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Income Taxes | 12 Months Ended
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Dec. 31, 2016
Income Taxes | 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 years ended 2014, 2015 and 2016, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $3.7 million, $3.4 million and $4.1 million reflecting effective tax provision rates of 14.7%, 12.9% and 76.8%, respectively. For the year ended 2014 and 2015, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of 14.7% and 12.9%. Exclusive of discrete items, the effective tax provision rate would be 13.6% in 2014 and 9.5% in 2015. The decrease in the effective rate absent discrete items was primarily due to the foreign rate differential. The rate exclusive of discrete items can be materially impacted by the proportion of Hong Kong earnings to consolidated earnings. The 2016 tax expense of $4.1 million included a discrete tax benefit of $0.1 million primarily comprised of return to provision adjustments. Absent these discrete tax expenses, the Company’s effective tax rate for 2016 was 79.2%; primarily due to US federal alternative minimum tax, various state taxes and taxes on foreign income. In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The guidance in ASU 2015-17 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard as of January 1, 2016 and applied the standard retrospectively. As a result of adopting this standard, current deferred tax liabilities of $2.7 million and non-current deferred tax assets of $0.4 million were reclassified to net non-current deferred tax liabilities as of December 31, 2015. For years ended 2015 and 2016, the Company had net deferred tax liabilities of approximately $2.3 million and $2.0 million, respectively, related to foreign jurisdictions. Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):
|  | 2014 |  |  | 2015 |  |  | 2016 |
Federal |  | $ | (4 | ) |  | $ | — |  |  | $ | 1,549 |
State and local |  |  | 287 |  |  |  | 708 |  |  |  | 652 |
Foreign |  |  | 3,887 |  |  |  | 3,044 |  |  |  | 1,637 |
Total Current |  |  | 4,170 |  |  |  | 3,752 |  |  |  | 3,838 |
APIC |  |  | (84 | ) |  |  | — |  |  |  | 548 |
Deferred |  |  | (371 | ) |  |  | (329 | ) |  |  | (259 | )
Total |  | $ | 3,715 |  |  | $ | 3,423 |  |  | $ | 4,127 |
The components of deferred tax assets/(liabilities) are as follows (in thousands):
|  | 2015 |  |  | 2016 |
Net deferred tax assets/(liabilities): |  |  |  |  |  |
Reserve for sales allowances and possible losses |  | $ | 756 |  |  | $ | 801 |
Accrued expenses |  |  | 1,193 |  |  |  | 1,739 |
Prepaid royalties |  |  | 13,155 |  |  |  | 16,806 |
Accrued royalties |  |  | 3,963 |  |  |  | 2,638 |
Inventory |  |  | 3,315 |  |  |  | 3,506 |
State income taxes |  |  | ― |  |  |  | 98 |
Property and equipment |  |  | 3,833 |  |  |  | 4,997 |
Original issue discount interest |  |  | (10,332 | ) |  |  | (6,945 | )
Goodwill and intangibles |  |  | 35,086 |  |  |  | 29,378 |
Share based compensation |  |  | 2,359 |  |  |  | 1,607 |
Undistributed foreign earnings |  |  | ― |  |  |  | (48,731 | )
Federal and state net operating loss carryforwards |  |  | 34,684 |  |  |  | 22,755 |
Credit carryforwards |  |  | 13,254 |  |  |  | 21,097 |
Other |  |  | (2,621 | ) |  |  | (2,495 | )
Gross |  |  | 98,645 |  |  |  | 47,251 |
Valuation allowance |  |  | (100,938 | ) |  |  | (49,285 | )
Total net deferred tax assets/(liabilities) |  | $ | (2,293 | ) |  | $ | (2,034 | )
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:
|  | 2014 |  |  | 2015 |  |  | 2016 |
Federal income tax expense |  |  | 35.0 | % |  |  | 35.0 | % |  |  | 35.0 | %
State income tax expense, net of federal tax effect |  |  | ― |  |  |  | 1.0 |  |  |  | (3.6 | )
Effect of differences in U.S. and foreign statutory rates |  |  | (14.1 | ) |  |  | (9.4 | ) |  |  | (53.7 | )
Uncertain tax positions |  |  | ― |  |  |  | 0.3 |  |  |  | 3.4 |
Earn-out adjustments |  |  | ― |  |  |  | (7.4 | ) |  |  | ― |
Provision to return |  |  | ― |  |  |  | 12.2 |  |  |  | 4.5 |
Non-deductible expenses |  |  | 1.1 |  |  |  | 1.1 |  |  |  | 8.9 |
Other |  |  | (1.5 | ) |  |  | 0.5 |  |  |  | 0.6 |
Foreign deemed dividend |  |  | ― |  |  |  | 1.7 |  |  |  | 262.2 |
Foreign tax credit |  |  | ― |  |  |  | (0.5 | ) |  |  | (126.1 | )
Undistributed foreign earnings |  |  | ― |  |  |  | ― |  |  |  | 906.5 |
