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Income Taxes | 12 Months Ended
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Dec. 31, 2019
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 2017, 2018 and 2019, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $1.6 million, $3.0 million, and $1.9 million, respectively, reflecting effective tax provision rates of (2.0%), (7.5%), and (3.6%), respectively. For the years ended 2017 and 2018, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (2.0%) and (7.5%). Exclusive of discrete items, the effective tax provision rate would be (2.8%) in 2017 and (9.6%) in 2018. The 2019 tax expense of $1.9 million included a discrete tax expense of $0.2 million primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax expenses, the Company’s effective tax rate for 2019 was (3.1%), primarily due to state taxes and taxes on foreign income. As of December 31, 2018 and 2019, the Company had net deferred tax liabilities of approximately $1.0 million and $14,000, 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,
| 2017 |  | 2018 |  | 2019
Federal | $ | 550 |  |  | $ | (1,475 | ) |  | $ | (212 | )
State and local | 51 |  |  | 62 |  |  | 66 |
Foreign | 2,256 |  |  | 4,154 |  |  | 3,037 |
Total Current | 2,857 |  |  | 2,741 |  |  | 2,891 |
Deferred | (1,251 | ) |  | 210 |  |  | (979 | )
Total | $ | 1,606 |  |  | $ | 2,951 |  |  | $ | 1,912 |
The components of deferred tax assets/(liabilities) are as follows (in thousands):
| December 31, |
| 2018 |  | 2019 |
Net deferred tax assets/(liabilities): |  |  |  |
Reserve for sales allowances and possible losses | $ | 478 |  |  | $ | 686 |  |
Accrued expenses | 938 |  |  | 2,381 |  |
Prepaid royalties | 2,659 |  |  | 6,224 |  |
Accrued royalties | 5,973 |  |  | 2,314 |  |
Inventory | 10,751 |  |  | 10,309 |  |
State income taxes | 19 |  |  | 17 |  |
Property and equipment | 2,635 |  |  | 1,952 |  |
Goodwill and intangibles | 11,542 |  |  | 9,185 |  |
Share-based compensation | 773 |  |  | 894 |  |
Undistributed foreign earnings | (2,121 | ) |  | (1,970 | ) |
Interest limitation | 2,210 |  |  | 3,539 |  |
Operating lease right-of-use assets | — |  |  | (7,422 | ) |
Operating lease liabilities | — |  |  | 8,195 |  |
Federal and state net operating loss carryforwards | 46,759 |  |  | 53,845 |  |
Credit carryforwards | 1,121 |  |  | 909 |  |
Other | (633 | ) |  | 1,706 |  |
Gross | 83,104 |  |  | 92,764 |  |
Valuation allowance | (84,097 | ) |  | (92,778 | ) |
Total net deferred tax liabilities | $ | (993 | ) | * | $ | (14 | ) | *
*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 a deferred income tax liability, net in the consolidated balance sheets. As of December 31, 2019, a deferred tax asset of $212 was reported as other long term assets in the consolidated balance sheets and $226 was reported as a deferred income tax liability, net in the consolidated balance sheets. 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,
| 2017 |  | 2018 |  | 2019
Federal income tax expense | 35.0 | % |  | 21.0 | % |  | 21.0 | %
State income tax expense, net of federal tax effect | 5.0 |  |  | 9.7 |  |  | 6.1 |
Effect of differences in U.S. and foreign statutory rates | 1.9 |  |  | 2.0 |  |  | 0.6 |
Uncertain tax positions | — |  |  | (0.8 | ) |  | (0.3 | )
Provision to return | (0.7 | ) |  | (40.6 | ) |  | (1.6 | )
Non-deductible expenses | (48.0 | ) |  | (16.9 | ) |  | (13.0 | )
Other | (0.2 | ) |  | (0.6 | ) |  | (0.4 | )
Foreign tax credit | 20.3 |  |  | — |  |  | — |
Undistributed foreign earnings | 57.3 |  |  | 4.5 |  |  | 0.2 |
Effect of change in federal statutory rate | (23.0 | ) |  | — |  |  | — |
Valuation allowance | (49.6 | ) |  | 14.2 |  |  | (16.2 | )
| (2.0 | )% |  | (7.5 | )% |  | (3.6 | )%
Deferred taxes result from temporary differences between tax basis 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 more likely than not that the U.S. net deferred tax assets will not be realized. The components of income (loss) before provision for income taxes are as follows (in thousands):
| Year ended December 31,
| 2017 |  | 2018 |  | 2019
Domestic | $ | (85,288 | ) |  | $ | (58,693 | ) |  | $ | (61,798 | )
Foreign | 3,866 |  |  | 19,219 |  |  | 8,331 |
| $ | (81,422 | ) |  | $ | (39,474 | ) |  | $ | (53,467 | )
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. During 2018, approximately $0.6 million of additional UTP was recognized, and approximately $0.4 million of the liability for UTP was de-recognized. Approximately $0.1 million of additional UTP related to foreign withholding taxes was recognized in 2019. 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 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. During 2019, the Company recognized an additional $40,000 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, 2019 (in millions):
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 |
Current year additions | 0.1 |
Balance, December 31, 2019 | $ | 1.6 |
The Company does not expect the gross unrecognized tax benefits to significantly change within the next 12 months. Tax years 2016 through 2018 remain subject to examination in the United States. The tax years 2015 through 2018 are generally still subject to examination in the various states. The tax years 2013 through 2018 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 the Company's evaluation of all positive and negative evidence, as of December 31, 2019, a valuation allowance of $92.8 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2019, the valuation allowance increased by $8.7 million from $84.1 million at December 31, 2018 to $92.8 million at December 31, 2019. 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. The net deferred tax liabilities of $14,000 in 2019 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, 2019, the Company has U.S. federal net operating loss carryforwards, or "NOLs", of approximately $164.1 million, which will begin to expire in 2031. At December 31, 2019, the Company's state NOLs were mainly from California. The majority of the approximately $209.3 million of California NOLs will begin to expire in 2031. At December 31, 2019, the Company had foreign tax credit carryforwards of approximately $0.1 million, which will begin to expire in 2027. At December 31, 2019, 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, 2019, 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.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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