Income Taxes
Significant components of the provision for income taxes expense (benefit) from continuing operations are as follows:
|
| | | | | | | | |
| Fiscal Year Ended |
| July 1,
2017 |
| July 2,
2016 |
|
| (in thousands) |
Current: | | | | |
Federal | $ | — |
| | $ | — |
| |
State | — |
| | — |
| |
Foreign |
|
| |
|
| |
| — |
| | — |
| |
Deferred: | | | | |
Federal | — |
| | — |
| |
State | — |
| | — |
| |
Foreign | — |
| | — |
| |
| — |
| | — |
| |
Provision (benefit) from continuing operations | $ | — |
| | $ | — |
| |
The components of loss from continuing operations before income taxes are as follows:
|
| | | | | | | | |
| |
| July 1,
2017 |
| July 2,
2016 |
|
| |
United States | $ | (42,162 | ) | | $ | (18,126 | ) | |
Foreign | — |
| | — |
| |
Total loss from continuing operations before income taxes | $ | (42,162 | ) | | $ | (18,126 | ) | |
A reconciliation of the federal statutory tax rate with the Company’s effective income tax rate from continuing operations is as follows:
|
| | | | | | |
| Fiscal Year Ended | |
| July 1,
2017 |
| July 2,
2016 |
|
Federal statutory rate | (35.0 | )% | | (35.0 | )% | |
State rate, net of federal benefit | (3.9 | ) | | (3.9 | ) | |
Valuation allowance | 38.9 |
| | 38.9 |
| |
Effective tax rate | — | % | | — | % | |
9. Income Taxes (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes.
Significant components of the Company’s deferred tax assets (liabilities) are as follows:
|
| | | | | | | |
| July 1, 2017 | | July 2, 2016 |
| (in thousands) |
Gift certificates, gift cards and store credits | $ | 1,040 |
| | 1,145 |
|
Inventory | 2,072 |
| | 2,692 |
|
Other accrued expenses | 1,580 |
| | 464 |
|
Deferred revenue | 139 |
| | 513 |
|
Accrued vacation | 73 |
| | 731 |
|
Prepaid expenses | (197 | ) | | (769 | ) |
Basis difference in fixed assets | 6,979 |
| | 14,767 |
|
Deferred rent | — |
| | 4,531 |
|
Stock based compensation | 832 |
| | 1,508 |
|
Foreign tax credit | 1,357 |
| | 1,592 |
|
Tax credit and net operating loss carryovers | 128,138 |
| | 66,942 |
|
Construction allowance | — |
| | (5,935 | ) |
Indirect benefit from uncertain tax positions | 48 |
| | 46 |
|
Other | 2,307 |
| | 2,350 |
|
Total non-current | 144,368 |
| | 90,577 |
|
Valuation allowance | (144,368 | ) | | (90,577 | ) |
Deferred tax assets, net | $ | — |
| | $ | — |
|
As of July 1, 2017, the Company has federal, state and foreign gross net operating loss carryovers of approximately $323.7 million, $335.2 million and $10.0 million, respectively. If not used, these carry forwards will expire at various dates from fiscal year 2017 to fiscal year 2036. The Company also has foreign tax credit and state tax credit carry forwards of approximately $1.4 million and $0.2 million, respectively, which will be available to offset future taxable income. If not used, the foreign tax credit carry forwards will expire at various dates from 2017 to 2027 and the state tax credit will expire from 2020 to 2022.
As of July 1, 2017, it was considered more likely than not that the Company’s deferred tax assets would not be realized. The Company regularly assesses the need for a valuation allowance against its deferred assets. In evaluating whether it is more likely than not that some or all of the Company’s deferred tax assets will not be realized, it considers all available positive and negative evidence, including recent years' operating results which is objectively verifiable evidence. As a result of its evaluation of the realizability of its deferred tax assets as of July 1, 2017, the Company has concluded, based upon all available evidence, that it is more likely than not that the majority of its deferred tax assets will not be realized. Therefore, the Company increased its valuation allowance by approximately $53.8 million for the current fiscal year. The Company will continue to maintain a valuation allowance against its deferred tax assets until the Company believes it is more likely than not that these assets will be realized in the future. If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the more likely than not standard, the valuation allowance would be reversed accordingly in the period that such determination is made.
The Company accounts for interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the fiscal years ended July 1, 2017, and July 2, 2016, the Company recognized approximately $0.0 million and $0.0 million in interest and penalties, respectively. The Company had no accruals for interest and penalties at July 1, 2017 or July 2, 2016.
The Company could be subject to Federal income tax examinations for fiscal years 2014 and forward and could be subject to state and Canada examinations for fiscal years 2010 and forward. The Company is not currently under examination with the IRS. The Company is under audit in certain states for fiscal year 2011 through fiscal year 2014, and expects additional
9. Income Taxes (Continued)
audits to commence. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s financial statements.
As of July 1, 2017, the Company has $0.1 million in unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:
|
| | | | | | | | |
| July 1, 2017 | | July 2, 2016 | |
| |
Balance as of beginning of period | $ | 384 |
| | $ | 384 |
| |
Additions for tax positions taken during the current year | — |
| | — |
| |
Additions for tax positions taken during prior years | — |
| | — |
| |
Reductions for tax positions taken during the current year | (317 | ) | | — |
| |
Settlements | — |
| | — |
| |
Expirations of statues of limitations | — |
| | — |
| |
Balance as of end of period | $ | 67 |
| | $ | 384 |
| |
Of the $0.1 million recorded at July 1, 2017, $0.0 million of unrecognized tax benefits would affect the effective tax rate if recognized. While the Company expects the amount of unrecognized tax benefits to change in the next twelve months, the change is not expected to have a significant effect on the estimated effective annual tax rate, the results of operations or financial position.