INCOME TAXES

Income tax provisions from continuing operations consisted of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
Income (loss) from continuing operations before provisions for income taxes	$	54,735		$	(44,811	)	$	(14,509	)
Provision for income taxes from continuing operations	(392		)	(480		)	(25,521		)
Effective tax rate	0.7		%	(1.1		)%	(175.9		)%

The 2018 and 2017 provision for income tax from continuing operations resulted primarily from estimated foreign taxes and foreign withholding tax expense. The 2016 provision for income tax from continuing operations resulted primarily from the application of a full federal valuation allowance against deferred tax assets.

The Company reported pre-tax book income or loss from continuing operations of (in thousands):



	Year Ended December 31,
	2018		2017			2016
Domestic	$	49,509	$	(23,994	)	$	(14,656	)
Foreign	5,226		(20,817		)	147
Total	$	54,735	$	(44,811	)	$	(14,509	)

The provisions for income taxes from continuing operations consisted of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current:
U.S. federal	$	—		$	—		$	(1,649	)
State and local	(3		)	(5		)	859
Foreign	(331		)	(448		)	(442		)
Total current	$	(334	)	$	(453	)	$	(1,232	)
Deferred:
U.S. federal	—			—			(24,261		)
State and local	—			—			—
Foreign	(58		)	(27		)	(28		)
Total deferred	(58		)	(27		)	(24,289		)
Total provision for income taxes	$	(392	)	$	(480	)	$	(25,521	)

On July 27, 2015, a U.S. Tax Court opinion (Altera Corporation et. al v. Commissioner) concerning the treatment of stock-based compensation expense in an intercompany cost sharing arrangement was issued. In its opinion, the U.S. Tax Court accepted Altera's position of excluding stock-based compensation from its intercompany cost sharing arrangement. On February 19, 2016, the IRS appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit. On July 24^,2018, the U.S. Court of Appeals for the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court that had found certain Treasury regulations related to stock-based compensation to be invalid. On August 7, 2018, the U.S. Court of Appeals for the Ninth Circuit withdrew its July 24, 2018 opinion to allow a reconstituted panel to confer on the decision. This reconstituted panel will reconsider the validity of the cost sharing regulations at issue. The regulations at issue require related entities to share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as “qualified cost-sharing arrangements” and to avoid potential IRS adjustment. Although the IRS has appealed the decision, based on the findings of the US Tax Court, the Company has concluded that it is more likely than not that the decision will be upheld and accordingly has excluded stock-based compensation from intercompany charges during the period. The Company will continue to monitor ongoing developments and potential impacts to its consolidated financial statements.

On December 22, 2017, the Tax Act was passed into law. Among other changes, the Tax Act reduces the US federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In addition, the Act introduced the Base Erosion and Anti-Abuse Tax (the “BEAT”), which creates a new tax on certain related party payments. Some provisions of the Tax Act began to impact the Company in 2017, while other provisions impact the Company beginning in 2018.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the federal tax rate change and other tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In connection with the Company's adoption of the Tax Act and in consideration of SAB 118, the following updates have been made to the Company's income tax provision. In the fourth quarter of 2017, the Company recorded a $12.9 million reduction to deferred tax assets and related valuation allowance in connection with the re-measurement of certain deferred tax assets and liabilities, resulting in no impact to its results of operations. The Company estimated that no current tax expense should be recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, a provisional estimate at December 31, 2017. The Company completed its analysis of the impacts of the Tax Act in the fourth quarter of 2018 and determined there were no significant adjustments to the provisional tax amounts recorded in the fourth quarter of 2017.

For the Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act, the Company completed its assessment during the fourth quarter of 2018 and, effective January 1, 2018, elected an accounting policy to record GILTI as period costs if and when incurred. Additionally, the Company concluded that it is has not met the threshold requirements of the BEAT. Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of topics, is expected to be issued. In accordance with Accounting Standards Codification (ASC) 740, the Company will recognize any effects of the guidance in the period that such guidance is issued.

Deferred tax assets and liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax losses, and credit carryforwards. Significant components of the net deferred tax assets and liabilities consisted of (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	4,968		$	13,394
State income taxes	1			1
Deferred revenue	2,347			5,349
Research and development and other credits	9,590			11,447
Reserves and accruals recognized in different periods	3,734			3,088
Basis difference in investment	—			583
Capitalized R&D expenses	3,415			3,623
Depreciation and amortization	472			413
Deferred rent	160			183
Other	6			—
Total deferred tax assets	24,693			38,081
Valuation allowance	(24,398		)	(37,680		)
Net deferred tax assets	295			401
Foreign credits	(29		)	(43		)
Other	(17		)	—
Net deferred tax liabilities	(46		)	(43		)
Net deferred taxes	$	249		$	358

The Company accounts for deferred taxes under ASC 740 which requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the ASC 740 more-likely-than-not realization ("MLTN") threshold criterion. This assessment considers matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The evaluation of the recoverability of the deferred tax assets requires that the Company weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. As of December 31, 2018, based on its assessment of the realizability of its deferred tax assets, the Company continued to maintain a full valuation allowance against all of its federal and state, and certain of its foreign net deferred tax assets.

