Income taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income taxes

8. Income taxes

Income (loss) before income taxes consisted of the following:

	Year ended December 31,
(in thousands)	2022		2021		2020
United States	$	26,215	$	83,419	$	(70,572)
Foreign	8,238		6,681		8,615
Income (loss) before income taxes	$	34,453	$	90,100	$	(61,957)

Income tax expense (benefit) consisted of the following:

	Year ended December 31,
(in thousands)	2022		2021		2020
Current
Federal	$	2	$	(128)	$	(164)
State	818		267		84
Foreign	2,076		(7,669)		4,956
Total current	2,896		(7,530)		4,876
Deferred
Federal	5,039		(205,856)		—
State	(2,312)		(67,933)		—
Foreign	(17)		248		(50)
Total deferred	2,710		(273,541)		(50)
Income tax expense (benefit)	$	5,606	$	(281,071)	$	4,826

	Year ended December 31,
	2022				2021				2020
(dollars in thousands)	$		%		$		%		$		%
Reconciliation to statutory rate
Tax at federal statutory rate	$	7,234	21.0	%	$	18,921	21.0	%	$	(13,011)	21.0	%
Nondeductible items	1,805		5.2		1,684		1.9		227		(0.4)
Impact of foreign operations	1,572		4.6		(8,222)		(9.2)		5,010		(8.1)
State income taxes, net of federal benefit	1,189		3.5		1,828		2.0		(682)		1.1
Change in valuation allowance	—		—		(284,551)		(315.8)		16,767		(27.1)
Stock-based compensation	(1,192)		(3.5)		(5,345)		(5.9)		696		(1.1)
Tax credits	(5,222)		(15.1)		(6,091)		(6.8)		(3,538)		5.7
Other	220		0.6		705		0.8		(643)		1.1
Income tax expense (benefit) at effective tax rate	$	5,606	16.3	%	$	(281,071)	(312.0)	%	$	4,826	(7.8)	%

The effective tax rate of 16.3% for 2022 primarily resulted from tax expense on pre-tax book income, partially offset by the income tax benefits from stock-based compensation and the federal and California research and development credits, and an income tax benefit related to foreign provision to income tax return adjustments. The negative effective tax rate of 312.0% for 2021 primarily resulted from tax expense on pre-tax book income, offset by the income tax benefit from the full release of valuation allowance on United States federal and state deferred tax assets and the release of a portion of the Company’s uncertain tax positions as a result of a lapse in the statute of limitations in certain jurisdictions, and income tax benefits from stock-based compensation and federal and California research and development credits.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities were as follows:

	Year ended December 31,
(in thousands)	2022		2021
Deferred tax assets:
Net operating loss carryforwards	$	118,399	$	158,125
Tax credit carryforwards	91,147		85,650
Stock-based compensation	6,034		5,551
Allowance for returns	1,818		2,504
Intangible assets	3,753		4,803
Depreciation and amortization	1,661		1,313
Operating lease liabilities	10,177		12,359
Capitalized research and development costs	29,122		—
Accruals and reserves	22,001		10,514
Total deferred tax assets	$	284,112	$	280,819
Deferred tax liabilities:
Operating lease right-of-use assets	(5,072)		(6,389)
Total deferred tax liabilities	(5,072)		(6,389)
Net deferred tax assets	$	279,040	$	274,430

Each quarter the Company assesses the recoverability of its existing deferred tax assets under ASC Topic 740. The Company assesses available positive and negative evidence and uses judgment regarding past and future events, including operating results to estimate whether sufficient future taxable income will be generated to use its existing deferred tax assets. In the assessment for the year ended December 31, 2021, the Company concluded it was more likely than not that its deferred tax assets related to United States federal and state income taxes will be realizable and the United States federal and state valuation allowances were fully released. For the period ended December 31, 2022, based on evidence currently available, the Company continues to believe that it is more likely than not that its United States federal, state and foreign deferred tax assets will be realized and thus, a valuation allowance is not required on its deferred tax assets. The Company will continue assessing the realizability of the deferred tax assets in each of the applicable jurisdictions going forward.

As of December 31, 2022, the Company’s federal, California and other state net operating loss carryforwards for income tax purposes were $441.7 million, $235.9 million and $167.2 million, net of reserves, respectively. Also, the Company’s federal and California state tax credit carryforwards were $51.4 million and $50.2 million, net of reserves, respectively. If not utilized, federal net operating losses that arose before 2018 and California loss carryforwards will begin to expire from 2035 to 2040, while federal credit and other state loss carryforwards will begin to expire primarily from 2023 to 2042. Federal net operating losses that arise after 2017 and all California tax credits will be carried forward indefinitely.

Uncertain income tax positions. The Company had gross unrecognized tax benefits of $23.4 million, $21.3 million and $27.5 million, as of December 31, 2022, 2021 and 2020, respectively. For fiscal year 2022, 2021 and 2020, total unrecognized income tax benefits were $9.8 million, $7.3 million and $15.3 million, respectively, and if recognized, would reduce income tax expense. A material portion of the Company’s gross unrecognized tax benefits, if recognized, would increase the Company’s net operating loss carryforward.

The Company conducts business globally and as a result, files income tax returns in the United States and foreign jurisdictions. The Company’s unrecognized tax benefits relate primarily to unresolved matters with taxing authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves reflect the more likely outcome. The Company believes, due to statute of limitations expiration, that within the next 12 months it is possible that up to $2.3 million of uncertain tax positions could be released. It is also reasonably possible that additional uncertain tax positions will be added. It is not reasonably possible at this time to quantify the net effect.

A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits are as follows:

	Year ended December 31,
(in thousands)	2022		2021		2020
Balance at January 1	$	21,330	$	27,471	$	27,178
Increase related to current year tax positions	2,543		3,081		2,541
Increase related to prior year tax positions	—		3,900		1,681
Decrease related to prior year tax positions	(459)		(13,122)		(3,929)
Balance at December 31	$	23,414	$	21,330	$	27,471

The Company’s policy is to account for interest and penalties related to income tax liabilities within the provision for income taxes. The balances of accrued interest and penalties recorded in the balance sheets and provision were not material for any period presented.

The Company files income tax returns in the United States and in foreign jurisdictions. As of December 31, 2022, the Company continues to assert indefinite reinvestment to the extent of any foreign withholding taxes on the undistributed earnings related to these foreign branches. Any foreign withholding tax on these earnings is deemed not to be material.