12.

Income Taxes

Consolidated income before taxes for domestic and foreign operations consisted of the following:

	Year ended December 31,
	2018			2017
Domestic	$	(7,751	)	$	(12,630	)
Foreign		(2,496	)		(3,263	)
Total	$	(10,247	)	$	(15,893	)

The Company’s (provision) for income taxes consisted of the following:

	Year ended December 31,
	2018			2017
Current:
Federal	$	(71	)	$	577
State		37			(66	)
Foreign		117			(682	)
Total current		83			(171	)
Deferred:
Federal		2,233			1,497
State		667			480
Foreign		495			748
Total		3,395			2,725
Change in valuation allowance		(9,918	)		(833	)
Total deferred		(6,523	)		1,892
Benefit/(provision) for income taxes	$	(6,440	)	$	1,721

The income tax benefit (provision) differs from that computed at the federal statutory corporate income tax rate as follows:

	Year ended December 31,
	2018			2017
Tax benefit (provision) at federal statutory rate	$	2,152		$	5,403
State income tax benefit (provision), net of federal benefit		413			439
Research and development tax credits		250			411
Subpart F inclusion		—			(370	)
Foreign earnings or losses taxed at different rates		12			(540	)
Tax rate change		23			(3,161	)
Other		628			372
Change in valuation allowance		(9,918	)		(833	)
Tax benefit (provision)	$	(6,440	)	$	1,721

The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following:

	2018			2017
Deferred revenue	$	50		$	738
Basis difference in intangible assets		3,283			3,403
Inventory reserve		2,235			2,089
Net operating loss carryforwards		4,067			1,627
Research and development tax credits		794			163
Accrued expenses		143			75
Stock-based compensation		362			327
Allowance for sales returns and doubtful accounts		160			119
Difference in property and equipment basis		(185	)		(212	)
Other		551			438
Total net deferred income tax asset		11,460			8,767
Less: Valuation allowance		(11,460	)		(2,236	)
Net deferred income tax asset (liability)	$	—		$	6,531

The Company has

not

provided for foreign withholding taxes on undistributed earnings of its non-U.S. subsidiaries since these earnings are intended to be reinvested indefinitely, in accordance with guidelines contained in ASC Topic

740,

Accounting for Income Taxes

. It is

not

practical to estimate the amount of additional taxes that might be payable on such undistributed earnings.

The Company routinely evaluates the likelihood of realizing the benefit of its deferred tax assets and

may

record a valuation allowance if, based on all available evidence, it determines that it is more likely than

not

some portion of the tax benefit will

not

be realized. As of

December 31, 2018,

the Company had an aggregate of approximately

$11.5

million in deferred tax assets primarily related to intangible assets, net operating losses, tax credit carryforwards, and inventory basis differences. On a quarterly basis, the Company tests the value of deferred tax assets for impairment at the taxpaying-component level within each tax jurisdiction. Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following:

●

sufficient taxable income within the allowed carryback or carryforward periods;

●

future reversals of existing taxable temporary differences, including any tax planning strategies that could be utilized;

●

nature or character (e.g., ordinary vs. capital) of the deferred tax assets and liabilities; and

●

future taxable income exclusive of reversing temporary differences and carryforwards.

Based on the foregoing criteria, the Company determined that it

longer meets the “more likely than

not”

threshold that net operating losses, tax credits and other deferred tax assets will be realized. Accordingly, the Company recorded a full valuation allowance at

September 30, 2018,

and continues to be in a full valuation allowance position at

December 31, 2018.

The Company has federal and state net operating loss (“NOL”) carryforwards of approximately

8.4

million (pre-tax), and Spain NOL carryforwards of approximately

$7.5

million. The majority of the federal NOL carryforward and the Spain NOL carryforward do

not

expire. The state NOL carryforwards expire over various periods.

Effective

July 1, 2007,

the Company adopted the accounting standards related to uncertain tax positions. This standard requires that tax positions be assessed using a

two

-step process. A tax position is recognized if it meets a “more likely than

not”

threshold, and is measured at the largest amount of benefit that is greater than

percent likely of being realized. Uncertain tax positions must be reviewed at each balance sheet date. Liabilities recorded as a result of this analysis must generally be recorded separately from any current or deferred income tax accounts.

The total amount of unrecognized tax benefits at

December 31, 2018

and

2017,

that would favorably impact our effective tax rate if recognized was

$679

and

$647,

respectively. As of

December 31, 2018

and

2017,

we accrued

$15

and

$14,

respectively, in interest and penalties related to unrecognized tax benefits. We account for interest expense and penalties for unrecognized tax benefits as part of our income tax provision.

Although we believe our estimates are reasonable, we can make

assurance that the final tax outcome of these matters will

not

be different from that which we have reflected in our historical income tax provisions and accruals. Such difference could have a material impact on our income tax provision and operating results in the period in which we make such determination.

A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:

	Year ended December 31,
	2018			2017
Balance - beginning of year	$	652		$	1,189
Additions based on tax positions related to the current year		58			67
Additions for tax positions of prior years		118			520
Reductions for tax positions of prior years		(53	)		-
Settlements		-			(165	)
Lapse in statutes of limitations		(96	)		(959	)
Uncertain tax positions, ending balance	$	679		$	652

The Company’s U.S. federal income tax returns for

2015

through

2018

are subject to examination. The Company also files in various state and foreign jurisdictions. With few exceptions, the Company is

longer subject to federal, state, or non-U.S. income tax examinations by tax authorities for years prior to

2015.

The Company completed its audit by the Internal Revenue Service (“IRS”) for its

2012

and

2013

tax returns in

2017.

As a result of the audit by the IRS, there were

material adjustments made to the Company’s tax return.

The Inland Revenue Department of Hong Kong, a Special Administrative Region (the “IRD”), commenced an examination of the Company’s Hong Kong profits tax returns for

2009

through

2011

in the

fourth

quarter of

2012,

which was completed subsequent to

December 31, 2017.

As a result of the audit, there were

material changes to the Company’s financial position. During the next

twelve

months, it is reasonably possible that the amount of the Company’s unrecognized income tax benefits could change significantly. These changes could be the result of our ongoing tax audits or the settlement of outstanding audit issues. However, due to the issues being examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts currently accrued.