LeapFrog 2015 Annual Report Download - page 35

A full valuation allowance was recorded against our domestic deferred tax assets starting in 2006. As of
December 31, 2012, based on our evaluation of all evidence available, we determined that a portion of our
domestic deferred tax assets would be realized. Accordingly, $21.6 million of our domestic valuation
allowance was released and recorded as an income tax benefit for the year ended December 31, 2012.
For the year ended December 31, 2013, we evaluated our ability to realize the benefit of our domestic
deferred tax assets. Consideration was given to negative evidence such as: the duration and severity of losses
in our history, high seasonal revenue concentrations, increasing competitive pressures, and a challenging
retail environment. However, after considering four consecutive years of profitability and a significant three
year cumulative domestic income position as of December 31, 2013, we believed the weight of the objectively
verifiable positive evidence was sufficient to overcome the weight of the existing negative evidence.
Accordingly, we concluded that the benefit of a significant portion of our domestic deferred tax assets would
be realized and $62.8 million of our domestic deferred tax valuation allowance was released and recorded as
an income tax benefit for the year ended December 31, 2013.
Due to the change in our fiscal year-end, the three months ended March 31, 2014 was treated as a separate tax
year. Accordingly, we reevaluated our ability to realize the benefit of our domestic deferred tax assets with
carryforward periods and concluded that we would not be able to realize the full benefit of some of our state
net operating loss carryforwards before they are due to expire. As a result, we established an additional
valuation allowance of $0.2 million for the three months ended March 31, 2014.
For the year ended March 31, 2015, we evaluated our ability to realize the benefit of our domestic deferred
tax assets during the quarter ended December 31, 2014. We considered existing positive evidence available
such as: historic profitability, lack of expiring net operating loss and tax credit carryforwards, and viable
tax strategies that could potentially impact the likelihood of realizing our deferred tax assets. However,
our performance during the 2014 holiday season was significantly lower than anticipated and the
underperformance of products and product lines newly introduced to the market had a considerable impact on
our projections of future taxable income. Consequently, we anticipated a three year cumulative domestic loss
position within the current fiscal year. In determining if sufficient projected future taxable income exists to
realize the benefit of our deferred tax assets, we consider cumulative losses in recent years as significant
negative evidence that is difficult to overcome, and the goodwill impairment charge recorded in the quarter
ended December 31, 2014 was considered additional significant negative evidence indicating the benefit of our
deferred tax assets would not be realized. After weighing all evidence available as of December 31, 2014, we
believed there was not sufficient positive evidence to overcome the significant negative evidence and so
determined that sufficient projected future taxable income did not exist to realize the full benefit of our
domestic deferred tax assets before expiration. As a result, we concluded that a full valuation allowance
against our domestic deferred tax assets was appropriate. Accordingly, for the year ended March 31, 2015, we
established an additional valuation allowance of $117.8 million, of which $90.8 million was recorded as an
income tax provision and impacted our effective tax rate. The remaining $27.0 million of additional valuation
allowance was established against deferred tax assets attributable to current year losses, the respective tax
expense and tax benefits of which were fully offset during the year, and therefore did not impact our effective
tax rate for the year ended March 31, 2015.
As of March 31, 2015, we maintained a valuation allowance of $126.0 million against our domestic deferred
tax assets. We also maintained a full valuation allowance of $1.0 million against the deferred tax assets of our
subsidiary in Mexico, which was initially established during 2012. We also evaluated the need for a valuation
allowance against the deferred tax assets of our other foreign jurisdictions, and believe that the benefit of
these deferred tax assets, totaling $0.7 million as of March 31, 2015, will be realized at the required
more-likely-than not level of certainty. Therefore, no valuation allowance has been established against such
deferred tax assets as of March 31, 2015. We will continue to evaluate all evidence in all jurisdictions in
future periods, to determine if a change in valuation allowance against our deferred tax assets is warranted.
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