INCOME TAXES

On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The Company did not record additional provisional income tax given the Company has full valuation allowances on its deferred tax assets and liabilities and the net operating loss generated in 2017. This represents our best estimate based on interpretation of the U.S. legislation as we are still accumulating data to finalize the underlying calculations, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the U.S. legislation. Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.

Accordingly, the Company’s income tax provision as of December 31, 2017 reflects (i) the current year impacts of the U.S. Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail:

(a) The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%. The impact from the permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018. The Company adjusted the deferred tax asset and liabilities and the corresponding valuation reserve as a result of the reduction in the U.S. federal corporate tax rate.

The Tax Act imposes a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. The one-time transition tax is based on our total post-1986 foreign earnings and profits ("E&P") for which we have previously deferred from U.S. income taxes. The Company determined there to be no provisional amount for its one-time transition tax liability for its foreign subsidiaries given the cumulative net operating losses in its foreign jurisdictions. We have not yet completed our calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets which may change when we finalize these amounts and the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference (i.e., basis difference in excess of that subject to the one-time transition tax) inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. It is not practicable to determine the amount of unrecognized withholding taxes and deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities. The position to indefinitely reinvest foreign earnings will be reassessed as part of the analysis related to the one-time repatriation tax.

Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

The components of (loss) income before taxes for the years ended December 31 are as follows:



Origin of income before taxes	2017			2016			2015
United States	$	(9,821	)	$	(13,016	)	$	(9,763	)
Foreign	(1,208		)	(2,708		)	1,140
(Loss) before income taxes	$	(11,029	)	$	(15,724	)	$	(8,623	)

Significant components of income tax benefit (expense) for the years ended December 31 are as follows:



	2017			2016			2015
Current:
Federal	$	111		$	(357	)	$	1,155
State	—			—			(14		)
Foreign	(65		)	(105		)	(120		)
Total current	46			(462		)	1,021
Deferred:
Federal	—			—			(4,143		)
State	—			—			(548		)
Foreign	—			(1,202		)	(87		)
Total deferred	—			(1,202		)	(4,778		)
Income tax benefit (expense)	$	46		$	(1,664	)	$	(3,757	)

A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the years ended December 31 is as follows:



	2017		2016		2015
Provision at the U.S. federal statutory rate	34.0	%	34.0	%	34.0	%
State taxes, net of federal benefit	—	%	2.4	%	5.2	%
Foreign tax rate differential	(0.2	)%	—	%	0.6	%
Valuation allowance	10.2	%	(42.7	)%	(72.3	)%
Federal tax rate change	(43.9	)%	—	%	—	%
Other true up	—	%	(0.6	)%	(7.8	)%
Intangible assets impairment and other non-deductibles	(1.8	)%	—	%	(2.2	)%
Other	2.1	%	(4.1	)%	(1.1	)%
Income tax benefit (expense) effective rate	0.4	%	(11.0	)%	(43.6	)%

The deferred tax assets and liabilities at December 31 are as follows:



	2017			2016
Deferred tax assets:
Stock compensation expense	$	1,814		$	2,624
Goodwill	2,366			2,235
Royalty accruals	443			353
Intangible assets	—			967
Bad debt allowance	360			389
Inter-company interest expense accrual	496			629
Net operating loss carryforwards	5,253			5,485
Credit carry-forwards	694			584
Inventory reserve	254			318
Depreciation	555			—
Other	362			399
Total deferred tax assets	12,597			13,983
Deferred tax liabilities:
Depreciation	—			(460		)
Intangible assets	(386		)	—
Other	(146		)	(344		)
Total deferred tax liabilities	(532		)	(804		)
Net deferred tax asset before valuation allowance	12,065			13,179
Valuation allowances for deferred tax assets	(12,065		)	(13,179		)
Net deferred tax asset	$	—		$	—

The change in the valuation allowance for deferred tax assets for the years ended December 31 is as follows:



Year	Balance at January 1		Charged to costs and expenses		(Deductions)/Other		Balance at December 31
2015	$	2,006	6,625		(799	)	$	7,832
2016	$	7,832	5,347		—		$	13,179
2017	$	13,179	(1,114	)	—		$	12,065

For the years ended December 31, 2017, 2016 and 2015, there were no exercises of stock options.

As required by ASC 740, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

The following table summarizes our unrecognized tax benefit activity (excluding interest and penalties) during the years ended December 31, 2017, 2016 and 2015:



Description	2017		2016			2015
Balance at beginning of period	$	—	$	140		$	117
Increases in positions taken in a current period	—		—			38
Decreases due to settlements	—		(140		)	(15		)
Balance at end of period	$	—	$	—		$	140

We recognize interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. There were no interest and penalties recognized in income tax expense during the years ended December 31, 2017, 2016 and 2015. The total amount of unrecognized tax benefits as of December 31, 2017, 2016 and 2015, including interest and penalties, was $0, $0 and $140, respectively, all of which if ultimately recognized will reduce our annual effective tax rate.

We are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2014.

Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for both federal and state tax issues are included in current liabilities on the consolidated balance sheet.

The investment in our foreign subsidiaries is considered to be indefinite in duration and therefore we have not provided a provision for deferred U.S. income taxes on the unremitted earnings from those subsidiaries. A provision has not been established because it is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings and because it is our present intention to reinvest the undistributed earnings indefinitely. This position will be reassessed as part of the analysis related to the one-time repatriation tax.

As required by ASC 740, a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We have approximately $13,276 of US net operating loss carryforwards available to offset future US taxable income as of December 31, 2017. The net operating loss carry-forwards related to tax losses generated in prior years in the US begin to expire in 2034. Further, we have tax loss carry-forwards of approximately $3,837 available to offset future foreign income in Italy as of December 31, 2017. We have recorded a full valuation allowance against the resulting $920 deferred tax asset because we cannot anticipate when or if this entity will have taxable income sufficient to utilize the net operating losses in the future. There is no expiration of the net operating loss carry-forwards related to tax losses generated in prior years in Italy. Finally, we have tax loss carry-forwards of approximately $3,613 available to offset future foreign income in China as of December 31, 2017. The net operating loss carry-forwards related to tax losses generated in prior years in China expire in 2022.