Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Loss before income taxes consisted of the following:
Year Ended December 31,
2023 2022 2021
United States
 $ (8,904) $ (7,586) $ (245)
Foreign
 (88,061) (173,028) (4,994)
Loss before income taxes
 $ (96,965) $ (180,614) $ (5,239)
The components of the provision for (benefit from) income taxes consisted of the following:
Year Ended December 31,
2023 2022 2021
Current:
Federal
 $ 1,496  $ 1,059  $ 2,631 
State
 649  354  733 
Foreign
 465  (1,208) 7,828 
Total
 2,610  205  11,192 
Deferred:
Federal
 (2,305) (2,325) (579)
State
 467  (126) (42)
Foreign
 1,149  (1,671) (9,719)
Total (689) (4,122) (10,340)
Provision for (benefit from) income taxes
 $ 1,921  $ (3,917) $ 852 
The (benefit from) provision for income taxes differs from the tax computed using the statutory U.S. federal income tax rate of 21% as a result of the following items:
Year Ended December 31,
2023 2022 2021
(Benefit from) provision for income taxes at U.S. statutory rate
 $ (20,363) $ (37,929) $ (1,100)
State income taxes, net of federal income tax benefit
 512  250  546 
Permanent differences
 555  266  1,121 
Foreign tax rate differential
 (8,220) (14,900) (886)
Transaction costs
 —  —  (477)
Equity-based compensation
 1,082  860  1,689 
Goodwill impairment
 21,444  51,990  — 
Change in valuation allowance
 6,987  —  — 
Change in tax basis of Culture Kings’ inventory and intangibles
 —  (2,233) — 
Intra-entity transfer of certain intellectual property rights
 —  (1,030) — 
Other
 (76) (1,191) (41)
Provision for (benefit from) income taxes
 $ 1,921  $ (3,917) $ 852 
The foreign tax rate differential relates to differences between the income tax rates in effect in the foreign countries in which the Company operates, in particular Australia where the corporate tax rate is 30%.
The components of net deferred tax assets (liabilities) were as follows:
Year Ended December 31,
2023 2022
Deferred tax assets:
Transaction costs $ 843  $ 1,327 
Property and equipment
 1,678  1,217 
Accruals and reserves 5,201  3,155 
Lease liabilities 11,391  10,601 
Asset retirement obligation
 165  348 
Inventory
 2,427  273 
Foreign exchange gains / losses 1,078  150 
Interest limitation
 1,034  551 
Loss carryforwards
 10,472  6,874 
Other
 387  — 
Subtotal 34,676  24,496 
Less: Valuation allowance (12,158) (4,755)
Total deferred tax assets 22,518  19,741 
Deferred tax liabilities:
Property and equipment
 (2,427) — 
Intangible assets (6,850) (8,372)
Right-of-use assets
 (11,472) (10,668)
Foreign exchange gains / losses (200) — 
Other —  85 
Total deferred tax liabilities (20,949) (18,955)
Net deferred assets
 $ 1,569  $ 786 
The Company had gross deferred tax assets of $34.7 million and $24.5 million and gross deferred tax liabilities of $20.9 million and $19.0 million at December 31, 2023 and 2022, respectively. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. When weighing all available evidence associated with the realizability of its deferred tax assets, in particular, uncertainties related to the future generation of taxable income, the recent negative trends in the Australian market and cumulative losses in the Australian market, the Company determined that it was not “more likely than not” that it would be able to realize the tax benefits associated with certain of its net deferred tax assets. Based on this evaluation, a full valuation allowance of $11.8 million has been recorded on the net deferred tax assets in the Company’s Australian business. Additionally, a full valuation allowance of $0.4 million has been recorded on the U.S. capital loss carryforward related to the sale of Rebdolls in March 2023. For the year ended December 31, 2023, the valuation allowance increased by $7.4 million, primarily due to incremental net operating losses in Australia that were not considered realizable.
As of December 31, 2023, the Company had a $26.0 million Australian net operating loss carryforward and a $15.8 million Australian capital loss carryforward, as well as a U.S. capital loss carryforward of $1.7 million on the sale of Rebdolls. As of December 31, 2022, the Company had a $7.1 million Australian net operating loss carryforward and a $15.8 million Australian capital loss carryforward on the intra-entity transfer of certain intellectual property rights from Australia to the U.S. The net operating loss and capital loss carryforwards have no expiration.
The Company has not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries that have been considered permanently reinvested. As of December 31, 2023, there are no unremitted earnings from these operations.
As of December 31, 2023 and 2022, the Company had no uncertain tax positions.
The Company is subject to taxation in the United States, Cayman Islands and Australia. For U.S. federal income tax purposes, 2020 and later tax years remain open for examination by the tax authorities under the normal three-year statute of limitations. For major U.S. states, 2019 and later tax years remain open for examination by the tax authorities under a four-year statute of limitations. For Australia, 2019 and subsequent tax years remain subject to examination.
Tax Contingencies
The Company is subject to income taxes in the United States and Australia. Significant judgment is required in evaluating the Company’s tax positions and determining the provision for income taxes. During the ordinary course of business, the Company considers tax positions for which the ultimate tax determination is uncertain for the purpose of determining whether a reserve is required, despite the Company’s belief that the tax positions are fully supportable. To date the Company has not established a reserve provision because the Company believes that all tax positions are highly certain.