Income Taxes

12 Months Ended

Dec. 31, 2020

The CARES Act adjusted a number of provisions of the tax code, including the eligibility of certain deductions and the treatment of net operating losses (“NOLs”) and tax credits. The CARES Act did not result in any material adjustments to the Company’s income tax provision for the year ended December 31, 2020, or to its deferred tax assets as of December 31, 2020.

(Loss) income before income tax (benefit) expense for the years ended December 31, 2020, 2019 and 2018 is as follows (in thousands):


	2020		2019		2018
(Loss) income before income tax (benefit) expense:
Domestic	$	(6,954)	$	7,053	$	6,126
Foreign	(7,102)		(3,408)		(2,302)
Total	$	(14,056)	$	3,645	$	3,824

Income tax (benefit) expense
Current:
Federal	$	(434)	$	(303)	$	(448)
State	273		290		126
Total current benefit	$	(161)	$	(13)	$	(322)
Deferred:
Federal	$	(12,856)	$	(3,409)	$	1,070
State	(5,211)		(939)		321
Foreign	—		—		115
Total deferred (benefit) expense provision	$	(18,067)	$	(4,348)	$	1,506
Total tax (benefit) expense provision	$	(18,228)	$	(4,361)	$	1,184

A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended December 31, 2020, 2019 and 2018 is as follows:


	2020		2019		2018
Federal statutory tax rate	21.00	%	21.00	%	21.00	%
State income taxes, net of federal income tax benefit	14.29	%	(19.47)	%	11.01	%
Non-deductible expenses	(1.42)	%	7.49	%	3.80	%
Compensation expense	65.78	%	(135.12)	%	(12.52)	%
Transaction expenses	—	%	—	%	7.09	%
Tax credits	32.11	%	—	%	(1.87)	%
Adjustment due to adoption of accounting standards	—	%	—	%	(13.84)	%
Uncertain tax position	1.21	%	(3.32)	%	—	%
Return to provision and other deferred tax adjustments	7.38	%	(13.20)	%	—	%
Foreign tax rate differential	(1.64)	%	—	%	7.20	%
Other, net	(0.06)	%	(2.78)	%	0.66	%
Valuation allowance	(8.97)	%	25.74	%	8.44	%
Effective tax rate	129.68	%	(119.66)	%	30.97	%

At December 31, 2020 and 2019, deferred income tax assets and liabilities consisted of the following (in thousands):


	2020		2019
Deferred tax assets:
Accounts receivable, net	$	1,286	$	1,401
Accrued compensation	5,403		3,718
Net operating loss carry-forwards	33,888		17,687
Tax credits	4,575		—
Stock-based compensation	1,999		2,056
Operating lease liabilities	11,589		6,822
Other	1,470		571
Gross deferred tax assets	60,210		32,255
Less: valuation allowance	(2,631)		(1,261)
Total deferred tax assets	57,579		30,994
Deferred tax liabilities:
Operating lease right-of-use assets	(11,120)		(6,422)
Investment in non-consolidated affiliate	(1,000)		—
Convertible debt discount	(6,636)		—
Intangible assets	(29,268)		(31,840)
Property and equipment	(14,678)		(8,298)
Other	(292)		—
Total deferred tax liabilities	(62,994)		(46,560)
Net deferred income tax liabilities	$	(5,415)	$	(15,566)

At December 31, 2020, the Company has federal net operating loss carry forwards of approximately $123.7 million, foreign net operating loss carryforwards of approximately $15.6 million and state net operating loss carry forwards of approximately $102 million. Federal net operating loss carry forwards will begin to expire in 2036. Under the Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Act, or the CARES Act, our federal NOLs generated in tax years ending after December 31, 2017 may be carried forward indefinitely, however, the deductibility of such federal net NOLs in tax years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Act, as modified by the CARES Act. State tax NOLs will begin to expire in 2022. Additionally, California recently enacted legislation limiting our ability to use our state NOLs for taxable years 2020, 2021, and 2022. NOLs in Switzerland and China begin to expire in 2024 and 2025, if not utilized in future periods. The NOLs in Singapore do not expire. As of December 31, 2020, the Company has federal R&D credit carryforwards of approximately $3.7 million that begin to expire in 2036 and state research and investment credit carryforwards of approximately $3 million that do not expire. An ownership change of more than 50 percent could result in a limitation of the use of net operating loss carryforwards and credit carryforwards under IRC Section 382 and the regulations thereunder. Management believes it is more likely than not that a

limitation under Section 382 would not impact the realizability of the deferred tax assets related to federal and state net operating losses or credits.

Management assesses the recoverability of its deferred tax assets as of the end of each quarter, weighing all positive and negative evidence, and is required to establish and maintain a valuation allowance for these assets if it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed. As of December 31, 2020, management determined that sufficient positive evidence did not exist to conclude that it is more likely than not that the Net Operating Losses incurred by the Company's Switzerland, Singapore and China operations would be utilized in future periods. Accordingly, management established a full valuation allowance of $2.6 million against the deferred tax assets generated by these three jurisdictions.

The Company files income tax returns in the U.S. as well as Singapore, Switzerland, China and in various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment. For federal and most state purposes, the Company has open tax years ended December 31, 2016 to December 31, 2019. The 2017 U.S. federal income tax filing is currently under examination by the IRS.

The Company adopted the accounting standard for uncertain tax positions and recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from management’s belief that a position can or cannot be sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.

The following are the unrecognized tax benefits as of December 31, 2020 and 2019 (in thousands):


	For the Years Ended December 31,
	2020		2019
Unrecognized tax benefits - January 1	$	444	$	1,847
Increases in prior year positions	1,020		27
Reversals of prior year positions	—		(1,215)
Increases in tax positions taken in current year	378		—
Statute expirations	(172)		(215)
Unrecognized tax benefits - December 31	$	1,670	$	444

The amount of unrecognized tax benefits at December 31, 2020, if recognized would favorably affect the Company's effective tax rate. These unrecognized tax benefits are classified as other long-term liabilities in the Company’s Consolidated Balance Sheets. The interest and penalties related to the unrecognized tax benefit are immaterial. Interest and tax penalties related to unrecognized tax benefits are included in income tax expense.

The Company has received a temporary tax holiday in Switzerland as an incentive to locate and grow operations. The tax holiday is for two consecutive 5-year periods beginning with the year ended December 31, 2017 and is dependent on meeting agreed upon employment and capital investment targets. The first 5-year period ends with the year ended December 31, 2021 and the second 5-year period, should the employment and capital investment targets be met, end with the year ended December 31, 2026. As the Switzerland operations have been in a tax loss position since inception, no financial benefits have been realized.

- 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.

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