Note 9 – Income Taxes

As discussed in “Note 1 – Summary of Significant Accounting Policies and Nature of Operations”, the Company applies the current U.S. GAAP on accounting for uncertain tax positions, which prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has greater than 50 percent likelihood of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. As of December 28, 2013, the Company had no material unrecognized tax benefits, interest or penalties related to federal and state income tax matters. The Company’s policy is to record interest and penalties as income tax expense.

The Company is subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years 2009-2012 remain open to examination by the major taxing jurisdictions to which the Company is subject, except the Internal Revenue Service for which the tax years 2010-2012 remain open. The Company does not anticipate a significant change to the amount of unrecognized tax benefits within the next twelve months.

The components of loss before income tax provision consist of the following:

 

		Fifty-Two Weeks Ended
		December 28, 2013				December 29, 2012				December 31, 2011
Domestic operations		$	(16,155	)		$	(37,469	)		$	(16,976	)
Foreign operations			564				554				327
Total loss before income taxes		$	(15,591	)		$	(36,915	)		$	(16,649	)

Income tax (benefit) provision for fiscal year 2013, 2012 and 2011 consists of the following:

 

		Fifty-Two Weeks Ended
		December 28, 2013				December 29, 2012				December 31, 2011
Current:
Federal tax		$	—			$	—			$	—
State tax			20				14				23
Foreign tax			(37	)			(76	)			4
Total current taxes			(17	)			(62	)			27
Deferred:
Federal tax			(5,260	)			(12,612	)			(5,516	)
State tax			(1,353	)			(2,618	)			(1,728	)
Foreign tax			60				275				—
Total deferred taxes			(6,553	)			(14,955	)			(7,244	)
Valuation allowance			6,613				14,080				5,705
Income tax (benefit) provision		$	43			$	(937	)		$	(1,512	)

 

Income tax (benefit) provision differs from the amount that would result from applying the federal statutory rate as follows:

 

		December 28, 2013				December 29, 2012				December 31, 2011
Income tax at U.S. federal statutory rate		$	(5,301	)		$	(12,551	)		$	(5,661	)
Share-based compensation			43				38				21
State income tax, net of federal tax effect			(1,348	)			(2,528	)			(1,629	)
Foreign tax			70				(27	)			(108	)
Other			(42	)			51				137
Change in valuation allowance			6,621				14,080				5,728
Effective tax (benefit) provision		$	43			$	(937	)		$	(1,512	)

For fiscal year 2013, 2012 and 2011, the effective tax rate for the Company was (0.3)%, 2.5% and 9.1%, respectively. The Company’s effective tax rate for fiscal year 2013 differs from the U.S. federal statutory rate primarily as a result of the recording of a $6,621 valuation allowance against the Company’s net deferred tax assets. The Company’s effective tax rate for fiscal year 2012 differs from the U.S. federal statutory rate primarily as a result of the recording of a $14,080 valuation allowance against the Company’s deferred tax assets. For 2013, the effective tax provision stems primarily from recording of a $6,621 valuation allowance against the Company’s deferred tax assets. For 2012, the effective income tax benefit stems primarily from the reversal of the net deferred income tax liability resulting from the write down of goodwill and other intangible assets, and the impact of the Philippine tax holiday, partially offset by the accrual of withholding taxes related to potential repatriation of earnings in the Philippines. 2013 foreign tax was impacted by the expiration of our Philippine tax holiday in September 2013 and the recording of Philippine withholding taxes on future possible repatriation of earnings. The Company’s effective tax rate for fiscal year 2011 differs from the U.S. federal statutory rate primarily as a result of the recording of a $5,728 valuation allowance against the Company’s deferred tax assets. Additionally, the Company’s fiscal 2011 tax benefit was substantially the result of a $5,138 impairment loss on intangibles resulting in the reduction of long term deferred tax liabilities.

Deferred tax assets and deferred tax liabilities consisted of the following:

 

		December 28, 2013				December 29, 2012
Deferred tax assets:
Inventory and inventory related allowance		$	1,075			$	1,029
Share-based compensation			4,545				4,378
Amortization			13,704				15,668
Sales and bad debt allowances			583				773
Vacation accrual			374				345
Book over tax amortization			377				—
Net operating loss and AMT credit carry-forwards			23,114				17,656
Other			388				401
Total deferred tax assets			44,160				40,250
Valuation Allowance			(43,509	)			(36,896	)
Net deferred tax assets			651				3,354
Deferred tax liabilities:
Tax over book depreciation			784				3,206
Tax over book amortization			—				130
Prepaid catalog expenses			202				293
Total deferred tax liabilities			986				3,629
Net deferred tax liabilities		$	(335	)		$	(275	)

 

At December 28, 2013, federal and state net operating loss (“NOL”) carryforwards were $50,809 and $65,779, respectively. Federal NOL carryforwards of $2,690 were acquired in the acquisition of WAG which are subject to Internal Revenue Code section 382 and limited to an annual usage limitation of $135. Additionally, the tax benefit of $219 of the federal and state NOL carryforwards which was created by the exercise of stock options will be credited to additional paid-in-capital once recognized. Federal NOL carryforwards begin to expire in 2029, while state NOL carryforwards begin to expire in 2016. The state NOL carryforwards expire in the respective tax years as follows:

 

2016-2022		$	38,831
2023-2032			26,948
Total		$	65,779

The valuation allowance for deferred tax assets recorded during fiscal year 2013 and 2012 is based on a more likely than not threshold. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We considered the following possible sources of taxable income when assessing the realization of deferred tax assets:

 

•

Future reversals of existing taxable temporary differences;

 

•

Future taxable income exclusive of reversing temporary differences and carryforwards;

 

•

Taxable income in prior carryback years; and

 

•

Tax-planning strategies.

Under the provisions of ASC 740, “Income Taxes”, management is required to evaluate whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Realization of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies, and reversal of existing taxable temporary differences. ASC 740 provides that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years or losses expected in early future years. Based on this evaluation, as of December 28, 2013, a valuation allowance of $43,509 has been recorded against our deferred tax assets.

If, in the future, we generate taxable income on a sustained basis in jurisdictions where we have recorded full valuation allowances, our conclusion regarding the need for full valuation allowances in these tax jurisdictions could change, resulting in the reversal of some or all of the valuation allowances. If our operations generate taxable income prior to reaching profitability on a sustained basis, we would reverse a portion of the valuation allowance related to the corresponding realized tax benefit for that period, without changing our conclusions on the need for a full valuation allowance against the remaining net deferred tax assets.

Included in accrued expenses are income taxes payable of $26 and $25 for the fiscal year 2013 and 2012 respectively, consisting primarily of foreign taxes.