11. Taxes on Income

Geographic sources of (loss) income from continuing operations before income taxes are as follows:


	Year Ended
	February 3,		January 28,		January 30,
(In thousands)	2018		2017		2016
United States	$	(46,044)	$	(3,877)	$	12,791
Foreign		(6,787)		(1,587)		—
(Loss) income from continuing operations before income taxes	$	(52,831)	$	(5,464)	$	12,791

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


	Year Ended
	February 3,		January 28,		January 30,
(In thousands)	2018		2017		2016
Current:
Federal	$	(81)	$	813	$	2,585
State		(164)		252		(13)
Foreign		1,639		1,221		1,183
		1,394		2,286		3,755
Deferred:
Federal		(150)		1,088		644
State		13		108		33
Foreign		1,773		177		—
		1,636		1,373		677
Tax benefit recorded as a decrease of paid-in capital:
Federal		—		(364)		(68)
State		—		(37)		(6)
		—		(401)		(74)
	$	3,030	$	3,258	$	4,358

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
		February 3,				January 28,				January 30,
(In thousands, except percentages)		2018				2017				2016
Tax expense at U.S. statutory rate	$	(17,329)	32.8	%	$	(1,858)	34.0	%	$	4,349	34.0	%
State income taxes, net of federal income tax benefit		(942)	1.8			179	(3.3)			187	1.5
Change in U.S. federal statutory rate		7,350	(13.9)			—	—			—	—
Stock-based compensation		1,517	(2.9)			—	—			—	—
Stock warrants		425	(0.8)			—	—			—	—
Adjustments to unrecognized tax benefits		(794)	1.5			233	(4.3)			(189)	(1.5)
Nondeductible expenses		18	—			151	(2.8)			17	0.1
Nondeductible transaction costs		250	(0.5)			2,894	(53.0)			—	—
Valuation allowance		10,688	(20.3)			942	(17.2)			—	—
Foreign Taxes		562	(1.1)			163	(2.9)			—	—
Exchange rate changes		1,427	(2.7)			—	—			—	—
Other		(142)	0.4			554	(10.1)			(6)	—
Tax provision	$	3,030	(5.7)	%	$	3,258	(59.6)	%	$	4,358	34.1	%

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



	February 3, 2018		January 28, 2017
(In thousands)	Non-Current		Non-Current
Deferred tax assets:
Deferred revenue		213		478
Amortization		5,967		—
Other		1,578		2,691
State income taxes		—		85
Employee compensation		543		1,630
Net operating loss and credit carryforwards		18,778		12,754
Valuation Allowance		(27,079)		(14,889)
Total deferred income tax assets		—		2,749
Deferred tax liabilities:
Amortization		(10,466)		(10,376)
Depreciation		—		(91)
Total deferred income tax liabilities		(10,466)		(10,467)
Net deferred income tax liabilities	$	(10,466)	$	(7,718)

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. Federal and state net operating loss carryforwards totaled $25.4 million and $15.3 million, respectively, at February 3, 2018. As a result of recent tax law changes, $9.7 million of the Company’s federal net operating loss carryforwards do not expire, while $15.7 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 $52.7 million at February 3, 2018 and begin to expire in 2021. The Company has federal and state tax credit carryforwards of $1.7 million at February 3, 2018 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 $10.6 million at February 3, 2018 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 $16.5 million at February 3, 2018.

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

The Tax Cuts and Jobs Act was enacted on December 22, 2017 and reduced U.S. corporate income tax rates to 21.0% as of January 1, 2018. Consequently, the Company recorded a decrease in its deferred tax assets and the associated valuation allowance of $7.4 million each, which had no net impact on deferred income tax expense for Fiscal 2018. The rate change became effective during Fiscal 2018 resulting in a blended statutory tax rate of 32.8% for Fiscal 2018. On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the tax legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the income tax effects discussed above represent the Company’s best estimate based on its current interpretation of this tax legislation. The Company is accumulating data to finalize the underlying calculations and evaluate other aspects of this tax legislation, including its impact on the Company’s foreign subsidiaries, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the tax legislation. In accordance with SAB 118, the income tax effects of the tax legislation discussed above are considered provisional and will be finalized in Fiscal 2019.

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 other long term liabilities in the accompanying balance sheets. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:


	Year Ended
	February 3,		January 28,		January 30,
(In thousands)	2018		2017		2016
Gross unrecognized tax benefits at beginning of year	$	3,977	$	—	$	449
Additions:
Tax positions taken in prior years		315		2,566		—
Tax positions taken in the current year		1,609		1,411		—
Reductions:
Tax positions taken in prior years		—		—		(96)
Settlement with taxing authorities		(38)		—		(170)
Lapse in statute of limitations		(2,017)		—		(183)
Gross unrecognized tax benefits at year end	$	3,846	$	3,977	$	—

Interest and penalties related to unrecognized tax benefits are included within the provision for income taxes in the statements of operations. The total amount of interest recognized related to unrecognized tax benefits was $0.1 million for Fiscal 2018, and was insignificant for Fiscal 2017 and Fiscal 2016.

Although we cannot predict the timing of resolution with taxing authorities, if any, we believe it is reasonably possible that $3.8 million of unrecognized tax benefits will be recognized in the next twelve months due to change in the composition of a consolidated tax filing group or expiration of the applicable statute of limitations. At February 3, 2018, approximately $1.9 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 2015 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 2014 and later tax years remain open for examination by the tax authorities under a four-year statute of limitations.