Income Taxes

12 Months Ended

Dec. 31, 2019

The Company’s loss before income taxes for the years ended December 31, 2019 and 2018 is comprised of the following (in thousands):



	Year Ended December 31,
	2019			2018
Domestic	$	(39,187	)	$	(7,335	)
Foreign	(387		)	7
Loss before income taxes	$	(39,574	)	$	(7,328	)

The provision for income taxes for the years ended December 31, 2019 and 2018 is comprised of the following (in thousands):



	Year Ended December 31,
	2019			2018
Current:
Federal	$	(49	)	$	—
State	35			35
Foreign	1,148			766
Total current	1,134			801
Deferred:
Federal	12			12
State	—			—
Foreign	(610		)	2
Total deferred	(598		)	14
Provision for income taxes	$	536		$	815

The Company’s net deferred tax liabilities consist of the following (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Provision for excess and obsolete inventory	$	2,003		$	2,710
Depreciation and amortization	—			1,426
Interest expense limitation	5,562			2,769
Net operating loss and tax credit carryforwards	95,258			86,385
Share-based compensation	1,226			1,218
Right-of-use-asset	650			—
Unrecognized tax benefits	1,288			1,163
Deferred tax assets	105,987			95,671
Deferred tax liabilities:
Operating lease liability	(650		)	—
Purchased intangible assets	(3,623		)	(4,485		)
Depreciation and amortization	(1,742		)	—
Accrued expenses	(219		)	(1,799		)
Deferred tax liabilities	(6,234		)	(6,284		)
Valuation allowance	(103,702		)	(93,844		)
Net deferred tax liabilities	$	(3,949	)	$	(4,457	)

The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company’s estimate of future tax effects attributable to temporary differences and carryforwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

At December 31, 2019 and 2018, the Company recognized valuation allowances of $9.2 million and $2.9 million, respectively, related to its deferred tax assets created in those respective years. As a result, no net income tax benefits resulted in the Company’s statements of operations from the operating losses created during those years.

The provision for income taxes reconciles to the amount computed by applying the statutory federal income tax rate of 21% in 2019 and 2018 to loss before income taxes as follows (in thousands):



	Year Ended December 31,
	2019			2018
Federal tax benefit, at statutory rate	$	(8,311	)	$	(1,555	)
State benefit, net of federal benefit	27			27
Foreign tax rate difference	476			24
Valuation allowance against future tax benefits	9,168			2,878
Research and development credits	(1,456		)	(471		)
Share-based compensation	341			121
Other	291			(209		)
Provision for income taxes	$	536		$	815

At December 31, 2019, the Company had U.S. federal net operating loss carryforwards (“NOLs”) related to tax years 2019 and prior of approximately $389.1 million. Approximately $41.3 million of these NOLs have no expiration date. The remainder begin to expire in 2021, unless previously utilized. Some of these NOLs may be limited by either past or future changes in control events. The Company has California net operating loss carryforwards at December 31, 2019 of approximately $44.0 million, which begin to expire in 2028, unless previously utilized, and foreign net operating losses for its active foreign subsidiaries of approximately $50.2 million, which generally have no expiration date. At December 31, 2019, the Company had federal research and development tax credit carryforwards of approximately $10.2 million, which begin to expire in 2026, unless previously utilized, and California research and development tax credit carryforwards of approximately $12.1 million, which have no expiration date.

Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a rolling three-year period. An analysis was performed for the period through December 31, 2019 and did not identify any events of cumulative change in ownership during the review period. The Company will continue monitoring any future changes in stock ownership.

The Company entered into a Rights Agreement on January 22, 2018 (the “Rights Agreement”), subsequent to the balance sheet date, with Computershare Trust Company, N.A., a federally chartered trust company, as rights agent. The Rights Agreement is intended to discourage acquisitions of the Company’s common stock which could result in a cumulative change in ownership of more than 50% within a rolling three-year period, thereby preserving the Company’s current ability to utilize net operating loss carryforwards to offset future income tax obligations; however, there is no assurance that the Rights Agreement will prevent a cumulative change in ownership.

It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes on U.S. income taxes which may become payable if undistributed earnings of the foreign subsidiary were paid as dividends to the Company.

The Company follows the accounting guidance related to financial statement recognition, measurement and disclosure of uncertain tax positions. The Company recognizes the impact of an uncertain income tax position on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. No income tax benefit was recognized during the years ended December 31, 2019 and 2018. At December 31, 2019 and 2018, the Company did not have interest expense related to uncertain tax positions or a liability for unrecognized tax benefits. The Company does not expect changes to its uncertain tax position in the next twelve months.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):



Balance at December 31, 2017	$	36,582
Increases related to current and prior year tax positions	324
Balance at December 31, 2018	36,906
Increases related to current and prior year tax positions	929
Balance at December 31, 2019	$	37,835

There are no tax benefits that, if recognized, would affect the effective tax rate that are included in the balances of unrecognized tax benefits at December 31, 2019.

The Company and its subsidiaries file U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The Company’s tax returns are subject to examination by federal, state and foreign taxing authorities. The Company’s federal and state tax returns are subject to examination for the years beginning in 2015 and 2014, respectively. Net operating loss carryforwards arising prior to these years are also open to examination, if and when utilized. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. However, because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company’s current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open years.