Note O - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE O—INCOME TAXES

The sources of the Company’s income (loss) from operations before income taxes were as follows (in thousands):

	Year ended December 31,
	2019			2018			2017
Domestic	$	(35,279	)	$	(11,444	)		17,497
Foreign		(16,108	)		1,666			67,029
Total income (loss) before income taxes	$	(51,387	)	$	(9,778	)		84,526

The provision for income tax expense (benefit) for the years ended December 31, was as follows (in thousands):

Current:	2019			2018			2017
Federal	$	—		$	—		$	—
State		16			80			(292	)
Foreign		97			1,349			10,965
Total	$	113		$	1,429		$	10,673
Deferred:
Federal	$	16,375		$	(6,391	)	$	2,015
State		1,716			61			(1,669	)
Foreign		(3,542	)		(2,731	)		(444	)
Total	$	14,549		$	(9,061	)	$	(98	)
Income tax (benefit) expense	$	14,662		$	(7,632	)	$	10,575

Deferred income tax assets and liabilities result principally from net operating losses, different methods of recognizing depreciation, reserves for doubtful accounts and inventory, research and development credits and foreign tax credits. At December 31, the net deferred tax assets and liabilities are comprised of the following approximate amounts (in thousands):

	2019			2018
NOL carryforward	$	21,516		$	12,049
Inventory reserves		2,385			1,490
AMT credit		172			172
Unrealized gains and losses		96			69
Share-based compensation		528			510
Foreign tax credit		4,599			4,599
Research and development credits		8,264			6,648
Interest		888			208
ASC 842 Assets		1,641			—
Other		520			718
Deferred tax assets		40,609			26,463
Less valuation allowance		(25,736	)		—
Deferred tax assets, net		14,873			26,463
Depreciation and amortization		(6,180	)		(4,749	)
ASC 842 Liabilities		(1,406	)		—
Deferred tax liabilities		(7,586	)		(4,749	)
Deferred tax assets, net	$	7,287		$	21,714

The Company has a U.S. net operating loss carry forward of approximately $75.9 million, $32.7 million of which, if unused, expires between 2026 and 2032 and $43.2 million of which, can be carried forward indefinitely. The Company has U.S. and state research and development tax credits of $8.3 million, which, if unused, expire between 2028 and 2038. In addition, the Company has foreign tax credits of $4.6 million, which, if unused, will expire in 2028. Utilization of U.S. net operating losses and tax credit carry forwards are subject to an annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2019. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2019, a valuation allowance of $25.7 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. Substantially all of the the deferred taxes in the US has been reserved with the remaining deferred taxes in Taiwan and China considered more likely than not to be realizable as of   December 31, 2019. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

A reconciliation of the U.S. federal income tax rate of 21%, 21% and 35% for the years ended December 31, 2019, 2018 and 2017, respectively, to the Company’s effective income tax rate follows (in thousands):

	2019			2018			2017
Expected taxes at statutory rate	$	(10,791	)	$	(2,053	)	$	29,584
Non-deductible/non-taxable items		962			1,020			1,212
Foreign rate differences		590			(1,043	)		(11,656	)
Foreign permanent differences		(671	)		(1,067	)		416
Increase (decrease) in valuation allowance		25,736			—			(1,700	)
Share-based compensation		607			(1,325	)		(10,348	)
Changes in tax rates		—			(103	)		2,768
Transition tax adjustment, net of foreign tax credits					(1,777	)		5,067
Research and development credits		(1,616	)		(2,022	)		(2,821	)
Uncertain tax positions		—			—			(1,616	)
Foreign other		27			514			—
Other, net		(182	)		224			(331	)
Tax (benefit) expense	$	14,662		$	(7,632	)	$	10,575

The Company's provision for income taxes in 2019 was higher than 2018 primarily due to the recognition of a valuation allowance on our US and state deferred tax assets, along with excess tax expense from stock-based compensation, partially offset by differences in pre-tax income and recording research and development credits.

The Company’s provision for income taxes in 2018 was lower than in 2017 primarily due to a decrease in pre-tax income and the impact of the 2017 Tax Act, partially offset by excess tax benefits from stock-based compensation, recording research and development credits, and the U.S. return-to-accrual adjustment as a result of the 2017 Tax Act as discussed below.

The Company’s wholly owned subsidiary, Prime World is a tax-exempt entity under the Income Tax Code of the British Virgin Islands.

The Company’s wholly owned subsidiary, Global Technology, Inc., has enjoyed preferential tax concessions in China as a national high-tech enterprise. In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises. Global Technology, Inc. was recognized as a National high-tech enterprise in 2008 and was entitled to a 15% tax rate for a three year period from November 2008 to November 2011. In 2011 and 2014, Global Technology, Inc. renewed its National high-tech enterprise certificate and was therefore extended its three-year tax preferential status through September 2017. In November 2017, Global Technology, Inc. again renewed its National high-tech enterprise certificate and was therefore extended its three-year tax preferential status from November 2017 until November 2020. This tax holiday reduced its 2019, 2018 and 2017 income tax provision by approximately $1.0, $0.5 and $1.4 million respectively. This tax holiday reduced its fiscal 2019, 2018 and 2017 diluted earnings per share by approximately $0.05, $0.03 and $0.07 respectively. Effective January 1, 2016, China expanded the scope of the National high-tech enterprise to include additional deductions for qualifying research and development.

As of December 31, 2019, 2018 and 2017, the total amount of unrecognized tax benefit was $0.2 million, $0.2 million, and $0.2 million, respectively. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):

	2019		2018		2017
Unrecognized tax benefits — January 1	$	181	$	181	$	181
Gross increases — tax positions in prior period		—		—		—
Gross decreases — tax positions in prior period		—		—		—
Unrecognized tax benefits — December 31	$	181	$	181	$	181

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, it has not accrued penalties or interest during 2019 as a result of net operating losses. During 2018 or 2017, the Company also accrued no penalties or interest.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company’s open tax years subject to examination in the U.S. federal and state jurisdictions are 2016 through 2018. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward. The Company is subject to examination for tax years 2010 forward for various foreign jurisdictions.

The U.S. Tax Act significantly changed how the U.S. taxes corporations. The U.S. Tax Act requires complex computations to be performed that were not previously required by U.S. tax law, significant judgments to be made in interpretation of the provisions of the U.S. Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the U.S. Tax Act will be applied or otherwise administered. As future guidance is issued, the Company may make adjustments to amounts that we have previously recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.

As of December 31, 2019, the Company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $27.9 million. Because $27.9 million of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the U.S. Tax Act, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes.  The Company intends, however, to indefinitely reinvest these earnings and expects future U.S. cash generation to be sufficient to meet future U.S. cash needs.