As of December 31, 2018, the net operating loss carryforwards for federal and state income tax purposes were approximately $0 and $52.9 million, respectively. The state net operating losses begin to expire in 2028. The Company also has net operating loss carryforwards from Ireland of 2.4 million that can be carried forward indefinitely and do not expire. As of December 31, 2018, the Company had federal and state tax credit carryforwards of approximately $9.5 million and $2.3 million, respectively, available to offset future tax liabilities. The federal credit carryforwards will expire between 2019 and 2038 and the California tax credits will carryforward indefinitely. In addition, as of December 31, 2018, the Company has Canadian research and development credit carryforwards of $1.6 million, which will expire at various dates through 2038. These operating losses and credit carryforwards have not been reviewed by the relevant tax authorities and could be subject to adjustment upon examinations.

Section 382 of the Internal Revenue Code (“IRC Section 382”) imposes limitations on a corporation’s ability to utilize its net operating losses and credit carryforwards if it experiences an “ownership change” as defined by IRC Section 382. Utilization of a portion of the Company’s federal net operating loss carryforward was limited in accordance with IRC Section 382, due to an ownership change that occurred during 1999. This limitation has fully lapsed as of December 31, 2010. As of December 31, 2018, the Company conducted an IRC Section 382 analysis with respect to its net operating loss and credit carryforwards and determined there was no limitation. There can be no assurance that future issuances of the Company’s securities will not trigger limitations under IRC Section 382 which could limit utilization of these tax attributes.

For purposes of the reconciliation between the provision for income taxes at the statutory rate and the effective tax rate, a national U.S. 21% rate is applied for 2018, the year in which the Tax Act took effect. For prior years presented in the table below, the national U.S. rate of 35%, the rate in effect prior to the Tax Act change, was applied for the reconciliation between the provision for income taxes at the statutory rate and the effective tax rate:



	2018		2017		2016
Federal statutory tax rate	21.0	%	35.0	%	35.0	%
Sale of IP rights to foreign subsidiary	—	%	—	%	(13.8	)%
Foreign withholding	0.1	%	(0.2	)%	(1.2	)%
Stock compensation expense	(1.0	)%	(2.0	)%	(6.6	)%
Foreign rate differential	(1.5	)%	(17.0	)%	(1.2	)%
Prior year true-up items	—	%	(0.1	)%	(0.3	)%
Tax reserves	(1.3	)%	(0.1	)%	1.8	%
Loss on expiration of capital loss carryover	1.1	%	—	%	—	%
Credits	(0.1	)%	0.4	%	1.6	%
Other	0.9	%	—	%	(1.6	)%
2017 Tax Act impact	1.1	%	(28.7	)%	—	%
Valuation allowance	(19.6	)%	11.6	%	(193.4	)%
State refunds	—	%	—	%	3.8	%
Effective tax rate	0.7	%	(1.1	)%	(175.9	)%

Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for applicable income taxes has been provided thereon. Upon distribution of those earnings, the Company would be subject to withholding taxes payable to various foreign countries. As of December 31, 2018, any foreign withholding taxes on the undistributed earnings of the Company’s foreign subsidiaries were immaterial.

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



	2018			2017			2016
Balance at beginning of year	$	4,672		$	6,232		$	6,285
Gross increases for tax positions of prior years	—			—			—
Gross decreases for federal tax rate change for tax positions of prior years	—			(1,670		)	(22		)
Gross increases for tax positions of current year	45			110			111
Lapse of statute of limitations	(106		)	—			(142		)
Balance at end of year	$	4,611		$	4,672		$	6,232

The unrecognized tax benefits relate primarily to federal and state research and development credits and intercompany profit on the transfer of certain IP rights to one of the Company’s foreign subsidiaries as part of the Company’s tax reorganization described above. The Company’s policy is to account for interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2018, the Company accrued interest or penalties related to uncertain tax positions in the amount of $18,000. As of December 31, 2018, the total amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized, is $97,000.

Because the Company has net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine the Company’s tax returns for all years from 1998 through the current period.