10. Income Taxes

The components of the pretax income (loss) from continuing operations are presented in the following table (in thousands):

	Year Ended December 31,
	2017			2016
U.S. Domestic	$	(4,536	)	$	(29,898	)
Foreign		(38	)		(1,037	)
Pretax loss from operations	$	(4,574	)	$	(30,935	)

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

	Year Ended December 31,
	2017			2016
Current income tax (benefit) provision:
Federal	$	(102	)	$	(8	)
State		101			72
Foreign		3			—
Total current		2			64
Deferred income tax benefit:
Federal		(36	)		(4,269	)
State		—			(429	)
Total deferred		(36	)		(4,698	)
Total income tax benefit	$	(34	)	$	(4,634	)

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,
	2017			2016
Federal statutory rate		(35.0	)%		(35.0	)%
Adjustments for tax effects of:
State taxes, net		(7.4	)%		(1.7	)%
Stock-based compensation		16.1	%		2.3	%
Foreign taxes		1.2	%		0.1	%
Tax law change		459.1	%		—
Fair market value adjustments		(92.1	)%		0.4	%
Other permanent adjustments		1.3	%		0.3	%
Tax rate adjustment		(19.1	)%		0.3	%
Uncertain tax positions		(4.9	)%		(0.1	)%
Other		21.8	%		0.9	%
Valuation allowance		(341.8	)%		17.5	%
Effective income tax rate		(0.8	)%		(15.0	)%

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):

	December 31,
	2017			2016
Deferred tax assets:
Allowances and reserves	$	259		$	705
Accrued expenses		1,808			1,452
Inventory reserves		4,443			7,071
Net operating loss carryforwards		35,975			37,444
Property and equipment		1,249			2,730
Intangible asset		2,046			3,291
Stock-based compensation		1,542			1,766
Legal settlement		6,881			11,494
Goodwill		1,755			3,029
Income tax credit carryforwards		3,326			5,429
Total deferred tax assets		59,284			74,411
Valuation allowance		(44,389	)		(58,202	)
Total deferred tax assets, net of valuation allowance		14,895			16,209
Deferred tax liabilities:
Investment in foreign partnership		14,859			16,215
Total deferred tax liabilities		14,859			16,215
Net deferred tax assets (liabilities)	$	36		$	(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, 2017, a valuation allowance of $44.4 million has been established against the net deferred tax assets as realization is uncertain. During the year ended December 31, 2017 and 2016, valuation allowance decreased by $13.8 and $5.4 million, respectively.

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 its deferred tax assets.

At December 31, 2017, the Company has unrecognized tax benefits of $4.4 million of which $3.7 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 (in thousands):

	Year ended December 31,
	2017			2016
Unrecognized tax benefit at the beginning of the year		9,331			10,359
Additions based on tax positions related to the current year		(1,981	)		153
Additions based on tax positions related to the prior year		—			57
Reductions as a result of lapse of applicable statute of limitations		(551	)		(184	)
Reductions as a result of tax rate changes		(236	)		—
Reductions as a result of foreign exchange rates and other		(2,123	)		(1,054	)
Unrecognized tax benefits at the end of the year	$	4,440		$	9,331

The Company believes it is reasonably possible it will reduce its unrecognized tax benefits by $0.1 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 2013. 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.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. As of December 31, 2017, there were no accrued interest and penalties. During 2017, there was a decrease of $1.2 million in the accrued interest and penalties related to the uncertain tax positions of the Scient’x operations.

At December 31, 2017, the Company had federal and state net operating loss carryforwards of $120.4 million and $85.2 million, respectively, expiring at various dates beginning in 2018 through 2037. At December 31, 2017, the Company had federal and state research and development tax credit carryforwards of $3.4 million and $3.1 million, respectively. The federal research and development tax credits expire at various dates beginning in 2018 through 2037, while the state credits do not expire. As of December 31 2017, the Company had foreign net operating loss carryforwards of $6.5 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 Tax Cuts and Jobs Act ("Act") was enacted on December 22, 2017. The Act reduces the US federal corporate 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. At December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, it has made a reasonable estimate of the effects on our existing deferred tax balances.

The Company re-measured certain deferred tax assets and liabilities based on the tax rate at which they are expected to reverse in the future. However, the Company is 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. The provisional amount recorded related to the re-measurement of our deferred tax balance was $21.0 million, which was fully offset by a decrease in our valuation allowance.

The Company recorded a deferred tax benefit for the expected recovery of its minimum tax credits as of December 31, 2017 in the amount of $36 thousand.

Due to uncertainties which currently exist in the interpretation of the provisions of the Act regarding Internal Revenue Code Section 162(m), the Company is continuing to evaluate the potential impacts of IRC Section 162(m) as amended by the Act.

The one-time transition tax is based on the total post-1986 earnings and profits ("E&P") previously deferred from US income taxes. In aggregate, the Company has a deficit in post-1986 E&P from its foreign subsidiaries. Therefore, the Company did not provide for US income taxes under the Act related to its foreign operations