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Income Taxes
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]

Note 12—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 2024, 2023 and 2022, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $5.5 million, an expense of $6.8 million, and an benefit of $41.0 million, respectively, reflecting effective tax provision rates of 13.9%, 15.2% and (81.9)%, respectively.

 

The 2024 tax expense of $5.5 million included a discrete tax benefit of $1.4 million primarily comprised return to provision adjustments. Absent these discrete tax benefits, our effective tax rate for 2024 was 17.4%, primarily due to taxes on federal, state and foreign income.

 

For the years ended 2023 and 2022, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of 15.2% and (81.9)%, respectively. Exclusive of discrete items, the effective tax provision rate would be 21.3% in 2023 and 17.6% in 2022.

 

As of December 31, 2024 and 2023, the Company had net deferred tax assets of $70.4 million and $68.1 million, respectively, related to U.S. and 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, 
   2024   2023   2022 
Current income tax expense (benefit):            
Federal  $4,204   $11,935   $11,293 
State and local   569    2,167    2,031 
Foreign   3,010    3,070    3,523 
Total current income tax expense (benefit)   7,783    17,172    16,847 
Deferred income tax expense (benefit):               
Federal   (2,340)   (8,989)   (51,579)
State and Local   247    (1,358)   (6,071)
Foreign   (158)   8    (205)
Total deferred income tax expense (benefit)   (2,251)   (10,339)   (57,855)
                
Total income tax expense (benefit)  $5,532   $6,833   $(41,008)

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

 

   Year ended December 31, 
Deferred Income Tax Assets:  2024   2023 
Reserve for sales allowances and possible losses  $956   $654 
Accrued expenses   1,940    3,467 
Prepaid royalties   39    676 
Accrued royalties   1,833    1,693 
Inventory   12,876    12,444 
State income taxes   224    477 
Property and equipment   1,752    1,789 
Goodwill and intangibles   728    1,192 
Share based compensation   1,277    1,025 
Interest limitation   2,243    2,243 
Lease obligation   12,766    4,991 
Federal and state net operating loss carryforwards   34,355    34,458 
Foreign net operating loss carryforwards   110    110 
Credit carryforwards   3    — 
Section 174 Capitalization   10,884    7,962 
Other   1,567    1,097 
Total Deferred Income Tax Assets   83,553    74,278 
           
Deferred Income Tax Liabilities:          
Undistributed foreign earnings   (428)   (503)
Operating lease right-of-use assets   (12,013)   (4,908)
Total Deferred Income Tax Liabilities   (12,441)   (5,411)
Valuation allowance   (718)   (724)
Total Net Deferred Income Tax Assets/(Liabilities)  $70,394   $68,143 

 

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, 
   2024   2023   2022 
Federal income tax expense   21.0%   21.0%   21.0%
State income tax expense, net of federal tax effect   1.8    2.0    1.9 
Effect of differences in U.S. and foreign statutory rates   (1.3)   (1.1)   (1.3)
Uncertain tax positions   0.4    0.6    5.5 
Provision to return   (4.4)   (0.1)   (0.2)
Other deferred adjustments   (0.2)   (5.7)   21.4 
Change in tax rate   0.8    0.1    6.9 
GILTI   5.2    —    4.2 
Foreign derived intangible income   (8.6)   (9.8)   (10.6)
Other non-deductible expenses   (3.6)   (0.7)   0.5 
Unrealized loss   —    4.2    0.3 
Section 162(m)   8.1    6.4    4.2 
R&D credit   (1.0)   (1.5)   (0.5)
Foreign tax credit   (4.8)   —    (3.6)
Undistributed foreign earnings   (0.2)   0.1    (1.4)
Valuation allowance   —    —    (130.2)
Other   0.7    (0.3)   — 
    13.9%   15.2%   (81.9)%

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, 
   2024   2023   2022 
Domestic  $24,801   $28,552   $31,588 
Foreign   14,931    16,394    18,487 
   $39,732   $44,946   $50,075 

 

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, 2024 (in millions):

 

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 
Additions based on tax positions related to the current year   0.3 
Additions for tax positions of prior years   0.8 
Settlements   (0.9)
Balance, December 31, 2023   3.1 
Additions based on tax positions related to the current year   0.2 
Additions for tax positions of prior years   0.1 
Settlements   (0.2)
Balance, December 31, 2024  $3.2 

 

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 2024 and 2023, the Company recognized $173 thousand and $41 thousand of interest expense related to UTPs, respectively.

 

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

 

Tax years 2021 through 2023 remain subject to Federal examination in the United States. The tax years 2020 through 2023 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 2018 through 2023 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, 2024, 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, 2024, the valuation allowance remained approximately the same as the $0.7 million recorded at December 31, 2023. The 2024 and 2023 net deferred tax assets of $70.4 million and $68.1 million, respectively, consist of the net deferred tax assets in the US and foreign jurisdictions, 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.

 

At December 31, 2024, the Company has U.S. federal net NOLs, of approximately $148.6 million, which will begin to expire in 2033. At December 31, 2024, the Company has state NOLs of approximately $48.7 million, which will begin to expire in 2025.

 

The Company maintained undistributed earnings overseas as of December 31, 2024. As of December 31, 2024, the Company believed the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S., with the exception of Hong Kong. As a result of tax reform, the Company’s unrepatriated earnings are no longer subject to federal income tax in the U.S. when distributed.