12. Income Taxes

The components of loss from continuing operations before income taxes are as follows:

 

		For the Fiscal Years Ended January 31,
		2017				2016				2015
		(Amounts in thousands)
Domestic		$	(40,452	)		$	(38,709	)		$	(25,920	)
Foreign			(16,166	)			(10,044	)			(2,694	)
Loss from continuing operations before income taxes		$	(56,618	)		$	(48,753	)		$	(28,614	)

The components of the income tax provision (benefit) from continuing operations are as follows:

 

		For the Fiscal Years Ended January 31,
		2017				2016				2015
		(Amounts in thousands)
Current:
Federal		$	—			$	—			$	—
State			50				50				(762	)
Foreign			(94	)			(49	)			24
Total			(44	)			1				(738	)
Deferred:
Foreign			14,675				(1,030	)			(368	)
Total			14,675				(1,030	)			(368	)
Income tax (benefit) provision		$	14,631			$	(1,029	)		$	(1,106	)

The income tax provision (benefit) for continuing operations computed using the federal statutory income tax rate differs from our effective tax rate primarily due to the following:

 

		For the Fiscal Years Ended January 31,
		2017				2016				2015
		(Amounts in thousands)
Statutory U.S. federal tax rate		$	(19,816	)		$	(17,066	)		$	(10,014	)
State taxes, net of federal tax benefit			32				33				(779	)
Income (losses) not benefitted			10,679				15,712				8,913
Non-deductible stock compensation expense			266				3				—
Other non-deductible items(1)			252				(31	)			(74	)
Innovative technology and development incentive			—				(189	)			(68	)
Foreign tax rate differential			3,499				509				916
APB 23 deferred tax liability			14,675				—				—
Goodwill impairment			5,044				—				—
Income tax provision (benefit)		$	14,631			$	(1,029	)		$	(1,106	)

 

(1)

Within the other line in the table above, other non-deductible items were $0.1 million and ($0.2) million for the fiscal years ended January 31, 2017 and 2016, respectively, and were immaterial for fiscal 2015. These items have been aggregated with various adjustments related to differences in prior year U.S. and foreign tax provisions and the actual returns filed.

Our effective tax rate was a provision of 26% for the fiscal year ended January 31, 2017 and a benefit of 2% and 4% for the fiscal years ended January 31, 2016 and 2015, respectively.

 

The components of deferred income taxes are as follows:

 

		January 31,
		2017				2016
		(Amounts in thousands)
Deferred tax assets:
Accruals and reserves		$	1,815			$	5,041
Deferred revenue			79				346
Stock-based compensation expense			3,730				3,655
U.S. federal, state and foreign tax credits			7,459				7,510
Intangible assets			6,834				7,153
Loss carryforwards			38,356				24,172
Deferred tax assets			58,273				47,877
Less: Valuation allowance			(58,134	)			(47,368	)
Net deferred tax assets			139				509
Deferred tax liabilities:
APB 23 deferred tax liability			14,675				—
Other			75				75
Property and equipment			121				426
Total net deferred tax (liabilities) assets		$	(14,732	)		$	8

At January 31, 2017, we had federal, state and foreign net operating loss carry forwards of $84.7 million, $117.5 million and $6.3 million respectively, which can be used to offset future tax liabilities and expire at various dates beginning in fiscal 2018. Utilization of these net operating loss carry forwards may be limited pursuant to provisions of the respective local jurisdiction. At January 31, 2017, we had a federal capital loss carry forward of $13.1 million. This loss can only be utilized to offset capital gains and it expires in fiscal 2018. In addition, at January 31, 2017, we had federal and state research and development credit carry forwards of $3.6 million and $1.8 million respectively, and state investment tax credit carry forwards of $0.2 million. We also have alternative minimum tax credit carry forwards of $0.6 million which are available to reduce future federal regular income taxes over an indefinite period. We have foreign tax credit carry forwards of $2.0 million which are available to reduce future federal regular income taxes. These credits expire at various dates beginning in fiscal 2018, except for $0.8 million in credits that have an unlimited carryforward period.

We review the adequacy of the valuation allowance for deferred tax assets on a quarterly basis. We have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets and have established a valuation allowance of $58.1 million for such assets, which are comprised principally of net operating loss carry forwards, research and development credits, deferred revenue, inventory and stock-based compensation. If we generate pre-tax income in the future, some portion or all of the valuation allowance could be reversed and a corresponding increase in net income would be reported in future periods. The valuation allowance increased $10.7 million from $47.4 million at January 31, 2016.

Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our operations outside the United States. Pursuant to Accounting Standard Codification Topic No. 740-30, “Income Taxes-Other Considerations or Special Areas,” undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes under U.S. tax law. Prior to the second quarter of fiscal 2017, we asserted that the undistributed earnings of all our foreign subsidiaries were permanently reinvested.

In the second quarter of fiscal 2017, following a review of our operations, liquidity and funding, and investment in our product roadmap, we determined that the ability to access certain amounts of foreign earnings would provide greater flexibility to meet the Company’s working capital needs. Accordingly, in the second quarter of fiscal 2017, we withdrew the permanent reinvestment assertion on $58.6 million of earnings generated by our Irish operations through July 2016. We recorded a deferred tax liability of $14.7 million related to the foreign income taxes on $58.6 million of undistributed earnings.

At January 31, 2017, we have indefinitely reinvested $6.0 million of the cumulative undistributed earnings of certain foreign subsidiaries. The $6.0 million of such earnings would be subject to U.S. taxes if repatriated to the United States. Through January 31, 2017, we have not provided deferred income taxes on these undistributed earnings of our foreign subsidiaries because such earnings are considered to be indefinitely reinvested outside the United States. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances existing if, and when, remittance occurs.

There is no certainty as to the timing of when such foreign earnings will be distributed to the United States in whole or in part. Further, when the foreign earnings are distributed via dividend to the United States, we anticipate that a substantial portion of the resulting U.S. income taxes would be reduced by existing tax attributes.

For the fiscal year ended January 31, 2017, we recognized incremental tax benefits of $0.4 million. This incremental tax benefit is primarily due to $0.3 million of tax benefit recorded for the expiration of the statute of limitations and $0.1 million related to effectively settling an audit. We recognize accrued interest and penalties related to uncertain tax positions in income tax expense. A reconciliation of the beginning and ending balance of the total amounts of gross unrecognized tax benefits, excluding interest of $0.3 million, is as follows:

 

		For the Fiscal Years Ended January 31,
		2017				2016
		(Amounts in thousands)
Balance of gross unrecognized tax benefits, beginning of period		$	5,151			$	5,527
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period			321				—
Decrease due to expiration of statute of limitation			(269	)			(325	)
Decrease for tax positions related to prior years			(96	)			—
Effect of currency translation			(14	)			(51	)
Balance of gross unrecognized tax benefits, end of period		$	5,093			$	5,151

We file income tax returns in U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. We have closed out an audit with the Internal Revenue Service (“IRS”) through fiscal 2013, however, the taxing authorities can still review the propriety of certain tax attributes created in closed years if such tax attributes are utilized in an open tax year, such as our federal research and development credit carryovers. During fiscal 2017, we closed an audit with the Dutch tax authorities for fiscal years 2010 through 2015.