(

)

Income Taxes

The Company’s income (loss) before income taxes from domestic and foreign operations (which include the U.K., Canada, China, Denmark and Ireland), is as follows (in thousands):

	Fiscal year ended					Five weeks ended
	February 2,			December 30,		February 3,
	2019			2017		2018
Domestic	$	(4,175	)	$	13,081	$	(1,275	)
Foreign		(14,332	)		732		247
Total income (loss) before income taxes	$	(18,507	)	$	13,813	$	(1,028	)

The components of the income tax expense (benefit) are as follows (in thousands):

	Fiscal year ended						Five weeks ended
	February 2,			December 30,			February 3,
	2019			2017			2018

Current:
U.S. Federal	$	(508	)	$	683		$	(125	)
U.S. State		(263	)		609			21
Foreign		(448	)		(313	)		78
Deferred:
U.S. Federal		(836	)		3,815			(181	)
U.S. State		239			(113	)		10
Foreign		1,242			1,216			14
Income tax expense (benefit)	$	(574	)	$	5,897		$	(183	)

The provision for income taxes was a benefit of

$0.6

million in fiscal

2018

compared to income tax expense of

$5.9

million in fiscal

2017.

The

2018

effective rate of

3.1%

differed from the statutory rate of

21%

primarily due to the valuation allowance recorded in certain foreign jurisdictions. The

2017

effective rate of

42.7%

differed from the statutory rate of

34%

primarily due to the effect of the provisional tax charge of

$1.4

million for the re-measurement of U.S. net deferred tax assets as a result of the enactment of the Act reducing the U.S. federal statutory rate to

21%

effective

January 1, 2018.

For the

five

weeks ended

February 3, 2018,

the income tax provision was a benefit of

$0.2

million with an effective rate of

17.8%

compared to the statutory rate of

21%.

As the Company has incurred a cumulative book loss in the U.K. over the

three

-year period ended

February 2, 2019,

management evaluated the realizability of the Company’s U.K. deferred tax assets, including an analysis of all available positive and negative evidence. The

three

-year cumulative loss is a significant piece of negative evidence. ASC

740

requires objective historical evidence be given more weight than subjective evidence, such as forecasts of future income. Accordingly, in the

fourth

quarter of fiscal

2018,

the Company recorded a

$3.7

million valuation allowance on its U.K. deferred tax assets. In fiscal

2018,

the Company recorded an additional allowance of

$0.5

million in certain other foreign jurisdictions. In fiscal

2017,

the Company recorded an additional allowance of

$0.3

million on its deferred tax assets in certain foreign jurisdictions due to cumulative losses and uncertainty about future earnings forecast.

Temporary differences that gave rise to deferred tax assets and liabilities are as follows (in thousands):

	February 2,			December 30,
	2019			2017

Deferred tax assets:
Net operating loss carryforwards	$	4,371		$	764
Deferred revenue		2,661			3,120
Deferred compensation		1,729			1,414
Accrued rents		1,203			1,625
Intangible assets		1,201			1,466
Inventories		987			1,179
Carryforward of tax credits		861			25
Receivable write-offs		477			40
Accrued compensation		88			533
Other		1,056			1,188
Total gross deferred tax assets		14,634			11,354
Less: Valuation allowance		5,079			1,301
Total deferred tax assets, net of valuation allowance		9,555			10,053

Deferred tax liabilities:
Deferred revenue		(4,088	)		-
Depreciation		(1,113	)		(1,704	)
Deferred expense		(763	)		(1,907	)
Other		(492	)		(61	)
Total deferred tax liabilities		(6,456	)		(3,672	)
Net deferred tax assets	$	3,099		$	6,381

As of

February 2, 2019,

the Company had gross net operating loss (NOL) carryforwards of approximately

$21.0

million, most of which relate to the U.K. and U.S. federal jurisdictions where NOLs have

expiration date. As of

February 2, 2019,

the Company had tax credit carryforwards of

$0.9

million primarily related to U.S. federal credits which expire in

2038.

The NOL and credit carryforward amounts were

not

material as of

December 30, 2017.

The Company continues to assert its investments in foreign subsidiaries are permanent in duration and it is

not

practical to estimate the income tax liability on the outside basis differences.

December 22, 2017,

the Act was enacted, which significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Act permanently reduces the U.S. federal statutory rate to

21%,

effective

January

2018.

The Act also provided for a

one

-time deemed repatriation of post-

1986

undistributed foreign subsidiary E&P through the year ended

December 30, 2017.

Under SAB

118,

the Company recorded a provisional tax charge of

$1.4

million for the re-measurement of its U.S. net deferred tax assets and estimated

cost for this

one

-time deemed repatriation in fiscal

2017.

The Company has completed its analysis based on legislative updates relating to the Act currently available, which resulted in a tax benefit of

$0.2

million for fiscal

2018.

A favorable adjustment of

$0.1

million was recorded for the revaluation of deferred tax assets and liabilities. In addition, a favorable adjustment of

$0.1

million was recorded for the impact of the

one

-time deemed repatriation of undistributed foreign subsidiary E&P.

As of

February 2, 2019,

the Company had total unrecognized tax benefits of

$0.4

million, of which approximately

$0.2

million would favorably impact the Company’s provision for income taxes if recognized. As of

December 30, 2017,

the Company had total unrecognized tax benefits of

$0.7

million, of which approximately

$0.3

million would favorably impact the Company’s provision for income taxes if recognized. The Company reviews its uncertain tax positions periodically and accrues interest and penalties accordingly. Accrued interest and penalties included within other liabilities in the consolidated balance sheets were less than

$0.1

million for both years ended as of

February 2, 2019

and

December 30, 2017.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes within the consolidated statement of operations. For the years ended

February 2, 2019

and

December 30, 2017,

the Company recognized an expense of less than

$0.1

million for interest and penalties for each year. For the

five

weeks ended

February 3, 2018,

the Company recognized an expense of less than

$0.1

million for interest and penalties.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance as of December 31, 2016	$	961
Increases for prior year tax positions		57
Decreases for prior year tax positions		(359	)
Balance as of December 30, 2017 (1)		659
Increases for prior year tax positions		288
Decreases for prior year tax positions		(333	)
Settlements		(183	)
Lapse of statute of limitations		(13	)
Balance as of February 2, 2019	$	418

(

)

For the

five

week transition period ending

February 3, 2018,

there was

activity.

Management estimates it is reasonably possible that the amount of unrecognized tax benefits could decrease by as much as

$0.4

million in the next

twelve

months as a result of the resolution of audits currently in progress involving issues common to multinational corporations and the lapsing of the statute of limitations.

The following tax years remain open in the Company’s major taxing jurisdictions as of

February 2, 2019:

United States (Federal)	2016 through 2018
United Kingdom	2016 through 2018