. INCOME TAXES

December 22, 2017,

the United States signed into law the Tax Cuts and Job Act, (the “Tax Act”), which imposes a repatriation tax on accumulated earnings of foreign subsidiaries, implements a territorial tax system together with a current tax on accumulated foreign earnings and lowers the general corporate income tax rate to

21%.

The Tax Act requires the Company to pay a

one

-time deemed repatriation income tax on the net accumulated earnings of its foreign subsidiaries at a tax rate of

15.5%.

The Tax Act significantly changes how the U.S. taxes corporations. The Tax Act requires complex computations to be performed that were

not

previously required, significant judgments to be made and significant estimates in calculations. The U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from the Company’s interpretation. The Securities and Exchange Commission staff issued Staff Accounting Bulletin

No.118

Income Tax Accounting Implications of the Tax Cuts and Jobs Act

(“SAB

118”

SAB118

allowed companies to record provisional amounts during a measurement period

not

to extend beyond

one

year of the enactment date. The Company's accounting for the Tax Act was completed within the measurement period provided by SAB

118.

The Company completed its calculations of the

one

-time deemed repatriation tax and finalized its U.S. federal income tax return in the

fourth

quarter of fiscal

2019.

The provisional tax expense for the

one

-time deemed repatriation tax was reduced from

$2.0

million estimated in fiscal

2018

$0.7

million, primarily due to the Company’s ability to use more foreign tax credits to reduce the transition tax liability. In the

fourth

quarter of fiscal

2019,

the Company recorded a tax benefit of

$1.3

million to reduce the initial accrual of

$2.0

million to

$0.7

million. The Company elected to pay the repatriation tax liability over a period of

eight

years as permitted by the Tax Act.

The Tax Act made broad fundamental changes to the U.S. international tax system with the enactment of Section

951A,

global intangible low-tax income ("GILTI"). GILTI applies to the Company’s foreign businesses that operate in corporate form and

may

cause the foreign income to be reported on its U.S. federal income tax return beginning in fiscal

2019.

As a result, the Company’s foreign earnings

may

be subject to U.S. taxes. The Company calculated the GILTI provision based on the proposed regulations released on

September 13, 2018.

These regulations provide computational, definitional, and anti-avoidance rule guidance relating to the determination of a U.S. shareholder’s GILTI inclusion. For fiscal

2019,

the Company does

not

have a GILTI inclusion due to a loss in Ireland.

The Company has elected to treat the deferred taxes related to GILTI provisions as a current-period expense when incurred (the “period cost method”).

Consolidated net income (loss) before income taxes is summarized as follows:

	Years Ended January 31,
	2019		2018			2017
	(in thousands)
Domestic net income (loss) before income taxes	$	6,562	$	(4,793	)	$	(3,774	)
Foreign net income before income taxes		5,355		585			7,600
Consolidated net income (loss) before income taxes	$	11,917	$	(4,208	)	$	3,826

Income tax expense is summarized as follows:

	Years Ended January 31,
	2019			2018			2017
	(in thousands)
Current:
U.S. federal	$	(829	)	$	2,862		$	437
State		(13	)		38			30
Foreign		3,784			2,433			3,894
Subtotal		2,942			5,333			4,361
Deferred:
U.S. federal		79			(519	)		11,564
State		(30	)		19			3,610
Foreign		(1,502	)		24			(348	)
Subtotal		(1,453	)		(476	)		14,826
Equity adjustment		—			—			89
Total	$	1,489		$	4,857		$	19,276

Actual income tax expense differs from that obtained by applying the statutory federal income tax rate to income before income taxes as follows:

	Years Ended January 31,
	2019			2018			2017
	(in thousands)
Computed expected tax expense (benefit)	$	2,503		$	(1,431	)	$	1,301
State income taxes, net of federal income tax expense		96			(157	)		(54	)
Incremental tax expense from foreign operations		715			923			137
Equity compensation		(2,916	)		(1,004	)		(29	)
Foreign withholding taxes		1,089			794			676
Net change in valuation allowance		3,224			5,448			16,861
Net change in contingency reserve		(71	)		(81	)		198
Non-deductible expenses		1,149			(407	)		660
Benefit of tax credits		(3,483	)		(1,766	)		(1,243	)
Subpart F income		101			302			345
U.S. Tax Reform (the “Tax Act”)		(1,312	)		1,951			—
Other		394			285			424
Total	$	1,489		$	4,857		$	19,276

The Company’s foreign earnings were primarily from the following countries: China, India and Mexico. These countries have higher statutory tax rates and effective tax rates than the U.S. However, the Company benefits from operating in Ireland which has a lower statutory income tax rate and effective tax rate than the U.S.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

●

India for fiscal years ended

March 31, 2010,

2013,

and

2014

●

Netherlands for fiscal year ended

January 31, 2016

●

Germany for fiscal years ended

January 31, 2015,

2016

and

2017

	●	Switzerland for fiscal years ended January 31, 2014, 2015, 2016, 2017 and 2018
	●	Tennessee for fiscal years ended January 31, 2014, 2015, 2016, 2017 and 2018

During fiscal

2019,

the Company closed the following audits with small or

adjustment:

●

Iowa for fiscal year ended

January 31, 2014

●

Kentucky for fiscal year ended

January 31, 2016

●

South Africa for fiscal years ended

January 31, 2016

and

2017

As of

January 31, 2019,

the Company continues to maintain its permanent reinvestment assertion under APB

for all of its foreign subsidiaries as it relates to withholding taxes, state taxes and currency translation. These permanently reinvested earnings are approximately

$89

million at

January 31, 2019.

