Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Mar. 31, 2018

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)	2018			2017
Federal:
Current	$	(697	)	$	—
Deferred	7			(1		)
	(690		)	(1		)
State:
Current	52			44
Deferred	2			1
	54			45
Foreign:
Current	39			24
Deferred	—			(10		)
	39			14
Total	$	(597	)	$	58

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



	Fiscal Year Ended March 31,
	2018		2017
Statutory federal income tax rate	30.8	%	34.0	%
Meals and entertainment	(4.5	)	(0.3	)
State income tax, net of federal tax effect	84.5		3.5
Valuation allowance	2,677.8		(34.7	)
Impact of Tax Reform	(2,686.5	)	—
Deferred tax adjustments	—		(0.4	)
Foreign tax credit	(8.9	)	0.2
Equity compensation	(20.4	)	(2.5	)
NoranTel CTA Adjustment	33.0		—
Other	(0.3	)	(0.2	)
Effective income tax rate	105.5	%	(0.4	)%

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



	March 31,
(in thousands)	2018			2017
Deferred income tax assets:
Allowance for doubtful accounts	$	24		$	34
Alternative minimum tax credit carryforward	—			697
Foreign tax credit carryforward	812			845
Depreciation	227			1,257
Deferred revenue	675			1,316
Accrued compensation	358			726
Inventory reserves	948			3,303
Accrued warranty	77			150
Net operating loss carryforward	34,924			46,156
Accrued restructuring	16			469
Other	660			940
Gross deferred tax assets	38,721			55,893
Valuation allowance	(37,103		)	(52,190		)
Net deferred income tax assets	1,618			3,703
Deferred income tax liabilities:
Intangibles and goodwill	(1,618		)	(3,703		)
Net deferred income tax liabilities	$	—		$	—

In fiscal years 2018 and 2017, the Company continued to maintain a full valuation allowance on deferred tax assets. The valuation allowance decreased by $15.1 million in fiscal year 2018. The Company recorded an income tax benefit from continuing operations of $597,000 in fiscal year 2018. In fiscal year 2017, the Company recorded an income tax expense from continuing operations of $58,000, that resulted from foreign tax and state tax based on gross margin.

The Company has, on a tax-effected basis, approximately $0.8 million in tax credit carryforwards and $25.9 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. Tax credit carryforward of $0.7 million has been reclassified to receivable in fiscal year 2018. 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 $9.1 million. The remaining state net operating loss carry forwards begin to expire in fiscal year 2019. In fiscal year 2018, $4,000 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 2017 and 2018 is as follows:



	(in thousands)
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
Additions based on positions related to fiscal year 2018	—
Unrecognized tax benefits at March 31, 2018	$	2,962

If the unrecognized tax benefit balances at March 31, 2018 and 2017, 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 2018 and 2017. As of March 31, 2018 and 2017, accrued interest and penalties were $15,300 and $11,200, 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	2014	-	2017
U.S. States	2013	-	2017
Foreign	2013	-	2017

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).

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). The Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate federal income tax rate from 34% to 21% effective January 1, 2018. As a result, a blended federal rate of 30.75% is required for the current year income tax expense. Further, the Company is required to re-measure, through income tax expense, its deferred tax assets and liabilities using the enacted rate at which the items are expected to be recovered or settled. During the third quarter, the Company recorded provisional amounts as a result of the re-measurement of the Company’s net deferred tax asset did not result in income tax expense due to the Company’s full valuation allowance position.

Total net deferred tax assets decreased by $15.1 million, which includes a reclassification of the federal alternative minimum tax (“AMT”) credit to long term receivable. As of March 31, 2018, the Company had net deferred tax assets of approximately $37.1 million before a valuation allowance of $37.1 million.

The final transition impacts of the Act may differ from the above estimate, due to, among other things, changes in interpretations of the Act, any legislative action to address questions that arise because of the Act, any changes in accounting standards for income taxes or related interpretations in response to the Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates. The Securities Exchange Commission has issued guidance that allows for a measurement period of up to one year after the enactment date of the Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments in the period the Company files the fiscal year ending March 31, 2018 income tax return.

As of March 31, 2018, the Company has $697,000 of AMT credit carryforward, which does not expire and is now carried as a tax receivable since, under new federal tax law, the Company expects to recover the entire amount by 2022 via a tax refund. Previously, there was a valuation allowance against the entire AMT credit carryforward. In the third quarter, the Company reversed the portion of the valuation allowance related to the AMT credit carryforward, which resulted in a discrete tax benefit of $697,000. The total refundable amount is not reduced by the sequestration rate since the fiscal year 2018 Consolidated Federal return is not expected to be filed until the third quarter of fiscal year 2019, and the sequestration rate for fiscal year 2019 is not yet available as of fiscal year 2018.