NOTE 6—INCOME TAXES

Income (loss) before income taxes and the provision for income taxes consists of the following:


	Year Ended March 31,
	2020		2019		2018
	(In thousands)
Income (loss) before income taxes:
U.S.	$	(8,574)	$	(5,487)	$	(3,654)
Foreign		(1,516)		5,755		(408)
	$	(10,090)	$	268	$	(4,062)
Current income tax expense (benefit):
U.S. federal	$	(39)	$	(28)	$	367
Foreign		274		121		153
State		1		1		1
		236		94		521
Deferred income tax expense (benefit):
U.S. federal		12		13		(90)
Foreign		—		—		22
State		(1)		(2)		—
		11		11		(68)
Provision for income taxes	$	247	$	105	$	453

The provision for income tax differs from the amount of income tax determined by applying the applicable U.S. statutory income tax rate to pre-tax loss as follows:


	Year Ended March 31,
	2020		2019		2018
	(In thousands)
U.S. Federal taxes at statutory rate	$	(2,120)	$	56	$	(1,282)
State taxes, net of federal benefit		—		(2)		—
Deemed repatriation transfer tax		—		—		5,117
Deferred tax re-measurement, change in tax rates		—		—		1,093
Stock-based compensation		(58)		(124)		(124)
Tax credits		(494)		(536)		(417)
Foreign tax rate differential		593		117		390
Tax exempt interest		(16)		(4)		(8)
Non-deductible expenses and other		38		17		97
		(2,057)		(476)		4,866
Valuation allowance		2,304		581		(4,413)
	$	247	$	105	$	453

Deferred tax assets and deferred tax liabilities consist of the following:


	March 31,
	2020		2019
	(In thousands)
Deferred tax assets:
Tax credits	$	5,512	$	4,819
Net operating losses		1,245		113
Stock-based compensation		950		891
Property and equipment		731		138
Other reserves and accruals		976		776
Total deferred tax assets		9,414		6,737
Less valuation allowance		(9,389)		(6,700)
Deferred tax assets, net		25		37
Deferred tax liabilities:
Unrecognized gains		(32)		(2)
Total deferred tax liabilities		(32)		(2)
Net deferred tax asset (liability)	$	(7)	$	35

The Company currently intends to indefinitely reinvest earnings in operations outside the United States. No provision has been made for state income taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of such potential liability.

The long-term portion of the Company’s unrecognized tax benefits at March 31, 2020 and 2019 was $613,000 and $622,000, respectively, of which the timing of the resolution is uncertain. As of March 31, 2020 and 2019, $2.7 million and $2.5 million, respectively, of unrecognized tax benefits had been recorded as a reduction to net deferred tax assets. As of March 31, 2020, the Company’s net deferred tax assets of $9.4 million are subject to a valuation allowance of $9.4 million. It is possible, however, that some months or years may elapse before an uncertain position for which the Company has established a reserve is resolved. A reconciliation of unrecognized tax benefits is as follows:


	Year Ended March 31,
	2020		2019		2018
	(In thousands)
Unrecognized tax benefits, beginning of period	$	3,102	$	2,735	$	2,714
Additions based on tax positions related to current year		394		371		520
Additions based on tax positions related to prior years		—		13		—
2017 Tax Act and tax rate re-measurement		—		—		(499)
Reductions based on tax positions related to prior years		(158)		(17)		—
Lapses during the current year applicable to statutes of limitations		(17)		—		—
Unrecognized tax benefits, end of period	$	3,321	$	3,102	$	2,735

The unrecognized tax benefit balance as of March 31, 2020 of $582,000 would affect the Company’s effective tax rate if recognized.

On December 22, 2017, the “Tax Cuts and Jobs Act” ("H.R. 1") was signed into law, significantly impacting several sections of the Internal Revenue Code. Following the enactment of the H.R. 1, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the H.R. 1 enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, the Company must reflect the income tax effects of those aspects of H.R. 1 for which the accounting under ASC 740 is complete. To the extent that the Company’s accounting for certain income tax effects of H.R. 1 is incomplete but the Company is able to determine a reasonable estimate, the Company must record a provisional estimate in the financial statements. If the Company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax law that were in effect immediately before the enactment of the H.R 1.

This new law includes significant changes to the U.S. corporate income tax system, including a permanent reduction in the corporate income tax rate from 35% to 21%, limitations on the deductibility of interest expense and executive compensation and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. We re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The re-measurement of our deferred tax balance of $1.1 million was offset by application of our valuation allowance. We calculated our best estimate of the impact of H.R. 1 in the fiscal 2018 year-end income tax provision, including the impact of the one-time transition tax, in accordance with our understanding of H.R. 1 and guidance available as of the date of this filing and recorded a tax expense of $367,000 in the year ended March 31, 2018 related to the transition tax associated with deemed repatriation of foreign earnings. Pursuant to Staff Accounting Bulletin No. 118, adjustments to the provisional amounts recorded by the Company that are identified within a subsequent measurement period of up to one year from the enactment date will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined. During the year ended March 31, 2019, the Company completed its assessment of the impact of H.R. 1 and recorded an immaterial additional liability that is included in Income Taxes Payable in the Consolidated Balance Sheet as of March 31, 2019.

H.R. 1 subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to treat GILTI book-tax differences as a period cost. In addition, the Company has elected to use the incremental cash tax savings approach (with and without method) in determining its U.S. valuation allowance.

At March 31, 2020, due to the Company’s valuation allowance in the United States, there was no net income tax effect related to GILTI in the Company’s fiscal year ended March 31, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act is an approximate $2 trillion emergency economic stimulus package passed in response to the COVID-19 global pandemic. The CARES Act includes direct financial assistance to Americans in the form of one-time payments to individuals, aid to small businesses in the form of loans and grants and other efforts to stabilize the U.S. economy and keep Americans employed. The Company has not filed, and currently does not intend to file, for funding related to the CARES Act due to its strong balance sheet and liquidity position with $70.7 million in cash and cash equivalents, short-term investments and long-term investments and no debt outstanding as of March 31, 2020. The Company currently has no plans to defer payroll taxes, to layoff or furlough employees or to modify leases and stock compensation plans. Also included in the CARES Act are numerous income tax provisions including changes to the net operating loss rules which the Company believes will not have a significant impact.

Management believes that within the next twelve months the Company will have no material reduction in uncertain tax benefits, including interest and penalties, as a result of the lapse of statute of limitations.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the Consolidated Statements of Operations.

The Company's federal and state net operating loss carryforwards for income tax purposes are approximately $5.3 and $1.9 million, respectively, at March 31, 2020. The Company's state tax net operating loss carryforwards expire beginning in 2034.

The Company's federal and state tax credit carryforwards for income tax purposes are approximately $2.6 million and $3.7 million respectively, at March 31, 2020. The Company's federal tax credit carryforwards expire beginning in 2033. The Company's state tax credit carryforwards have no expiration date.

The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of March 31, 2020, the Company maintained a valuation allowance of $9.4 million for deferred tax assets that are not expected to be utilized in future years. Fiscal years 2013 through 2020 remain open to examination by the federal tax authorities and fiscal years 2012 through 2020 remain open to examination by the state of California. Fiscal years 2016 and 2017 are currently being audited by the Israeli tax authorities.