Valuation allowance |  |  | (5.8 | ) |  |  | (21.6 | ) |  |  | (960.9 | )
|  |  | 14.7 | % |  |  | 12.9 | % |  |  | 76.8 | %
Deferred taxes result from temporary differences between tax bases 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 (“IRC”), 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 full 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):
|  | 2014 |  |  | 2015 |  |  | 2016 |
Domestic |  | $ | 5,358 |  |  | $ | 11,692 |  |  | $ | (7,760 | )
Foreign |  |  | 19,866 |  |  |  | 14,901 |  |  |  | 13,136 |
|  | $ | 25,224 |  |  | $ | 26,593 |  |  | $ | 5,376 |
The Company has approximately $206.0 million of cumulative undistributed earnings of non-U.S. subsidiaries for which U.S. deferred tax liability has been provided as of December 31, 2016. These earnings are no longer permanently reinvested outside the U.S. Due to the valuation allowance against the deferred tax assets, the deferred tax liability recorded reduces the valuation allowance. 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. $49,700 of additional UTP related to state taxes was recognized in 2016. During 2015, approximately $1.8 million of the liability for UTP was recognized, and approximately $2.1 million of the liability for UTP was de-recognized. Current interest on uncertain income tax liabilities is recognized as interest expense and penalties are recognized in selling, general and administrative expenses in the consolidated statement of operations. During 2014, the Company recognized $150,000 of current year interest expense relating to UTPs. During 2015, the Company did not recognize any current year interest expense relating to UTPs. During 2016, the Company recognized $67,900 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, 2016 (in millions):
Balance, January 1, 2014 |  | $ | 2.6 |
Current year additions |  |  | — |
Current year reduction due to lapse of applicable statute of limitations |  |  | (0.1 | )
Balance, December 31, 2014 |  |  | 2.5 |
Current year additions |  |  | 1.8 |
Current year reduction due to lapse of applicable statute of limitations |  |  | (2.1 | )
Balance, December 31, 2015 |  |  | 2.2 |
Current year additions |  |  | 0.1 |
Current year reduction due to audit settlement |  |  | — |
Balance, December 31, 2016 |  | $ | 2.3 |
We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months. Tax years 2013 through 2015 remain subject to examination in the United States. The tax years 2012 through 2015 are generally still subject to examination in the various states. The tax years 2010 through 2015 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. The U.S. Internal Revenue Service is currently examining the 2015 tax year. 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, 2016, a valuation allowance of $49.3 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2016, the valuation allowance decreased by $51.6 million from $100.9 million at December 31, 2015 to $49.3 million at December 31, 2016. The decrease in the valuation allowance is primarily due to the recognition of the deferred tax liability relating to the Company’s cumulative undistributed earnings of non-U.S. subsidiaries that are no longer permanently reinvested. The net deferred tax liabilities of $2.3 million and $2.0 million in 2015 and 2016, respectively, represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position. At December 31, 2016, the Company had U.S. federal net operating loss carryforwards, or "NOLs," of approximately $36.8 million, which will begin to expire in 2033. At December 31, 2016, the Company's state NOLs were mainly from California. The majority of the approximately $124.2 million of California NOLs will begin to expire in 2031. At December 31, 2016, the Company had foreign tax credit carryforwards of approximately $19.2 million, which will begin to expire in 2022. At December 31, 2016, 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, 2016, the Company had state research and development tax credits of approximately $0.1 million, which carry forward indefinitely. At December 31, 2016, the Company had AMT credit carryforwards of approximately $1.5 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.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32537-109319 + Details
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