INCOME TAXES

On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The Company did not record additional provisional income tax given the Company has full valuation allowances on its deferred tax assets and liabilities and the net operating loss generated in 2017. This represents our best estimate based on interpretation of the U.S. legislation as we are still accumulating data to finalize the underlying calculations, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the U.S. legislation. Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.

Accordingly, the Company’s income tax provision as of December 31, 2018 and 2017 reflects (i) the current year impacts of the U.S. Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail:

(a) The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%. The impact from the permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018. The Company adjusted the deferred tax asset and liabilities and the corresponding valuation reserve as a result of the reduction in the U.S. federal corporate tax rate.

The Tax Act created a new requirement that certain income (commonly referred to as “GILTI”) earned by controlled foreign corporations (CFC’s) must be included currently in the gross income of the CFC’s U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy of the new GILTI tax rules will depend on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. The Company has included an estimate of the GILTI tax in the Company’s annualized effective tax rate used to determine tax expense for the years ended December 31, 2018 and 2017.

Prior to the Tax Act, our practice and intention was to reinvest the earnings in our non-U.S. subsidiaries, and no U.S. deferred income taxes or foreign withholding taxes were recorded. The transition tax noted above resulted in the previously untaxed foreign earnings being included in fiscal 2018 taxable income. We are currently analyzing our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which may include withholding taxes, local country taxes and potential U.S. state taxation. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Tax Act and have not recorded any withholding or state tax liabilities, any deferred taxes attributable to GILTI (as noted above) or any deferred taxes attributable to our investment in our foreign subsidiaries.

Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

The components of income (loss) before taxes for the years ended December 31 are as follows:



Origin of income before taxes	2018			2017			2016
United States	$	3,277		$	(9,821	)	$	(13,016	)
Foreign	(3,272		)	(1,208		)	(2,708		)
Income (Loss) before income taxes	$	5		$	(11,029	)	$	(15,724	)

Significant components of income tax benefit (expense) for the years ended December 31 are as follows:



	2018			2017			2016
Current:
Federal	$	(18	)	$	111		$	(357	)
State	(13		)	—			—
Foreign	—			(65		)	(105		)
Total current	(31		)	46			(462		)
Deferred:
Federal	(2		)	534			—
Foreign	—			—			(1,202		)
Total deferred	(2		)	534			(1,202		)
Income tax benefit (expense)	$	(33	)	$	580		$	(1,664	)

A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the years ended December 31 is as follows:



	2018		2017		2016
Provision at the U.S. federal statutory rate	21.0	%	34.0	%	34.0	%
State taxes, net of federal benefit	(86.5	)%	—	%	2.4	%
Foreign tax rate differential	(2,210.3	)%	(0.9	)%	—	%
Valuation allowance	(7,152.8	)%	15.0	%	(42.7	)%
Federal tax rate change	—	%	(43.9	)%	—	%
Other true up	8,904.9	%	—	%	(0.6	)%
Intangible assets impairment and other non-deductibles	2,194.6	%	(1.8	)%	—	%
Other	(994.6	)%	2.1	%	(4.1	)%
Income tax benefit (expense) effective rate	676.3	%	4.5	%	(11.0	)%

The deferred tax assets and liabilities at December 31 are as follows:



	2018			2017
Deferred tax assets:
Stock compensation expense	$	1,867		$	1,814
Goodwill	1,927			2,366
Royalty accruals	484			443
Bad debt allowance	345			360
Inter-company interest expense accrual	—			496
Net operating loss carryforwards	6,654			5,253
Credit carry-forwards	685			694
Inventory reserve	277			254
Depreciation	515			555
Other	539			362
Total deferred tax assets	13,293			12,597
Deferred tax liabilities:
Intangible assets	(283		)	(386		)
Other	(137		)	(146		)
Total deferred tax liabilities	(420		)	(532		)
Net deferred tax asset before valuation allowance	12,873			12,065
Valuation allowances for deferred tax assets	(13,044		)	(12,234		)
Net deferred tax liability	$	(171	)	$	(169	)

The change in the valuation allowance for deferred tax assets for the years ended December 31 is as follows:



Year	Balance at January 1		Charged to costs and expenses		(Deductions)/Other	Balance at December 31
2016	$	7,832	5,347		—	$	13,179
2017	$	13,179	(945	)	—	$	12,234
2018	$	12,234	810		—	$	13,044

For the years ended December 31, 2018, 2017 and 2016, there were no exercises of stock options.

As required by ASC 740, we recognize 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% likelihood of being realized upon ultimate settlement with the relevant tax authority.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. There were no interest and penalties recognized in income tax expense during the years ended December 31, 2018, 2017 and 2016. There were no unrecognized tax benefits as of December 31, 2018, 2017 and 2016, including interest and penalties $0, $0 $140.

We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2015 through 2017; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2010 through 2017 based on local statutes.

Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for both federal and state tax issues are included in current liabilities on the consolidated balance sheet.

The investment in our foreign subsidiaries is considered to be indefinite in duration and therefore we have not provided a provision for deferred U.S. income taxes on the unremitted earnings from those subsidiaries. A provision has not been established because it is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings and because it is our present intention to reinvest the undistributed earnings indefinitely. As previously noted, the Tax Act made significant changes to the taxation of undistributed foreign earnings, requiring that all previously untaxed earnings and profits of our controlled foreign corporation be subjected to a one-time mandatory deemed repatriation tax. The transition tax substantially eliminated the basis differences that existed prior to the Tax Act. However, there are limited other taxes that could continue to apply such as foreign withholding and certain state taxes.

As required by ASC 740, a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We have approximately $10,408 of US net operating loss carryforwards available to offset future US taxable income as of December 31, 2018. The net operating loss carry-forwards related to tax losses generated in prior years in the US begin to expire in 2034. Further, we have tax loss carry-forwards of approximately $5,468 available to offset future foreign income in Italy as of December 31, 2018. We have recorded a full valuation allowance against the resulting $1,312 deferred tax asset because we cannot anticipate when or if this entity will have taxable income sufficient to utilize the net operating losses in the future. There is no expiration of the net operating loss carry-forwards related to tax losses generated in prior years in Italy. Finally, we have tax loss carry-forwards of approximately $10,186 available to offset future foreign income in China as of December 31, 2018. The net operating loss carry-forwards related to tax losses generated in prior years in China expire in 2022.