LeapFrog 2015 Annual Report Download - page 75

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
11. Income Taxes − (continued)
weight given to the positive and negative evidence is commensurate with the extent to which the evidence
may be objectively verified. Due to the high seasonality of the Company’s business with a significant portion
of its annual income earned late in the calendar year, the final determination for the need for valuation
allowances is generally made at the end of the December quarter, after the critical holiday season has passed.
Any changes to valuation allowance affect effective tax rate, but do not affect the amount of cash paid for
income taxes in the foreseeable future.
A full valuation allowance was recorded against the Company’s domestic deferred tax assets starting in 2006.
As of December 31, 2012, based on its evaluation of all evidence available, the Company determined that a
portion of its domestic deferred tax assets would be realized. Accordingly, $21,614 of the Company’s
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, the Company evaluated its ability to realize the benefit of its domestic
deferred tax assets. Consideration was given to negative evidence such as: the duration and severity of losses
in the Company’s 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, the Company believed
the weight of the objectively verifiable positive evidence was sufficient to overcome the weight of the existing
negative evidence. Accordingly, the Company concluded that the benefit of a significant portion of its
domestic deferred tax assets would be realized and $62,759 of the Company’s 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 fiscal year end, the three months ended March 31, 2014 was treated as a separate tax
year. Accordingly, the Company reevaluated its ability to realize the benefit of its domestic deferred tax assets
with carryforward periods and concluded that the benefit of its state net operating loss carryforwards would
not be realized. As a result, the Company established an additional valuation allowance of $251 for the
three months ended March 31, 2014.
For the year ended March 31, 2015, the Company evaluated its ability to realize the benefit of its domestic
deferred tax assets. The Company 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 its deferred tax assets. However, the Company’s 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 its projections of future taxable
income. Consequently, the Company 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
its deferred tax assets, the Company considers cumulative losses in recent years as significant negative
evidence that is difficult to overcome. In addition, the goodwill impairment charge recorded in the quarter
ended December 31, 2014 was considered additional significant negative evidence indicating the benefit of its
deferred tax assets would not be realized. After weighing all evidence available as of December 31, 2014, the
Company 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 its
domestic deferred tax assets before expiration. As a result, the Company concluded a full valuation allowance
against its domestic deferred tax assets was warranted. Accordingly, for the year ended March 31, 2015, the
Company established an additional valuation allowance of $117,842 of which $90,769 was recorded as an
income tax provision and impacted the Company’s effective tax rate. The remaining $27,073 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 the effective tax rate for the year ended March 31, 2015.
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