Income Taxes

Significant components of the (benefit) provision for income taxes are as follows (in thousands):



	December 31,
	2018			2017			2016
Current:
Federal	$	—		$	(615	)	$	(117	)
State	755			314			246
Foreign	6,575			57			84
Total current provision (benefit)	7,330			(244		)	213
Deferred:
Federal	(9,970		)	131			(2,545		)
State	(7,944		)	238			(63		)
Foreign	(215		)	4			4
Total deferred (benefit) provision	(18,129		)	373			(2,604		)
(Benefit) provision for income taxes	$	(10,799	)	$	129		$	(2,391	)

The Company’s income (loss) before income taxes was subject to taxes in the following jurisdictions for the following periods (in thousands):



	December 31,
	2018		2017			2016
United States	$	46,592	$	(8,198	)	$	(16,426	)
Foreign	16,792		162			227
Income (loss) before income taxes	$	63,384	$	(8,036	)	$	(16,199	)

Significant components of the Company’s deferred tax assets and deferred tax liabilities as of December 31, 2018 and 2017 are shown below (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	711		$	3,924
Intangible assets	3,502			2,935
Sale-leaseback, net	617			628
Allowance for returns and discounts	4,541			5,358
Stock-based compensation	5,333			5,933
Tax credit carryforwards	12,246			5,247
Other, net	6,883			4,580
Total deferred tax assets	33,833			28,605
Valuation allowance for deferred tax assets	(1,830		)	(15,204		)
Total deferred tax assets, net of valuation allowance	32,003			13,401
Deferred tax liabilities:
Convertible Senior Notes	(636		)	(3,633		)
Intangible assets	(2,165		)	(2,935		)
Property, plant and equipment	(7,010		)	(7,263		)
Total deferred tax liabilities	(9,811		)	(13,831		)
Net deferred tax assets (liabilities)	$	22,192		$	(430	)

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated in prior years was 3 years of cumulative pre-tax book losses. For the three years ended December 31, 2018, however, the Company has demonstrated positive cumulative pre-tax book income. Such objective positive evidence allows the Company to consider other subjective evidence, such as the Company’s projections for future profitability, to determine the realizability of its deferred tax assets. On the basis of this evaluation, during the quarter ended December 31, 2018, the Company released $13.4 million of valuation allowance, which is shown as a deferred tax benefit during the period. The Company maintains a valuation allowance of $1.8 million, which represents the portion of the deferred tax asset that management could not conclude was more likely than not to be realized. The amount of the deferred tax assets considered realizable could be adjusted in the future based on changes in available positive and negative evidence.

As of December 31, 2018, the Company had no federal net operating loss (“NOL”) carryforwards. The Company had state NOLs of approximately $19.3 million which will begin to expire in 2029, unless previously utilized. The Company has federal research credits of $5.8 million which will begin to expire on December 31, 2032, unless previously utilized. The Company has federal foreign tax credits of $2.4 million which will begin to expire on December 31, 2028 unless previously utilized. The Company has state research credits of $12.8 million, of which $12.4 million do not expire. The remaining $0.4 million begin to expire in 2028, unless previously utilized.

Pursuant to Internal Revenue Code Sections 382 and 383, the Company’s use of its NOL and research credit carryforwards may be limited as a result of cumulative changes in ownership of more than 50% over a three-year period. As of December 31, 2018, the Company does not believe any historical ownership change has limited the use of its NOLs or tax credit carryforwards.

The reconciliation of income tax computed at the federal statutory rate to the provision (benefit) for income taxes from continuing operations is as follows (in thousands):



	Year ended December 31,
	2018			2017			2016
Tax expense (benefit) at statutory tax rate	$	13,311		$	(2,812	)	$	(5,775	)
State tax (benefits), net of federal tax	1,526			(239		)	(390		)
Permanent differences	635			327			129
Federal and state research credits—current year	(3,628		)	(484		)	(979		)
Accrual of uncertain tax positions	—			142			43
Stock-based compensation	(9,286		)	(5,851		)	—
Impact of change in federal and state tax rate on revaluing deferred tax assets	—			3,357			(4		)
Change in valuation allowance	(13,374		)	5,799			4,687
Foreign Derived Intangible Income Deduction (FDII)	(786		)	—			—
Other	803			(110		)	(102		)
(Benefit) provision for income taxes	$	(10,799	)	$	129		$	(2,391	)

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax.

Pursuant to the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), a company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the provisional revaluation of deferred taxes and the effects of the transition tax on undistributed foreign earnings and profits for the period ended December 31, 2017. During the quarter ended December 31, 2018 the Company completed its accounting for the impacts of the Tax Act.

Additionally, the Company has elected to treat global intangible low taxed income (GILTI) as a period cost and will expense GILTI in the period it is incurred. Because of the Company’s current operational structure, there is minimal expected GILTI impacts for the year ended December 31, 2018 and future years.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):



	Year ended December 31,
	2018			2017		2016
Beginning balance	$	9,565		$	8,604	$	7,684
(Decreases) increases related to prior year tax positions	(558		)	10		(10		)
Increases related to current year tax positions	6,238			951		773
Other	—			—		157
Ending balance	$	15,245		$	9,565	$	8,604

As of December 31, 2018 and 2017, the unrecognized tax benefits of $15.2 million and $9.6 million, respectively, of which $9.3 million and $8.1 million, respectively, would reduce the Company’s annual effective tax rate, subject to the valuation allowance. The Company does not anticipate any significant decreases in its unrecognized tax benefits over the next 12 months. The Company’s policy is to recognize the interest expense and penalties related to income tax matters as a component of the income tax provision. The Company has accrued approximately $0.3 million of interest and penalties associated with uncertain tax positions as of the years December 31, 2018 and 2017. Interest expense, net of accrued interest (reversed), was approximately $0.1 million for both of the years ended December 31, 2018 and 2017. There was no interest expense, net of accrued interest (reversed) in 2016.

The Company is subject to periodic audits by domestic and foreign tax authorities; however, there are no known audits at this time. Due to the carryforward of unutilized net operating loss and credit carryovers, the Company’s federal tax years from 2009 and forward and state tax years 2001 and forward are subject to examination by tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.