Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
 12 Months Ended
Mar. 31, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
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 expenses (benefits) from continuing operations are summarized as follows:
 
Fiscal Year Ended March 31,
(in thousands)
2014
 
2013
 
2012
Federal:
 
Current
$
6

 
$
—

 
$
(775
)
Deferred
(7,432
)
 
24,578

 
(1,361
)
 
(7,426
)
 
24,578

 
(2,136
)
State:
 
 
 
 
 
Current
433

 
2

 
(18
)
Deferred
(1,712
)
 
4,797

 
1,411

 
(1,279
)
 
4,799

 
1,393

Foreign:
 
 
 
 
 
Current
56

 
(8
)
 
50

Deferred
(133
)
 
23

 
7

 
(77
)
 
15

 
57

Total
$
(8,782
)
 
$
29,392

 
$
(686
)

The statutory federal income tax rate is reconciled to the Company's effective income tax rates below:
 
Fiscal Year Ended March 31,
 
2014
 
2013
 
2012
Statutory federal income tax rate
34.0
 %
 
34.0
 %
 
35.0
 %
Meals and entertainment
(1.5
)
 
(0.2
)
 
(1.3
)
State income tax, net of federal tax effect
2.4

 
3.1

 
42.8

Valuation allowance
226.5

 
(256.1
)
 
(106.3
)
Goodwill impairment
—

 
(2.1
)
 
—

Deferred tax adjustments
8.3

 
1.4

 
(52.0
)
Contingent tax reserves
—

 
—

 
126.3

Foreign tax credit
3.3

 
(0.3
)
 
16.2

Equity compensation
(6.4
)
 
(0.6
)
 
(15.0
)
Capitalized transaction costs
(2.7
)
 
—

 
—

Other
(3.2
)
 
(2.7
)
 
(3.2
)
 
260.7
 %
 
(223.5
)%
 
42.5
 %

Components of the net deferred income tax assets are as follows:
 
March 31,
(in thousands)
2014
 
2013
Deferred income tax assets:
 
Allowance for doubtful accounts
$
33

 
$
4

Alternative minimum tax credit carryforward
697

 
697

Foreign tax credit carryforward
785

 
674

Depreciation
940

 
1,224

Deferred revenue
950

 
—

Compensation accruals
2,323

 
1,326

Inventory reserves
1,903

 
888

Warranty reserves
92

 
57

Net operating loss carryforward
29,510

 
29,315

Intangibles and goodwill
—

 
689

Other
863

 
1,106

Gross deferred tax assets
38,096

 
35,980

Valuation allowance
(28,542
)
 
(36,285
)
Net deferred income tax assets
9,554

 
(305
)
Deferred income tax liabilities:
 
 
 
Inventory step-up
(379
)
 
—

Intangibles and goodwill
(9,348
)
 
—

Net deferred income tax liabilities
$
(173
)
 
$
(305
)
Classified in Consolidated Balance Sheets as follows:
 
March 31,
(in thousands)
2014
 
2013
Deferred income tax assets
$
899

 
$
—

Deferred income tax liability
(1,072
)
 
(305
)
Net deferred income tax assets
$
(173
)
 
$
(305
)

In addition to the deferred tax assets listed in the table above, the Company has $1.3 million and $1.0 million of unrecorded tax benefits at March 31, 2014, and 2013, respectively, primarily attributable to the difference between the amount of the financial statement expense and the allowable tax deduction for stock issued under the Company’s stock compensation plans. Although not recognized for financial reporting purposes, this unrecognized tax benefit is available to reduce future income and is incorporated as a reduction to the Company’s federal and state NOL carry forwards, which are discussed below.
In fiscal year 2014, the Company continued to fully reserve deferred tax assets. The Company acquired Kentrox and CSI in stock transactions. Deferred tax liabilities of $9.1 million resulted from the acquisitions relating primarily to acquired intangible assets. The Company's anticipated ability to realize deferred tax assets from the reversal of these deferred tax liabilities resulted in a reversal of valuation allowance. Income tax expense, excluding the impact of the acquisitions noted above, was $0.4 million primarily from state income tax expense in non-unitary states and state taxes based on gross margin, not taxable income.
In fiscal year 2013, the Company considered both the positive and negative evidence available to assess the realizability of its deferred tax assets. The Company considered negative factors which included recent losses and a forecasted three-year cumulative loss position, as well as positive evidence consisting primarily of projected future earnings. The Company concluded that the negative evidence outweighed the objectively verifiable positive evidence. As a result, the Company increased the valuation allowance against deferred income tax assets by $34.0 million, which taken together with the liability for uncertain tax positions, had the effect of reserving in full all of the Company's deferred tax assets as of March 31, 2013.
In fiscal year 2012, the Company sold its ConferencePlus subsidiary and completed the CNS asset sale which changed the outlook for future taxable income, positively with regards to the CNS business which contributed to the majority of the Company’s historical losses and negatively in certain states where income generated by ConferencePlus was apportioned. In addition, certain states for which the Company has net operating loss carryforwards, such as Illinois, suspended the use of those carryforwards. The Company therefore was not able to utilize those carryforwards to offset fiscal year 2012 taxable income. The Company considered both the positive and negative evidence and established a forecast of future taxable income to evaluate the deferred tax assets for realizability. On this basis, the Company concluded that it was more likely than not that it would be able to utilize the majority of its deferred tax assets, but that certain state net operating loss carryforwards would expire prior to utilization. As a result, the Company increased the valuation allowance reserve by $1.7 million to $2.3 million in fiscal year 2012. In addition, the Company recognized $2.1 million of net tax benefits relating to the change in uncertain tax positions. The Company also changed the federal rate used on deferred taxes from 35% to 34%.  This change resulted in a $0.6 million tax expense.
The Company has approximately $1.5 million in tax credit carryforwards and $74.9 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. The federal net operating loss carryforwards begin to expire in fiscal year 2023. State net operating loss carryforwards, net of federal tax benefits, are $4.0 million. The state net operating loss carryforwards begin to expire in fiscal year 2023.
An income tax benefit of $0.1 million related to stock-based compensation was credited to additional paid-in-capital during fiscal year 2012. No related benefit was recorded in fiscal years 2014 or 2013.
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 2013 and 2014 is as follows: 
(in thousands)
 
Unrecognized tax benefits at March 31, 2012
$
3,483

Additions based on positions related to fiscal year 2013
—

Additions for tax positions of years prior to fiscal year 2013
1

Reductions for tax positions of years prior to fiscal year 2013
—

Reductions as a result of expirations of applicable statutes of limitations
(716
)
Settlements
—

Unrecognized tax benefits at March 31, 2013
$
2,768

Additions from acquisitions
186

Additions based on positions related to fiscal year 2014
—

Additions for tax positions of years prior to fiscal year 2014
1

Reductions for tax positions of years prior to fiscal year 2014
—

Reductions as a result of expirations of applicable statutes of limitations
—

Settlements
—

Unrecognized tax benefits at March 31, 2014
$
2,955


If the unrecognized tax benefit balances at March 31, 2014, and 2013, were recognized, it would affect the effective tax rate.
The Company recognized interest and penalties of $1,000, $12,000 and $14,000 as a component of income tax expense as of March 31, 2014, 2013, and 2012, respectively.  Interest and penalty credits result from reductions in uncertain tax positions.  As of March 31, 2014, and 2013, accrued interest and penalties were $0 and $9,000, 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
2010
-
2014
U.S. State
2009
-
2014
Foreign
2009
-
2014