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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | 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 2016, 2017 and 2018, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $4.1 million, $1.6 million, and $3.0 million reflecting effective tax provision rates of 76.8%, (2.0%), and (7.5%) respectively. For the years ended 2016 and 2017, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of 76.8% and (2.0%). Exclusive of discrete items, the effective tax rate would be 79.2% in 2016 and (2.8%) in 2017. The decrease in the effective tax rate absent discrete items was primarily due to the worldwide pre-tax book loss in 2017. The 2018 tax expense of $3.0 million included a discrete tax benefit of $0.9 million primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax benefits, the Company’s effective tax rate for 2018 was (9.6%) primarily due to state taxes and taxes on foreign income. As of December 31, 2017 and 2018, the Company had net deferred tax liabilities of approximately $0.8 million and $1.0 million, respectively, primarily related to foreign jurisdictions. Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):
| Year ended December 31,
| 2016 |  | 2017 |  | 2018
Federal | $ | 1,549 |  |  | $ | 550 |  |  | $ | (1,475 | )
State and local | 652 |  |  | 51 |  |  | 62 |
Foreign | 1,637 |  |  | 2,256 |  |  | 4,154 |
Total Current | 3,838 |  |  | 2,857 |  |  | 2,741 |
APIC | 548 |  |  | — |  |  | — |
Deferred | (259 | ) |  | (1,251 | ) |  | 210 |
Total | $ | 4,127 |  |  | $ | 1,606 |  |  | $ | 2,951 |
The components of deferred tax assets/(liabilities) are as follows (in thousands):
| December 31, |
| 2017 |  | 2018 |
Net deferred tax assets/(liabilities): |  |  |  |
Reserve for sales allowances and possible losses | $ | 611 |  |  | $ | 478 |  |
Accrued expenses | 1,375 |  |  | 938 |  |
Prepaid royalties | 13,631 |  |  | 2,659 |  |
Accrued royalties | 1,864 |  |  | 5,973 |  |
Inventory | 6,146 |  |  | 10,751 |  |
State income taxes | 26 |  |  | 19 |  |
Property and equipment | 4,257 |  |  | 2,635 |  |
Original issue discount interest | (2,131 | ) |  | — |  |
Goodwill and intangibles | 15,782 |  |  | 11,542 |  |
Share-based compensation | 578 |  |  | 773 |  |
Undistributed foreign earnings | (2,524 | ) |  | (2,121 | ) |
Interest limitation | — |  |  | 2,210 |  |
Federal and state net operating loss carryforwards | 14,091 |  |  | 46,759 |  |
Credit carryforwards | 35,195 |  |  | 1,121 |  |
Other | 22 |  |  | (633 | ) |
Gross | 88,923 |  |  | 83,104 |  |
Valuation allowance | (89,706 | ) |  | (84,097 | ) |
Total net deferred tax liabilities | $ | (783 | ) |  | $ | (993 | ) | *
*As of December 31, 2018, a deferred tax asset of $438 was reported as other long term assets in the consolidated balance sheets and $1,431 was reported as the deferred income tax liability, net in the consolidated balance sheets. The U.S. Tax Cuts and Jobs Act ("the Act") was signed into law on December 22, 2017 and introduced significant changes to the Internal Revenue Code. Effective for tax years beginning after December 31, 2017, the Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and related-party payments, which are referred to as the global intangible low-taxed income (“GILTI”) and the base erosion and anti-abuse tax, respectively. In addition, the Act included a one-time transition tax as of December 31, 2017 on accumulated foreign subsidiary earnings that were previously tax deferred. Due to the timing of the enactment and the complexity involved in applying the provisions of the Act, the SEC issued guidance on December 22, 2017 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company applied this guidance when accounting for the enactment date effects of the Act in 2017 and throughout 2018. At December 31, 2018, the Company has now completed its accounting for all of the enactment-date income tax effects of the Act. The Act required the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. At December 31, 2017, the Company recorded a provisional amount for the one-time transitional tax liability for its foreign subsidiaries of approximately $35.1 million, which did not entirely impact income tax expense for 2017 since the Company reflected the transition tax liability as a partial reduction to existing fully-valued tax attribute carryforwards. Upon further analyses of the Act and Notices and regulations issued and proposed by the U.S. Treasury Department and the Internal Revenue Service, the Company finalized its calculations of the transition tax liability during 2018 and recorded an income tax benefit of $1.1 million due to the utilization of foreign tax credits instead of the net operating loss carryforward as originally projected as of December 31, 2017. The Act reduced the U.S. statutory tax rate from 35% to 21% for tax years after December 31, 2017. Accordingly, the Company re-measured its deferred taxes at December 31, 2017 to reflect the reduced rate that would apply in future periods when these deferred taxes are settled or realized. The provisional amount related to the re-measurement was fully offset by a concurrent change in the valuation allowance, resulting in no tax expense impact. The Company has completed its accounting for the re-measurement of deferred taxes and there has been no change to the provisional amount recorded. The Act repealed the Alternative Minimum Tax (“AMT”) for tax years beginning after 2017. However, AMT credits are fully refundable by tax years beginning after 2021. The Company has $0.4 million of deferred tax assets related to the AMT credit carryforwards. The Company will continue to classify AMT credits along with its other deferred tax assets. The Act subjects a U.S. shareholder to tax on global intangible low-taxed income earned by certain foreign subsidiaries. The Company has elected to account for GILTI in the year the tax is incurred. 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:
