax rate differential for foreign subsidiary	(1,646		)	(2,985		)	(2,641		)
Valuation allowance, including tax benefits of stock activity	(16,962		)	10,272			3,894
Tax rate change	34,732			—			—
Foreign taxes on unremitted earnings	—			1,204			2,085
Stock-based compensation	224			441			134
Foreign withholding taxes	295			260			180
Return to provision adjustments	(2,931		)	1,062			1,131
Subpart F income inclusion	2,998			906			5,914
SEC settlement penalty	959			—			—
Business combination	(1,914		)	—			—
Other	1,558			(157		)	170
Tax provision	$	3,657		$	4,145		$	4,603

The Company has established a valuation allowance against its U.S. federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets as evidenced by the cumulative losses from operations through December 31, 2017. Management periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly and recorded as a tax benefit. The Company has recorded a valuation allowance of $61.4 million as of December 31, 2017 to reflect the estimated amount of deferred tax assets that may not be realized. The Company decreased its valuation allowance by $17.0 million for the year ended December 31, 2017.

At December 31, 2017, the Company has federal and state net operating loss carryforwards of approximately $219.0 million and $37.7 million, respectively. The federal tax loss carryforwards will begin to expire in 2020 and the state tax loss carryforwards will begin to expire in 2018. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of December 31, 2017 of $7.0 million and $9.0 million, respectively. The federal credits will begin to expire in 2019 unless utilized and the state credits have an indefinite life. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s federal net operating loss and credit carryforwards may be limited upon a cumulative change in ownership of more than 50% within a three-year period.

The Company was granted a tax holiday in Switzerland, which was effective as of January 1, 2012 for up to 10 years. The tax holiday was conditioned upon the Company meeting certain employment and investment thresholds. As of January 1, 2017, the Company was no longer eligible for the tax holiday due to not meeting the employment threshold. The impact of the tax holiday decreased foreign taxes by $0.6 million and $0.7 million for 2016 and 2015, respectively. The benefit of the tax holiday on net loss per diluted share was $0.02 for both 2016 and 2015. On January 16th, 2018, the Company was granted a new tax holiday in Switzerland, which was retroactively effective as of January 1, 2017 with a term through December 31, 2021. The new tax holiday is conditioned upon the Company meeting certain investment thresholds. The retroactive effect of the tax holiday will be recorded in the first quarter of 2018, in accordance with the enacted date of the new tax holiday.

The Company records U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the U.S. As of December 31, 2017, the Company has recorded a $4.9 million deferred tax liability for Swiss withholding taxes associated with $97.6 million of undistributed earnings of its Swiss subsidiary that are no longer considered indefinitely reinvested. In the event that the Company repatriates these funds, this withholding tax would become payable to the Swiss government. During the years ended December 31, 2017, 2016 and 2015, income tax expense associated with undistributed earnings of its Swiss subsidiary that are no longer considered indefinitely reinvested was $0, $1.2 million and $2.1 million, respectively. As of December 31, 2017, there were $11.8 million of undistributed earnings considered indefinitely reinvested. Determination of the amount of any unrecognized deferred income tax liability on the excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries is not practicable because of the complexities of the hypothetical calculation.

Items that give rise to significant portions of the deferred tax accounts are as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Tax loss carryforwards	$	50,183		$	62,994
Tax credit carryforwards	792			19
Uniform capitalization, contract and inventory related reserves	805			598
Accrued vacation	301			514
Stock-based compensation	2,029			2,130
Capitalized research and development	3,043			5,532
Tax basis depreciation less book depreciation	1,523			1,661
Intangible assets	—			1,354
Deferred revenue	175			33
Accrued foreign taxes	1,044			1,263
Other	2,369			2,523
Total	62,264			78,621
Deferred tax liabilities:
Inventory deduction	(587		)	(369		)
Pension assets	(1,326		)	(1,733		)
Allowance for doubtful accounts	(534		)	(677		)
Withholding tax on undistributed earnings of foreign subsidiary	(4,879		)	(4,879		)
Unrealized gains and losses	(351		)	(733		)
Intangible assets	(1,514		)	—
Total	(9,191		)	(8,391		)
Net deferred tax assets before valuation allowance	53,073			70,230
Valuation allowance	(61,403		)	(78,366		)
Net deferred tax liabilities	$	(8,330	)	$	(8,136	)

As of both December 31, 2017 and 2016, deferred tax assets of $0.4 million were included in other non-current assets in the consolidated balance sheets.

The Company accounts for uncertain tax benefits in accordance with the provisions of section 740-10 of the Accounting for Uncertainty in Income Taxes Topic of the FASB ASC. Of the total unrecognized tax benefits at December 31, 2017, approximately $16.0 million was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Company’s valuation allowance of $16.0 million. To the extent unrecognized tax benefits are recognized at a time when a valuation allowance does not exist, the recognition of the $16.0 million tax benefit would reduce the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2017 will change materially within the 12-month period following December 31, 2017.

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



Balance at December 31, 2015	$	14,014
Increase in current period positions	1,596
Increase in prior period positions	116
Decrease in prior period positions	(147		)
Balance at December 31, 2016	15,579
Increase in current period positions	1,081
Decrease in prior period positions	(518		)
Balance at December 31, 2017	$	16,142

The Company recognizes interest and penalties as a component of income tax expense. Interest and penalties for the years ended December 31, 2017, 2016 and 2015 were $29,000, $148,000 and $119,000, respectively.

The Company’s U.S. federal income tax returns for tax years subsequent to 2014 are subject to examination by the Internal Revenue Service and its state income tax returns subsequent to 2013 are subject to examination by state tax authorities. The Company’s foreign tax returns subsequent to 2012 are subject to examination by the foreign tax authorities.

Net operating losses from years for which the statute of limitations has expired (2014 and prior for federal and 2013 and prior for state) could be adjusted in the event that the taxing jurisdictions challenge the amounts of net operating loss carryforwards from such years.