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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]

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 2022, 2021 and 2020, the provision for income taxes, which included federal, state and foreign income taxes, was a benefit of $41.0 million, an expense of $0.2 million, and an expense of $0.7 million, respectively, reflecting effective tax provision rates of (81.9%), (4.0%), and (5.5%), respectively.

 

The 2022 tax benefit of $41.0 million included a discrete tax benefit of $49.8 million primarily comprised of the valuation allowance release. Absent these discrete tax benefits, our effective tax rate for 2022 was 17.6%, primarily due to taxes on federal, state, and foreign income.

 

For the years ended 2021 and 2020, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (4.0%) and (5.5%). Exclusive of discrete items, the effective tax provision rate would be (10.7%) in 2021 and (7.7%) in 2020.

 

As of December 31, 2022 and 2021, the Company had net deferred tax assets of $57.8 million related to the U.S. and foreign jurisdictions and net deferred tax liabilities of approximately $51,000 primarily related to foreign jurisdictions, respectively.

 

Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):

 

   

Year ended December 31,

  
   

2022

    

2021

    

2020

  

Federal

   $ 11,293     $ 1     $ (212

)

State and local

     2,031       43       134  

Foreign

     3,523       254       704  

Total Current

     16,847       298       626  

Deferred

     (57,855

)

     (72

)

     109  

Total

   $ (41,008

)

   $ 226     $ 735  

 

The components of deferred tax assets/(liabilities) are as follows (in thousands):

 

   

December 31,

  
   

2022

    

2021

  

Net deferred tax assets/(liabilities):

                

Reserve for sales allowances and possible losses

   $ 469     $ 356  

Accrued expenses

     3,884       2,998  

Prepaid royalties

     599       1,298  

Accrued royalties

     465       1,731  

Inventory

     9,574       9,313  

State income taxes

     420       17  

Property and equipment

     1,701       1,832  

Goodwill and intangibles

     2,412       4,266  

Share-based compensation

     738       593  

Interest limitation

     2,256       3,595  

Undistributed foreign earnings

     (479

)

     (2,919

)

Operating lease right-of-use assets

     (3,989

)

     (4,117

)

Operating lease liabilities

     4,120       4,518  

Federal and state net operating loss carryforwards

     31,263       42,731  

Credit carryforwards

     110       110  

Research & development capitalization

     3,792       -  

Other

     1,195       902  

Gross

     58,530       67,224  

Valuation allowance

     (726

)

     (67,275

)

Total net deferred tax assets (liabilities)

   $ 57,804     $ (51

)

 

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,

  
   

2022

    

2021

    

2020

 

Federal income tax expense

     21.0

%

     21.0

%

     21.0

%

State income tax expense, net of federal tax effect

     1.9       3.3       7.7  

Effect of differences in U.S. and foreign statutory rates

     (1.3

)

     (0.5

)

     1.2  

Uncertain tax positions

     5.0       7.0       3.4  

Provision to return

     21.2       6.3       (3.8

)

Change in tax rate

     6.9       6.5       4.4  

Foreign derived intangible income

     (10.6

)

     0.0       0.0  

Non-deductible expenses

     8.9       (68.7

)

     (26.2

)

PPP Loan

     0.0       29.1       0.0  

Foreign tax credit

     (3.6

)

     0.0       0.0  

Unrealized Loss

     0.3       (138.9

)

     (10.0

)

Undistributed foreign earnings

     (1.4

)

     (8.7

)

     (3.3

)

Valuation allowance

     (130.2

)

     139.6       0.1  
      (81.9

)%

     (4.0

)%

     (5.5

)%

 

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 components of income (loss) before provision for income taxes are as follows (in thousands):

 

   

Year ended December 31,

  
   

2022

    

2021

    

2020

  

Domestic

   $ 31,588     $ (7,881 )   $ (18,748 )

Foreign

     18,487       2,219       5,339  
    $ 50,075     $ (5,662 )   $ (13,409 )

 

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.

 

The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2022 (in millions):

 

Balance, December 31, 2019

   $ 1.6  

Settlements

     (0.6

)

Balance, December 31, 2020

     1.0  

Settlements

     (0.8

)

Balance, December 31, 2021

     0.2  

Additions based on tax positions related to the current year

     0.1  

Additions for tax positions of prior years

     2.8  

Settlements

     (0.2

)

Balance, December 31, 2022

   $ 2.9  

 

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 2022, the Company recognized $0.2 million of interest expense related to UTPs. The Company did not recognize any interest expense relating to UTPs in 2021.

 

The Company does not expect its gross unrecognized tax benefits to significantly change within the next 12 months.

 

Tax years 2019 through 2021 remain subject to examination in the United States. The tax years 2018 through 2021 are generally still subject to examination in the various states. Furthermore, all net operating losses and tax credit carryforwards are still subject to review given that the statute of limitation for these items would begin in the year of utilization. The tax years 2016 through 2021 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, 2022, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2022, the valuation allowance decreased from $67.3 million at December 31, 2021. The release of the valuation allowance as of December 31, 2022 was primarily due to a pattern of sustained profitability such that it is more likely than not that the deferred income tax assets will be realized. The net deferred tax assets of $57.8 million consists of the net deferred tax assets in the US and foreign jurisdictions, where the Company is in a cumulative income position. The net deferred tax liabilities of $51,000 in 2021 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.

 

Pursuant to the Internal Revenue Code of 1986, as amended (the “Code”) Sections 382 and 383, annual use of a company’s NOL and tax credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period. The amount of the annual limitation is determined based on the value of the company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. The Company had established a valuation allowance as the realization of such deferred tax assets had not met the more likely than not threshold requirement. Due to the existence of the valuation allowance, further changes in the Company’s unrecognized tax benefits did not impact the Company’s effective tax rate for 2021.

 

During 2022, the Company completed an assessment of the available net operating loss and tax credit carryforwards under Section 382 and 383 and determined that the Company underwent two ownership changes during the period from 2019 to 2021. As a result, net operating loss and tax credit carryforwards attributable to the pre-ownership changes are subject to substantial annual limitations under Section 382 and 383 of Code due to the ownership changes. The Company has adjusted their previously reported net operating loss and tax credit carryforwards to address the impact of the ownership changes. This resulted in a net reduction of available gross federal and state net operating loss carryforwards of approximately $53 million and $85 million, respectively which related to the year ended December 31, 2021 and prior. The tax effected federal and state net operating loss carryforwards (“NOL”) reduction amounts were $16.8 million. This also resulted in a reduction of federal tax credit carryforwards of approximately $0.6 million related to the years ended December 31, 2021 and prior. Accordingly, the net operating loss and tax credit carryforwards presented above for the year ending December 31, 2021 were reduced by $16.8 million and $0.6 million, respectively, with a corresponding reduction to the valuation allowance of $17.4 million.

 

At December 31, 2022, the Company has U.S. federal net NOLs, of approximately $136 million, which will begin to expire in 2033. At December 31, 2022, the Company has state NOLs of approximately $40 million, which will begin to expire in 2023.