| Year ended December 31,
| 2016 |  | 2017 |  | 2018
Federal income tax expense | 35.0 | % |  | 35.0 | % |  | 21.0 | %
State income tax expense, net of federal tax effect | (3.6 | ) |  | 5.0 |  |  | 9.7 |
Effect of differences in U.S. and foreign statutory rates | (53.7 | ) |  | 1.9 |  |  | 2.0 |
Uncertain tax positions | 3.4 |  |  | — |  |  | (0.8 | )
Earn-out adjustments | — |  |  | — |  |  | — |
Provision to return | 4.5 |  |  | (0.7 | ) |  | (40.6 | )
Non-deductible expenses | 8.9 |  |  | (48.0 | ) |  | (16.9 | )
Other | 0.6 |  |  | (0.2 | ) |  | (0.6 | )
Foreign deemed dividend | 262.2 |  |  | — |  |  | — |
Foreign tax credit | (126.1 | ) |  | 20.3 |  |  | — |
Undistributed foreign earnings | 906.5 |  |  | 57.3 |  |  | 4.5 |
Effect of change in federal statutory rate | — |  |  | (23.0 | ) |  | — |
Valuation allowance | (960.9 | ) |  | (49.6 | ) |  | 14.2 |
| 76.8 | % |  | (2.0 | )% |  | (7.5 | )%
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 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):
| Year ended December 31,
| 2016 |  | 2017 |  | 2018
Domestic | $ | (7,760 | ) |  | $ | (85,288 | ) |  | $ | (58,693 | )
Foreign | 13,136 |  |  | 3,866 |  |  | 19,219 |
| $ | 5,376 |  |  | $ | (81,422 | ) |  | $ | (39,474 | )
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. Approximately $0.4 million of the liability for UTP related to foreign withholding taxes was de-recognized in 2018. Additionally, approximately $0.6 million of additional UTP related to foreign withholding taxes and audit examination in Hong Kong was recognized in 2018. During 2017, approximately $0.1 million of additional UTP was recognized, and approximately $1.1 million of the liability for UTP was de-recognized. Current interest on uncertain income tax liabilities is recognized as a component of the income tax provision recognized in the consolidated statements of operations. During 2016, the Company recognized approximately $0.1 million of current interest expense relating to UTPs. During 2017, the Company did not recognize any current year interest expense relating to UTPs. During 2018, the Company recognized $0.1 million 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, 2018 (in millions):
Balance, December 31, 2015 | $ | 2.2 |
Current year additions | 0.1 |
Current year reduction due to lapse of applicable statute of limitations | — |
Balance, December 31, 2016 | 2.3 |
Current year additions | 0.1 |
Current year reduction due to lapse of applicable statute of limitations | (1.1 | )
Balance, December 31, 2017 | 1.3 |
Current year additions | 0.6 |
Current year reduction due to audit settlement | (0.4 | )
Balance, December 31, 2018 | $ | 1.5 |
We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months. Tax years 2016 through 2017 remain subject to examination in the United States. The tax years 2014 through 2017 are generally still subject to examination in the various states. The tax years 2012 through 2017 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. 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 management's evaluation of all positive and negative evidence, as of December 31, 2018, a valuation allowance of $84.1 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2018, the valuation allowance decreased by $5.6 million from $89.7 million at December 31, 2017 to $84.1 million at December 31, 2018. The net deferred tax liabilities of $0.8 million in 2017 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position, partially offset by the U.S. deferred tax assets related to the AMT credit carryforwards. The net deferred tax liabilities of $1.0 million in 2018 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position, partially offset by the U.S. deferred tax assets related to the AMT credit carryforwards. At December 31, 2018, the Company has U.S. federal net operating loss carryforwards, or "NOLs", of approximately $140.1 million, which will begin to expire in 2031. At December 31, 2018, the Company's state NOLs were mainly from California. The majority of the approximately $189.9 million of California NOLs will begin to expire in 2031. At December 31, 2018, the Company had foreign tax credit carryforwards of approximately $0.1 million, which will begin to expire in 2027. At December 31, 2018, 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, 2018, the Company had state research and development tax credits of approximately $0.1 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. During the first quarter of 2017, the Company adopted ASU 2016-09, “Improvement to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payments, including treatment of excess tax benefits and forfeitures, as well as consideration of minimum statutory tax withholding requirements. This accounting standard did not have a material effect on the Company’s income tax provision.

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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 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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