Note 12 - Income Taxes

12 Months Ended

Jan. 02, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 12 - Income Taxes

We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate.

The domestic and foreign components of Income (loss) before income taxes were as follows:

	Year Ended
(In thousands)	January 2, 2021		December 28, 2019		December 29, 2018
Domestic	$	11,772	$	33,417	$	(8,274	)
Foreign		36,684		11,648		(15,695	)
Income (loss) before taxes	$	48,456	$	45,065	$	(23,969	)

The components of Income tax expense are as follows:

	Year Ended
(In thousands)	January 2, 2021			December 28, 2019			December 29, 2018
Current:
Federal	$	54		$	499		$	536
State		68			45			38
Foreign		1,025			1,345			1,869
		1,147			1,889			2,443
Deferred:
Federal		—			—			—
State		—			—			—
Foreign		(83	)		(317	)		(90	)
		(83	)		(317	)		(90	)
Income tax expense	$	1,064		$	1,572		$	2,353

Income tax expense differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:

	Year Ended
	January 2, 2021	December 28, 2019	December 29, 2018
	%	%	%
Statutory federal rate	21	21	(21)
Adjustments for tax effects of:
State taxes, net	(4)	3	(6)
Research and development credits	(3)	3	(5)
Stock compensation	(23)	(11)	8
Foreign rate differential	(12)	(2)	20
Foreign dividends	15	—	—
Foreign withholding taxes	3	3	5
162(m) executive compensation limitation	13	5	2
Other deferred tax asset adjustment	3	—	13
Valuation allowance	(13)	(19)	(11)
Change in uncertain tax benefit accrual	2	—	2
Other	—	1	3
Effective income tax rate	2	4	10

ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly basis.

Through January 2, 2021, we continued to evaluate the valuation allowance position in the United States and concluded that we should maintain a full valuation allowance against the net federal and state deferred tax assets. In making this evaluation, we exercised significant judgment and considered estimates about our ability to generate revenue and taxable profits sufficient to offset expenditures in future periods within the United States. We will continue to evaluate both positive and negative evidence in future periods to determine if we will realize the net deferred tax assets. We don't have a valuation allowance in any foreign jurisdictions as we have concluded it is more likely than not that we will realize the net deferred tax assets in future periods.

The components of our net deferred tax assets are as follows:

(In thousands)	January 2, 2021			December 28, 2019
Deferred tax assets:
Accrued expenses and reserves	$	5,464		$	3,527
Stock-based and deferred compensation		3,851			2,812
Lease liability		4,190			4,369
Intangible assets		10,082			12,294
Fixed assets		351			256
Net operating loss carry forwards		87,443			86,899
Tax credit carry forwards		83,534			90,339
Capital loss carry forwards		4,018			4,235
Other		934			1,059
Total deferred tax assets		199,867			205,790
Less: valuation allowance		(192,478	)		(198,499	)
Net deferred tax assets		7,389			7,291
Deferred tax liabilities:
Fixed assets		2,809			2,620
Unremitted earnings		1,746			—
Deferred revenue		64			434
Right-of-use asset		3,939			3,759
Total deferred tax liabilities		8,558			6,813
Net deferred taxes		(1,169	)		478

The following table displays the activity related to changes in our valuation allowance for deferred tax assets:

Fiscal Years Ended	Balance at beginning		Charged (Credit) to costs and			Charged (credit) to other		Balance at end of
(in thousands)	of period		expenses			accounts		period
January 2, 2021	$	198,499	$	(6,021	)	$	—	$	192,478
December 28, 2019	$	207,108	$	(8,609	)	$	—	$	198,499
December 29, 2018	$	209,691	$	(2,583	)	$	—	$	207,108

At January 2, 2021, we had U.S. federal net operating loss ("NOL") carryforwards (pretax) of approximately $359.5 million that expire at various dates between 2021 and 2037. We had state NOL carryforwards (pretax) of approximately $147.6 million that expire at various dates from 2021 through 2037. We also had federal and state credit carryforwards of $51.7 million and $64.9 million, respectively. Of the $64.9 million state credit carryforwards, $64.5 million do not expire. The federal and remaining state credits expire at various dates from 2021 through 2040.

Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period. If there is a significant change in ownership, future tax attribute utilization may be restricted and an allowance will be recorded against NOL carryforwards and/or R&D credits to reflect the limitation.

Foreign earnings may be subject to withholding taxes in local jurisdictions if they are distributed and repatriated in the United States. At January 2, 2021, U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $3.1 million of the undistributed earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely.

At January 2, 2021, our unrecognized tax benefits associated with uncertain tax positions were $55.7 million, of which $53.6 million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of January 2, 2021, interest and penalties associated with unrecognized tax benefits were $9.1 million, which are not reflected in the table below.

The following table summarizes the changes to unrecognized tax benefits for the fiscal years presented:

	(in thousands)
Balance at December 30, 2017	$	58,377
Additions based on tax positions related to the current year		389
Additions based on tax positions of prior years		759
Reduction for tax positions of prior years		(5	)
Reduction as a result of lapse of applicable statute of limitations		(1,235	)
Balance at December 29, 2018		58,285
Additions based on tax positions related to the current year		238
Additions based on tax positions of prior years		1,084
Reductions for tax positions of prior years		(213	)
Reduction as a result of lapse of applicable statute of limitations		(2,432	)
Balance at December 28, 2019		56,962
Additions based on tax positions related to the current year		548
Additions based on tax positions of prior years		628
Reductions for tax positions of prior years		—
Reduction as a result of lapse of applicable statute of limitations		(2,401	)
Balance at January 2, 2021	$	55,737

The balance of the unrecognized tax benefit at December 30, 2017 included in the table above summarizing the changes to the unrecognized tax benefit has been updated from $44,832 thousand to $58,377 thousand. Additionally, the amounts in this table for Additions based on tax positions of prior years during 2018 and 2019 have been updated from $19 thousand and $334 thousand to $759 thousand and $1,084 thousand, respectively.

Our liability for uncertain tax positions (including penalties and interest) was $22.3 million and $24.6 million at January 2, 2021 and December 28, 2019, respectively, and is recorded as a component of Other long-term liabilities on our Consolidated Balance Sheets. The remainder of our uncertain tax position exposure of $42.5 million is netted against deferred tax assets.

At January 2, 2021, it is reasonably possible that $2.7 million of unrecognized tax benefits and $0.4 million of associated interest and penalties could be recognized during the next twelve months. The $3.1 million potential change would represent a decrease in unrecognized tax benefits, comprised of items related to tax filings for years that will no longer be subject to examination under expiring statutes of limitations.

The years that remain subject to examination are 2017 for federal income taxes, 2016 for state income taxes, and 2013 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount.

Our Philippines 2016 and 2017 and Israeli 2013 through 2017 income tax returns are currently under examination. We are not under examination in any other jurisdiction.

We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax NOL and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income and withholding taxes, which are reflected in income tax expense in our Consolidated Statements of Operations and are primarily related to the cost of operating offshore activities and subsidiaries. We accrue interest and penalties related to uncertain tax positions in income tax expense.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).  The CARES Act eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020.  The CARES Act makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. In addition, the CARES Act allows companies to defer making certain payroll tax payments until future years. With the enactment of the CARES Act, the Company does not expect a financial statement impact from income taxes.  The Company has not recorded any income tax expense or benefit relate to the Act for the year ended January 2, 2021.