11. Income Taxes

The components of the pretax income (loss) from continuing operations for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
U.S. Domestic	$	(29,898	)	$	(88,614	)	$	(3,821	)
Foreign		(1,037	)		(83,785	)		4,130
Pretax income (loss) from operations	$	(30,935	)	$	(172,399	)	$	309

The components of the (benefit) provision for income taxes from continuing operations are presented in the following table (in thousands):

	Year Ended December 31,
	2016			2015			2014
Current income tax (benefit) provision:
Federal	$	(8	)	$	221		$	—
State		72			149			145
Total current		64			370			145
Deferred income tax (benefit) expense:
Federal		(4,269	)		(1,363	)		238
State		(429	)		(153	)		24
Total deferred		(4,698	)		(1,516	)		262
Total income tax (benefit) provision	$	(4,634	)	$	(1,146	)	$	407

ASC 740-20 requires total income tax expense or benefit to be allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive income and items charged directly to shareholders’ equity. This allocation is referred to as intra-period tax allocation. The sale of the Company's international distribution operations and several foreign subsidiaries is reported under discontinued operations in the consolidated financial statements. Accordingly, we are required to allocate the provision for income taxes between continuing operations and discontinued operations. For the year ended December 31, 2016, we recognized a gain from discontinued operations before tax, and, as a result, we recorded a tax expense of $6.5 million in discontinued operations and a corresponding tax benefit to continuing operations.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income (loss) from continuing operations as a result of the following differences:

	December 31,
	2016			2015			2014
Federal statutory rate		(35.0	)%		(35.0	)%		(35.0	)%
Adjustments for tax effects of:
State taxes, net		(1.7	)%		(0.3	)%		(3.9	)%
Stock-based compensation		2.3	%		0.4	%		(239.7	)%
Foreign taxes		0.1	%		0.1	%		(17.2	)%
Tax credits		—			(0.1	)%		123.3	%
Deemed foreign dividend		—			0.1	%		—
Fair market value adjustments		0.4	%		(1.6	)%		293.4	%
Intercompany debt forgiveness and other permanent adjustments		0.3	%		0.1	%		(29.9	)%
Goodwill impairment		—			30.5	%		—
Tax rate adjustment		0.3	%		0.3	%		(16.3	)%
Uncertain tax positions		(0.1	)%		—			(54.0	)%
Other		0.9	%		(4.3	)%		913.2	%
Valuation allowance		17.5	%		9.1	%		(1,065.6	)%
Effective income tax rate		(15.0	)%		(0.7	)%		(131.7	)%

The 2016 benefit for income taxes from continuing operations primarily consists of domestic losses net of state taxes.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Allowances and reserves	$	705		$	955
Accrued expenses		1,452			2,331
Inventory reserves		7,071			9,631
Net operating loss carryforwards		37,444			43,427
Property and equipment		2,730			2,420
Intangible asset		3,291			—
Stock-based compensation		1,766			2,377
Legal settlement		11,494			11,806
Goodwill		3,029			3,362
Income tax credit carryforwards		5,429			3,235
Total deferred tax assets		74,411			79,544
Valuation allowance		(58,202	)		(63,612	)
Total deferred tax assets, net of valuation allowance		16,209			15,932
Deferred tax liabilities:
Investment in foreign partnership		16,215			15,467
Intangible assets		—			465
Total deferred tax liabilities		16,215			15,932
Net deferred tax assets (liabilities)	$	(6	)	$	—

The realization of deferred tax assets is dependent on the Company’s ability to generate sufficient taxable income in future years in the associated jurisdiction to which the deferred tax assets relate. As of December 31, 2016, a valuation allowance of $58.2 million has been established against the net deferred tax assets as realization is uncertain. The deferred tax liabilities consist primarily of the excess of the book value over the tax basis of their investment in the foreign partnership.

In determining the need for a valuation allowance, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based on the review of all positive and negative evidence, including a three year cumulative pre-tax loss, the Company determined that a full valuation allowance should be recorded against all U.S. deferred tax assets and all European deferred tax assets, except for Scient'x S.A.S. and Surgiview S.A.S. at December 31, 2016, as the French entities now have an overall net deferred tax liability. If the Company later determines that it is more-likely-than-not to realize all or a portion of the U.S. or other European deferred tax assets, it would reverse the previously provided valuation allowance.

At December 31, 2016, the Company has unrecognized tax benefits of $9.3 million of which $7.9 million will affect the effective tax rate if recognized when the Company no longer has a valuation allowance offsetting its deferred tax assets.

The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 (in thousands):

	Year ended December 31,
	2016			2015			2014
Unrecognized tax benefit at the beginning of the year		10,359			8,861			7,835
Additions based on tax positions related to the current year		153			859			1,050
Additions based on tax positions related to the prior year		57			1,144			391
Reductions as a result of lapse of applicable statute of limitations		(184	)		(76	)		(40	)
Reductions as a result of foreign exchange rates and other		(1,054	)		(429	)		(375	)
Unrecognized tax benefits at the end of the year	$	9,331		$	10,359		$	8,861

The Company believes it is reasonably possible it will reduce its unrecognized tax benefits by $0.6 million within the next 12 months.

The Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities in major jurisdictions for years prior to 2011. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses and tax credits were generated and carried forward, and make adjustments up to the amount of the carryforwards. The Company is not currently under examination by the Internal Revenue Service, foreign or state and local tax authorities, however Scient’x’s 2013 and 2014 tax years are currently under audit by the French tax authorities.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. As of December 31, 2016, accrued interest and penalties were $1.1 million, which primarily relates to the uncertain tax positions of the Scient’x operations. During 2016, there was a decrease of $0.1 million in the accrued interest and penalties related to the uncertain tax positions of the Scient’x operations.

At December 31, 2016, the Company had federal and state net operating loss carryforwards of $91.9 million and $113.9 million, respectively, expiring at various dates through 2036. At December 31, 2016, the Company had federal and state research and development tax credits of $3.4 million and $3.1 million, respectively. The federal research and development tax credits expire at various dates through 2036, while the state credits do not expire. The Company had foreign net operating loss carryforwards of $14.9 million which do not expire. Utilization of the net operating loss and tax credit carryforwards may become subject to annual limitations due to ownership change limitations that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of the net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income.

The Company does not record U.S. income taxes on the undistributed earnings of its foreign subsidiaries based upon the Company’s intention to permanently reinvest undistributed earnings to ensure sufficient working capital and further expansion of existing operations outside the United States. The undistributed earnings of the foreign subsidiaries as of December 31, 2016 are immaterial. In the event the Company is required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.