INCOME TAXES - Note 10

12 Months Ended

Mar. 31, 2017

Notes to Financial Statements

INCOME TAXES - Note 10

10. INCOME TAXES

For the years ended March 31, 2017, 2016 and 2015, the Company recorded a (benefit) provision for income taxes of approximately ($0.1) million, ($0.8) million and $2.8 million, respectively. The components of the consolidated (benefit) provision for income taxes for fiscal 2017, 2016 and 2015 consisted of the following (in thousands):

		March 31,
Current:		2017		2016		2015
Federal	$	(7)	$	97	$	92
State		588		551		457
Foreign		112		71		1
Total current tax provision		693		719		550
Deferred:
Federal		1,506		95		2,602
State		(1,095)		(854)		(363)
Foreign		(1,230)		(807)		-
Total deferred tax (benefit) provision		(819)		(1,566)		2,239
Income tax (benefit) provision	$	(126)	$	(847)	$	2,789

The Company's income (loss) from continuing operations before income taxes included ($8.4) million, ($6.9) million and ($3.5) million of foreign subsidiary loss for the fiscal years ended March 31, 2017, 2016 and 2015, respectively. The Company is permanently reinvesting the earnings of its profitable foreign subsidiaries. The Company intends to reinvest these profits in expansion of overseas operations. If the Company were to remit these earnings, the tax impact would be immaterial.

Upon adoption of ASU 2015-17 in fiscal 2017, the Company classifies all deferred tax assets or deferred tax liabilities as long-term. Deferred tax assets and (liabilities) were comprised of the following (in thousands):

		March 31,
Current deferred tax assets		2017		2016
Net operating loss carryforwards	$	-	$	2,739
Inventory valuation		-		14
Reserves and allowances		-		2,740
Net current deferred tax assets		-		5,493
Net operating loss carryforwards		36,427		38,449
Research and development and other credit carryforwards		8,614		7,106
Stock-based compensation		6,942		5,577
Reserves and allowances		3,266		-
Fixed assets and intangibles		(3,688)		(6,160)
Net non-current deferred tax assets		51,561		44,972
Valuation allowance		(2,934)		(3,760)
Total	$	48,627	$	46,705

As of March 31, 2017, and 2016, management assessed the realizability of deferred tax assets based on the available evidence, including a history of taxable income and estimates of future taxable income. At March 31, 2017, management evaluated the need for a valuation allowance and determined that a valuation allowance of approximately $2.9 million was needed compared with approximately $3.8 million as of March 31, 2016. The net change in the valuation allowance for the years ended March 31, 2017 and 2016 was a decrease of $0.8 million and $1.1 million, respectively.

At March 31, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $141.7 million and $23.2 million, respectively, which expire at various dates between 2018 and 2037. The net operating loss carryforwards include approximately $60.9 million in excess tax benefits resulting from employee exercises of non- qualified stock options or disqualifying dispositions of incentive stock options, the tax benefits of which, when realized, will be accounted for as an addition to additional paid-in capital rather than as a reduction of the provision for income taxes. In addition, at March 31, 2017, the Company had research and development credit carryforwards for federal and California tax reporting purposes of approximately $5.6 million and $7.3 million, respectively. The federal income tax credit carryforwards will expire at various dates between 2021 and 2037, while the California income tax credits will carry forward indefinitely. A reconciliation of the Company's provision (benefit) for income taxes to the amounts computed using the statutory U.S. federal income tax rate of 34% is as follows (in thousands):

		Years Ended March 31,
		2017		2016		2015
Tax provision at statutory rate	$	(1,652)	$	(2,029)	$	1,599
State income taxes before valuation allowance,
net of federal effect		108		9		269
Foreign tax rate differential		885		(769)		-
Research and development credits		(1,484)		(1,253)		(725)
Change in valuation allowance		(287)		(1,555)		(1,480)
Compensation/option differences		(246)		(471)		(331)
Non-deductible compensation		1,079		944		746
Acquisition costs		54		230		-
Expiring CA NOLs		-		1,626		1,484
Foreign loss not benefited		780		2,342		1,192
Other		637		79		35
Total income tax provision	$	(126)	$	(847)	$	2,789

For the years ended March 31, 2017, 2016 and 2015, the Company realized excess tax benefits as a result of stock option exercises and stock award settlements of $0.5 million, $0.2 million and $0.1 million, respectively, that were recorded to additional paid-in capital.

The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

		Unrecognized Tax Benefits
		2017		2016		2015
Balance at beginning of year	$	2,881	$	2,420	$	2,165
Gross increase - tax positions in prior period		-		82		27
Gross decreases - tax positions in prior period		-		-		-
Gross increases - tax positions related to the current year		450		379		228
Balance at end of year	$	3,331	$	2,881	$	2,420

At March 31, 2017, the company had a liability for unrecognized tax benefits of $3.3 million, all of which, if recognized, would decrease the company's effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. The Company has not been under examination by income tax authorities in federal, state or other foreign jurisdictions. The tax years fiscal 1998 through fiscal 2017 generally remain subject to examination by federal and most state tax authorities.

The Company's policy for recording interest and penalties associated with tax examinations is to record such items as a component of operating expense income before taxes. During the fiscal year ended March 31, 2017, 2016 and 2015, the Company did not recognize any interest or penalties related to unrecognized tax benefits.

Utilization of the Company's net operating loss and tax credit carryforwards can become subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carryforwards before utilization. The Company has performed an analysis of its changes in ownership under Section 382 of the Internal Revenue Code. The Company currently believes that the Section 382 limitation will not limit utilization of the carryforwards prior to their expiration, with the exception of certain acquired loss and tax credit carryforwards of Contactual, Inc.