Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Mar. 31, 2019

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)	2019			2018
Federal:
Current	$	—		$	(697	)
Deferred	(1		)	7
	(1		)	(690		)
State:
Current	20			52
Deferred	3			2
	23			54
Foreign:
Current	17			39
Deferred	—			—
	17			39
Total	$	39		$	(597	)

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



	Fiscal Year Ended March 31,
	2019		2018
Statutory federal income tax rate	21.0	%	30.8	%
Meals and entertainment	(0.2	)	(4.5	)
State income tax, net of federal tax effect	(6.4	)	84.5
Valuation allowance	(14.5	)	2,677.8
Impact of Tax Reform	—		(2,686.5	)
Foreign tax credit	(0.2	)	(8.9	)
Equity compensation	(0.1	)	(20.4	)
NoranTel CTA Adjustment	—		33.0
Other	—		(0.3	)
Effective income tax rate	(0.4	)%	105.5	%

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



	March 31,
(in thousands)	2019			2018
Deferred income tax assets:
Allowance for doubtful accounts	$	26		$	24
Foreign tax credit carryforward	810			812
Depreciation	173			227
Deferred revenue	425			675
Accrued compensation	412			358
Inventory reserves	757			948
Accrued warranty	33			77
Net operating loss carryforward	35,024			34,924
Accrued restructuring	—			16
Intangibles and goodwill	272			—
Other	839			660
Gross deferred tax assets	38,771			38,721
Valuation allowance	(38,771		)	(37,103		)
Net deferred income tax assets	—			1,618
Deferred income tax liabilities:
Intangibles and goodwill	—			(1,618		)
Net deferred income tax liabilities	$	—		$	—

In fiscal years 2019 and 2018, the Company continued to maintain a full valuation allowance on deferred tax assets. The valuation allowance increased by $1.7 million in fiscal year 2019. The Company recorded an income tax expense from continuing operations of $39,000 in fiscal year 2019. In fiscal year 2018, the Company recorded an income tax benefit from continuing operations of $597,000. The fiscal year 2018 income tax benefit was due primarily from the release of the tax valuation allowance associated with previously generated alternative minimum tax (AMT) credits due to the December 22, 2017 Tax Cuts and Jobs Act Tax Reform (the “Tax Act”).

The Company has, on a tax-effected basis, approximately $0.8 million in tax credit carryforwards and $26.9 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 2021. The federal net operating loss carryforwards begin to expire in fiscal year 2022. State tax credit carryforwards and net operating loss carryforwards, on a tax effected basis and net of federal tax benefits, are $0.1 million and $8.1 million, respectively. The remaining state tax credit carryforwards and state net operating loss carry forwards begin to expire in fiscal year 2020. In fiscal year 2019, $1.2 million 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 2018 and 2019 is as follows:



	(in thousands)
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
Additions based on positions related to fiscal year 2019	—
Reductions as a result of expirations of applicable statutes of limitations	(780		)
Unrecognized tax benefits at March 31, 2019	$	2,182

If the unrecognized tax benefit balances at March 31, 2019 and 2018, were recognized, it would affect the effective tax rate.

The Company recognized interest and penalties of $2,500 and $2,000 as a component of income tax expense in fiscal year 2019 and 2018, respectively. As of March 31, 2019 and 2018, accrued interest and penalties were $17,800 and $15,300, 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	2015	-	2018
U.S. States	2014	-	2018
Foreign	2014	-	2018

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).

The Tax 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. In the quarter ended December 31, 2018, the Company finalized its estimates of the impact of the Tax Act with no material effect on the Consolidated Financial Statements. Due to the lack of interest expense, foreign operations and modest officer’s compensation, as well as the full valuation allowance, the various provisions of tax reform, effective this year, had no impact.