Taxes on Income

12 Months Ended

Feb. 01, 2020

Income Tax Disclosure [Abstract]

Taxes on Income

11. Taxes on Income

Geographic sources of loss before income taxes are as follows:

	Year Ended
(In thousands)	February 1, 2020			February 2, 2019
United States	$	(4,490	)	$	(7,399	)
Foreign		(9,342	)		(2,239	)
Loss before income taxes	$	(13,832	)	$	(9,638	)

The provision for income taxes as shown in the accompanying consolidated statements of operations includes the following:

	Year Ended
(In thousands)	February 1, 2020			February 2, 2019
Current:
Federal	$	—		$	—
State		79			(11	)
Foreign		1,029			941
		1,108			930
Deferred:
Federal		—			—
State		(27	)		37
Foreign		(3,413	)		934
		(3,440	)		971
	$	(2,332	)	$	1,901

The provision for income taxes differs from the amounts computed using the statutory United States federal income tax rate as shown in the table below.  Nondeductible transaction costs arose in the Hi-Tec Acquisition.

	Year Ended
(In thousands, except percentages)	February 1, 2020					February 2, 2019
Tax expense at U.S. statutory rate	$	(2,905	)	21.0	%	$	(2,023	)	21.0	%
State income taxes, net of federal income tax benefit		443		(3.2	)		265		(2.7	)
Stock-based compensation		151		(1.1	)		262		(2.7	)
Adjustments to unrecognized tax benefits		(2,769	)	20.0			(380	)	3.9
Nondeductible expenses		6		—			12		(0.1	)
Nondeductible transaction costs		—		—			21		(0.2	)
Valuation allowance		3,388		(24.5	)		4,616		(47.9	)
Foreign Taxes		630		(4.6	)		381		(4.0	)
Indefinite-lived intangible assets		(1,429	)	10.3			(787	)	8.2
Other		153		(1.1	)		(466	)	4.8
	$	(2,332	)	16.8	%	$	1,901		(19.7	)%

A summary of deferred income tax assets and liabilities is as follows:

	Year Ended
(In thousands)	February 1, 2020			February 2, 2019
Deferred tax assets:
Deferred revenue	$	16		$	9
Amortization		1,576			3,855
Other		271			359
Employee compensation		106			242
Interest expense carryforward		1,844			1,277
Net operating loss and credit carryforwards		31,095			26,089
Valuation Allowance		(34,759	)		(31,472	)
Total deferred income tax assets		149			359
Deferred tax liabilities:
Amortization		(9,664	)		(11,627	)
Total deferred income tax liabilities		(9,664	)		(11,627	)
Net deferred income tax liabilities	$	(9,515	)	$	(11,268	)

The Company acquired various net operating loss and credit carryforwards as part of the Hi-Tec Acquisition, and generated additional net operating loss carryforwards in Fiscal 2018, Fiscal 2019 and Fiscal 2020.  Federal and state net operating loss carryforwards totaled $44.2 million and $19.4 million, respectively, at February 1, 2020.  As a result of recent tax law changes, $27.1 million of the Company’s federal net operating loss carryforwards do not expire, while $17.1 million of the Company’s federal and all of the Company’s state net operating loss carryforwards expire beginning in 2026.  Foreign net operating loss carryforwards were $68.3 million at February 1, 2020 and begin to expire in 2021.  The Company has foreign tax and other credit carryforwards of $4.1 million at February 1, 2020 that begin to expire in 2023.  The utilization of certain federal and state net operating loss and credit carryforwards acquired in connection with the Hi-Tec Acquisition are subject to annual limitations under Section 382 of the Internal Revenue Code of 1986 and similar state provisions. 

Primarily as a result of impairment charges related to certain trademarks, the Company’s U.S. operations have sustained a cumulative pretax loss over the last three fiscal years.  Accordingly, the Company has provided a valuation allowance of $12.9 million at February 1, 2020 to reduce the carrying value of the underlying deferred tax assets to zero.  This valuation allowance will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that these deferred tax assets will be realized.  The Company continues to maintain a valuation allowance related to deferred tax assets of the foreign subsidiaries acquired in the Hi-Tec Acquisition, primarily due to the cumulative losses generated in these jurisdictions, and which amounted to $21.9 million at February 1, 2020.  The Hi-Tec and Magnum indefinite-lived trademarks acquired in the Hi-Tec Acquisition result in a deferred tax liability that has an indefinite life and cannot be used as a source of taxable income to support the realization of other deferred tax assets.  Accordingly, the valuation allowance reserves for the deferred tax assets in these foreign jurisdictions and results in a “naked credit” for these indefinite-lived trademarks.  This naked credit would only result in a cash obligation when the underlying trademark assets were sold.

During the fourth quarter of the fiscal year ended February 1, 2020, management identified an immaterial error related to the remeasurement of the naked credit.  The Company used an incorrect exchange rate in the fiscal year ended February 2, 2019 when converting the deferred tax liability from euros to U.S. dollars, resulting in a $0.8 million overstatement of the income tax provision for that period.  Management concluded that the impact of this error was not material and has corrected the consolidated financial statements and other financial information presented in this Annual Report on Form 10-K to properly reflect the income tax provision and naked credit.  See Note 14 for further information.

The Company currently does not have unremitted earnings attributable to foreign subsidiaries.

The Company recorded a $3.9 million reserve for uncertain tax positions in Fiscal 2017 as part of Hi-Tec acquisition.  Gross unrecognized tax benefits are reflected in the accompanying balance sheets as reductions in deferred tax assets or in other long-term liabilities if there are no net operating loss carryforwards available to offset them.  The Company was granted approval in Fiscal 2020 to combine certain of its subsidiaries in the Netherlands as one tax filing group.  This determination allowed the Company to recognize certain tax benefits from uncertain tax positions taken in prior years.  A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:

	Year Ended
(In thousands)	February 1, 2020			February 2, 2019
Gross unrecognized tax benefits at beginning of year	$	3,416		$	3,846
Additions:
Tax positions taken in the current year		—			426
Reductions:
Tax positions taken in prior years		(2,729	)		(261	)
Lapse in statute of limitations		—			(595	)
Gross unrecognized tax benefits at year end	$	687		$	3,416

Interest and penalties related to unrecognized tax benefits are included within the provision for income taxes in the statements of operations.  Interest recognized related to unrecognized tax benefits was a reversal (benefit) of $0.1 million for Fiscal 2020 and an expense of $0.1 million for Fiscal 2019.

The timing of resolution with taxing authorities is not predictable or certain, but the Company believes it is reasonably possible that $0.7 million of unrecognized tax benefits will be recognized in the next twelve months due to a retroactive change in the composition of a consolidated tax filing group or expiration of the applicable statute of limitations.  At February 1, 2020, approximately $0.4 million of unrecognized tax benefits would, if recognized, impact the Company’s effective tax rate.

The Company files income tax returns in the U.S. federal, California and certain other state jurisdictions. For federal income tax purposes, the Fiscal 2017 and later tax years remain open for examination by the tax authorities under the normal three-year statute of limitations. For state tax purposes, the Fiscal 2016 and later tax years remain open for examination by the tax authorities under a four-year statute of limitations.