Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Mar. 31, 2017

Income Taxes:

The Company utilizes the liability method of accounting for income taxes and deferred taxes which are determined based on the differences between the financial statements and tax bases of assets and liabilities given the provisions of the enacted tax laws. In assessing the realizability of the deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized through the generation of future taxable income. In making this determination, the Company assessed all of the evidence available at the time including recent earnings, forecasted income projections, and historical financial performance. The Company has fully reserved deferred tax assets as a result of this assessment.

The income tax expense (benefit) from continuing operations are summarized as follows:



	Fiscal Year Ended March 31,
(in thousands)	2017			2016
Federal:
Current	$	—		$	—
Deferred	(1		)	(142		)
	(1		)	(142		)
State:
Current	44			135
Deferred	1			(28		)
	45			107
Foreign:
Current	24			(32		)
Deferred	(10		)	(35		)
	14			(67		)
Total	$	58		$	(102	)

The statutory federal income tax rate is reconciled to the Company's effective income tax rates below:



	Fiscal Year Ended March 31,
	2017		2016
Statutory federal income tax rate	34.0	%	34.0	%
Meals and entertainment	(0.3	)	(0.4	)
State income tax, net of federal tax effect	3.5		2.3
Valuation allowance	(34.7	)	(32.3	)
Deferred tax adjustments	(0.4	)	—
Foreign tax credit	0.2		(0.1	)
Equity compensation	(2.5	)	(2.9	)
Other	(0.2	)	—
Effective income tax rate	(0.4	)%	0.6	%

Components of the net deferred income tax assets are as follows:



	March 31,
(in thousands)	2017			2016
Deferred income tax assets:
Allowance for doubtful accounts	$	34		$	19
Alternative minimum tax credit carryforward	697			697
Foreign tax credit carryforward	845			821
Depreciation	1,257			1,146
Deferred revenue	1,316			1,092
Accrued compensation	726			1,130
Inventory reserves	3,303			3,804
Accrued warranty	150			168
Net operating loss carryforward	46,156			41,103
Accrued restructuring	469			701
Other	940			1,075
Gross deferred tax assets	55,893			51,756
Valuation allowance	(52,190		)	(46,683		)
Net deferred income tax assets	3,703			5,073
Deferred income tax liabilities:
Intangibles and goodwill	(3,703		)	(5,083		)
Net deferred income tax liabilities	$	—		$	(10	)

Net deferred income tax liabilities are classified in the Consolidated Balance Sheets as follows:



	March 31,
(in thousands)	2017		2016
Deferred income tax assets	$	—	$	—
Deferred income tax liability	—		(10		)
Net deferred income tax liabilities	$	—	$	(10	)

In fiscal years 2017 and 2016, the Company continued to maintain a full valuation allowance on deferred tax assets. The valuation allowance increased by $5.5 million in fiscal year 2017. The Company recorded an income tax expense from continuing operations of $58,000 in fiscal year 2017. In fiscal year 2016, the Company recorded an income tax benefit from continuing operations of $102,000, that resulted from foreign tax and state tax based on gross margin.

The Company has, on a tax-effected basis, approximately $1.5 million in tax credit carryforwards and $39.3 million of federal net operating loss carryforwards that are available to offset taxable income in the future. The tax credit carryforwards will begin to expire in fiscal year 2022. The federal net operating loss carryforwards begin to expire in fiscal year 2023. State net operating loss carryforwards, on a tax effected basis and net of federal tax benefits, are $6.8 million. The remaining state net operating loss carry forwards begin to expire in fiscal year 2018. In fiscal year 2017, $27,000 of state net operating loss carryforwards expired.

The Company accounts for uncertainty in income taxes under ASC 740, which prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits for fiscal years 2016 and 2017 is as follows:



	(in thousands)
Unrecognized tax benefits at March 31, 2015	$	2,962
Additions based on positions related to fiscal year 2016	—
Unrecognized tax benefits at March 31, 2016	2,962
Additions based on positions related to fiscal year 2017	—
Unrecognized tax benefits at March 31, 2017	$	2,962

If the unrecognized tax benefit balances at March 31, 2017 and 2016, were recognized, it would affect the effective tax rate.

The Company recognized interest and penalties of $2,000 as a component of income tax expense in both fiscal years 2017 and 2016. As of March 31, 2017 and 2016, accrued interest and penalties were $11,200 and $9,800, respectively.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates.

With few exceptions, the major jurisdictions subject to examination by the relevant taxable authorities, and open tax years, stated as the Company's fiscal years, are as follows:



Jurisdiction	Open Tax Years
U.S. Federal	2013	-	2016
U.S. States	2012	-	2016
Foreign	2012	-	2016

Since net operating loss carryovers are subject to audit based on the year in which they are utilized, all of the Company’s net operating losses generated in the past are open to adjustment to the Internal Revenue Service or state tax authorities (some states have shorter carryover periods).