It is

not

practicable for the Company to determine the amount of the related unrecognized deferred income tax liability.

Deferred income taxes reflect the net effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Tax Act reduces the U.S. statutory tax rate from

35%

21%

for years after

2017.

Accordingly, the Company has remeasured its deferred taxes as of

January 31, 2019

to reflect the reduced rate.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	January 31,
	2019			2018
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments	$	520		$	367
Accrued vacation		1,568			1,590
Tax credits		20,908			18,583
Deferred revenue		2,849			3,493
Net operating loss carry forwards		10,597			10,337
Accrued expenses - other		1,802			1,849
Other comprehensive income		1,189			1,164
Section 263(a) interest capitalization		198			206
Intellectual property		7,917			—
Equity compensation		4,626			4,380
Carryforward of Irish amortization		1,630			—
Other		2,345			1,243
Total deferred tax assets		56,149			43,212
Less valuation allowance		(34,898	)		(33,665	)
Less netting of unrecognized tax benefits against deferred tax assets		(886	)		(930	)
Deferred tax assets, net of valuation allowance	$	20,365		$	8,617
Deferred tax liabilities:
Depreciation and amortization		(804	)		(442	)
Topic 606: capitalized commissions and cloud costs		(2,891	)		—
Other		(498	)		(231	)
Total deferred tax liabilities		(4,193	)		(673	)
Total net deferred tax assets	$	16,172		$	7,944

The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-

not

standard. Management assessed historic, current and future financial projections by jurisdiction to draw its conclusion. In fiscal year

2019,

the Company continued to apply a valuation allowance against its U.S. federal and state deferred income tax assets due to a U.S.

three

-year cumulative loss, future earmarked investment in research and development, and hiring due to the Company’s business transition to the cloud. When the Company’s operating performance improves on a sustained basis, the conclusion regarding the need for a valuation allowance is likely to change, resulting in the reversal of some or all of the valuation allowance in the future. At

January 31, 2019

and

2018,

the worldwide valuation allowance attributable to deferred tax assets was

$34.9

million and

$33.7

million, respectively.

In the

fourth

quarter of fiscal

2018,

the Company had an intra-entity sale of intellectual property that resulted in

$10

million of additional tax basis. Upon adoption of ASU

2016

in the

first

quarter of fiscal

2019,

the Company established a deferred tax asset of

$9.6

million that will be amortized over

six

years for tax purposes. This benefit was recorded to retained earnings on

February 1, 2018

under the transition rules.

The Company has gross net operating loss carryforwards of

$38.5

million and tax credit carryforwards of

$23.2

million as of

January 31, 2019.

The majority of the Company’s net operating loss carryforwards do

not

expire. The Company’s foreign tax credits will begin to expire in fiscal year

2028.

The Company has

$6.5

million of U.S. and

$10.8

million of California R&D credits that have been valued. The Company has

$167,000

of U.S. R&D tax credit that will expire on

October 2019.

These credits are unlikely to be utilized before expiration. Australian and California R&D tax credits do

not

expire.

During the fiscal year ended

January 31, 2019,

the Company decreased its reserves for uncertain tax positions by

$0.5

million. Interest and penalties on accrued but unpaid taxes are classified in the Consolidated Statements of Operations and Comprehensive Income (Loss) as income tax expense. The liability for unrecognized tax benefits that

may

be recognized in the next

twelve

months is classified as short-term in the Company’s Consolidated Balance Sheet while the remainder is classified as long-term.

The following table reconciles the gross amounts of unrecognized tax benefits at the beginning and end of the period:

	Years Ended January 31,
	2019			2018
	(in thousands)
Unrecognized tax benefits at beginning of the year	$	1,662		$	1,743
Decreases as a result of tax positions taken in a prior period		(26	)		(115	)
Increases as a result of tax positions taken in the prior period		—			58
Reduction as a result of a lapse of the statute of limitations		(44	)		(24	)
Decreases as a result of settlements with taxing authorities		(424	)		—
Unrecognized tax benefit at end of year	$	1,168		$	1,662

All of the unrecognized tax benefits included in the Consolidated Balance Sheet at

January 31, 2019

would impact the effective tax rate on income from continuing operations, if recognized.

The total amount of interest recognized in the Consolidated Statement of Operations and Comprehensive Income for unpaid taxes was

$9,000

for the year ended

January 31, 2019.

The total amount of interest and penalties recognized in the Consolidated Balance Sheet at

January 31, 2019

was

$0.1

million.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statute of limitations. The years that

may

be subject to examination will vary by jurisdiction. Below is a list of our material jurisdictions and the years open for audit as of fiscal

2019:

Jurisdiction	Years Open for Audit
U.S. federal	Fiscal year 2016 and beyond
California	Fiscal year 2015 and beyond
Michigan	Fiscal year 2015 and beyond
New Jersey	Fiscal year 2015 and beyond
Australia	Fiscal year 2015 and beyond
France	Fiscal year 2016 and beyond
India	Fiscal years 2010, 2013 and 2014
Ireland	Fiscal year 2015 and beyond
United Kingdom	Fiscal year 2018 and beyond
China	Calendar year 2014 and beyond
Mexico	Calendar year 2014 and beyond