Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 13—Income Taxes

The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction.

For the year ended 2020, 2019 and 2018, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $0.7 million, $1.9 million and $3.0 million, respectively, reflecting effective tax provision rates of (5.5%), (3.6%), and (7.5%), respectively.

The 2020 tax expense of $0.7 million included a discrete tax benefit of ($0.3) million primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax benefits, the Company’s effective tax rate for 2020 was (7.7%), primarily due to state taxes and taxes on foreign income.

For the year ended 2019 and 2018, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (3.6%) and (7.5%). Exclusive of discrete items, the effective tax provision rate would be (3.1%) in 2019 and (9.6%) in 2018.

As of December 31, 2020 and 2019, the Company had net deferred tax liabilities of approximately $0.1 million and $14,000, respectively, primarily related to foreign jurisdictions.

Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):

	Year ended December 31,
	2020			2019			2018
Federal	$	(212	)	$	(212	)	$	(1,475	)
State and local		134			66			62
Foreign		704			3,037			4,154
Total Current		626			2,891			2,741
Deferred		109			(979	)		210
Total	$	735		$	1,912		$	2,951

The components of deferred tax assets/(liabilities) are as follows (in thousands):

	December 31,
	2020			2019
Net deferred tax assets/(liabilities):
Reserve for sales allowances and possible losses	$	658		$	686
Accrued expenses		3,227			2,381
Prepaid royalties		4,282			6,224
Accrued royalties		4,191			2,314
Inventory		8,793			10,309
State income taxes		23			17
Property and equipment		1,618			1,952
Goodwill and intangibles		6,015			9,185
Share-based compensation		780			894
Interest limitation		2,114			3,539
Undistributed foreign earnings		(2,419	)		(1,970	)
Operating lease right-of-use assets		(5,798	)		(7,422	)
Operating lease liabilities		6,427			8,195
Federal and state net operating loss carryforwards		61,239			53,845
Credit carryforwards		697			909
Other		794			1,706
Gross		92,641			92,764
Valuation allowance		(92,764	)		(92,778	)
Total net deferred tax liabilities	$	(123	)	$	(14	)

Provision for income taxes varies from the U.S. federal statutory rate. The following reconciliation shows the significant differences in the tax at statutory and effective rates:

	Year ended December 31,
	2020			2019			2018
Federal income tax expense		21.0	%		21.0	%		21.0	%
State income tax expense, net of federal tax effect		7.7			6.1			9.7
Effect of differences in U.S. and foreign statutory rates		1.2			0.6			2.0
Uncertain tax positions		3.4			(0.3	)		(0.8	)
Provision to return		0.6			(1.6	)		(40.6	)
Non-deductible expenses		(36.2	)		(13.0	)		(16.9	)
Other		0.0			(0.4	)		(0.6	)
Undistributed foreign earnings		(3.3	)		0.2			4.5
Valuation allowance		0.1			(16.2	)		14.2
		(5.5	)%		(3.6	)%		(7.5	)%

Deferred taxes result from temporary differences between tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The temporary differences result from costs required to be capitalized for tax purposes by the U.S. Internal Revenue Code, and certain items accrued for financial reporting purposes in the year incurred but not deductible for tax purposes until paid. The Company has established a valuation allowance on net deferred tax assets in the United States since, in the opinion of management, it is not more likely than not that the U.S. net deferred tax assets will be realized.

The components of income (loss) before provision for income taxes are as follows (in thousands):

	Year ended December 31,
	2020			2019			2018
Domestic	$	(18,748	)	$	(61,798	)	$	(58,693	)
Foreign		5,339			8,331			19,219
	$	(13,409	)	$	(53,467	)	$	(39,474	)

The Company uses a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions (“UTP”) taken or expected to be taken in a tax return.

Approximately $0.6 million of the liability for UTP related to foreign withholding taxes and Hong Kong audit examination was derecognized in 2020. During 2019, approximately $0.1 million of additional UTP related to foreign withholding taxes was recognized.

Current interest on uncertain income tax liabilities is recognized as a component of the income tax provision recognized in the consolidated statements of operations. During 2020, the Company did not recognize any current year interest expense relating to UTPs. During 2019, the Company recognized an additional $40,000 of current interest expense relating to UTPs. During 2018, the Company recognized $0.1 million of current interest expense relating to UTPs.

The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2020 (in millions):

Balance, December 31, 2017	$	1.3
Current year additions		0.6
Current year reduction due to audit settlement		(0.4	)
Balance, December 31, 2018		1.5
Current year additions		0.1
Balance, December 31, 2019		1.6
Current year reduction		(0.6	)
Balance, December 31, 2020	$	1.0

The Company does not expect its gross unrecognized tax benefits to significantly change within the next 12 months.

Tax years 2017 through 2019 remain subject to examination in the United States. The tax years 2016 through 2019 are generally still subject to examination in the various states. The tax years 2014 through 2019 are still subject to examination in Hong Kong. In the normal course of business, the Company is audited by federal, state and foreign tax authorities.

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 by jurisdiction. The Company is required to establish a valuation allowance for the U.S. deferred tax assets and record a charge to income if Management determines, based upon available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.

Based on our evaluation of all positive and negative evidence, as of December 31, 2020, a valuation allowance of $92.8 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2020, the valuation allowance remained consistent with the $92.8 million at December 31, 2019. The net deferred tax liabilities of $14,000 in 2019 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position, partially offset by the U.S. deferred tax assets related to the AMT credit carryforwards. The net deferred tax liabilities of $0.1 million in 2020 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.

At December 31, 2020, the Company has U.S. federal net operating loss carryforwards, or "NOLs", of approximately $190.2 million, which will begin to expire in 2033. At December 31, 2020, the Company's state NOLs were mainly from California. The majority of the approximately $228.6 million of California NOLs will begin to expire in 2031. At December 31, 2020, the Company had foreign tax credit carryforwards of approximately $0.1 million, which will begin to expire in 2027. At December 31, 2020, the Company had federal research and development tax credit carryforwards ("credit carryforwards") of approximately $0.5 million, which will begin to expire in 2029. At December 31, 2020, the Company had state research and development tax credits of approximately $0.1 million, which carry forward indefinitely. Utilization of certain NOLs and research credit carryforwards may be subject to an annual limitation due to ownership change limitations set forth in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and comparable state income tax laws. Any future annual limitation may result in the expiration of NOLs and credit carryforwards before utilization.