5. Income Taxes

 

The domestic and foreign components of net income (loss) before income tax expense consists of the following for the periods shown below (in thousands):

 

 

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

 

 

A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate follows:

 

 

Deferred tax assets and (liabilities) are comprised of the following (in thousands):

 

 

At December 31, 2013 and 2014, the Company had a full valuation allowance against the deferred tax assets of its domestic operations as it believes it is more likely than not that these benefits will not be realized. Significant judgment is required in determining our provision for income taxes, recording valuation allowances against deferred tax assets and evaluating our uncertain tax positions. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. Due to historical net losses incurred and the uncertainty of realizing the deferred tax assets, for all the periods presented, we have a full valuation allowance against our deferred tax assets. To the extent that we generate positive income and expect, with reasonable certainty, to continue to generate positive domestic income we may release all or a portion of our valuation allowance in a future period. This release would result in the recognition of certain deferred tax assets, a decrease to income tax expense for the period such release is made. In addition, our effective tax rate in subsequent periods would increase, and more closely approximate the federal statutory rate of 34%, after giving consideration to state income taxes, foreign income taxes and the effect of exercising incentive stock options. The net valuation allowance decreased by approximately $1.6 million and $1.8 million during the years ended December 31, 2013 and 2014, respectively.

 

Net operating loss and tax credit carryforwards as of December 31, 2014 are as follows (in thousands):

 

 

Approximately $18.4 million of the net operating losses reported above represents unrecorded tax benefits for stock-based compensation, which will be recorded in additional paid in capital when realized. Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the “IRC”), and similar state provisions. The Company recently performed a detailed analysis under Section 382 of the IRC to determine whether any ownership changes had occurred. The effect of an ownership change would be the potential imposition of annual limitations on the use of net operating loss carryforwards attributable to periods before the change. The detailed analysis confirmed that Section 382 ownership changes occurred on July 29, 2003 and March 27, 2007, but the Company concluded that the ownership changes do not result in any limitations regarding the utilization of net operating loss carryforwards.

 

The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits, excluding interest and penalties (in thousands):

 

 

The Company does not believe there will be any material changes in its unrecognized tax benefits over the next 12 months. As of December 31, 2014, the amount of unrecognized tax benefits that would, if recognized, impact the Company’s effective income tax rate is approximately $3.6 million.

 

The Company files income tax returns in the United States, including various state and local jurisdictions. The Company’s subsidiaries file income tax returns in the United Kingdom, Hong Kong, China and India. The Company is subject to examination in the United States, the United Kingdom, Hong Kong, China, and India as well as various state jurisdictions. As of December 31, 2014, the Company was not under examination by any tax authorities. Tax years beginning in 2011 are subject to examination by tax authorities in the United States, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. Tax years beginning in 2012 are subject to examination by the taxing authorities in Hong Kong. Tax years beginning in 2013 are subject to examination by the taxing authorities in the United Kingdom, China, and India.

 

At December 31, 2014, the Company had undistributed foreign earnings of $1.5 million, which the Company intends to permanently reinvest in the foreign subsidiary. Unrecognized deferred tax liabilities of $0.3 million from temporary differences related to the investment in this foreign subsidiary would have been taxable if the Company repatriated the foreign earnings. The Company anticipates that future overseas earnings will also be reinvested indefinitely. In accordance with the indefinite reversal criteria, the foreign currency gains recorded in other comprehensive income related to foreign currency translation have not been tax effected.