Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Mar. 31, 2015

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)	2015			2014 (as restated ⁽¹⁾)			2013
Federal:
Current	$	—		$	6		$	—
Deferred	13			(6,683		)	24,578
	13			(6,677		)	24,578
State:
Current	(31		)	433			2
Deferred	(87		)	(1,589		)	4,797
	(118		)	(1,156		)	4,799
Foreign:
Current	31			56			(8		)
Deferred	(127		)	(133		)	23
	(96		)	(77		)	15
Total	$	(201	)	$	(7,910	)	$	29,392

(1) See Note 1 for restatement information.

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



	Fiscal Year Ended March 31,
	2015 (as restated ⁽¹⁾)		2014 (as restated ⁽¹⁾)		2013
Statutory federal income tax rate	34.0	%	34.0	%	34.0	%
Meals and entertainment	(0.1	)	(1.5	)	(0.2	)
State income tax, net of federal tax effect	3.8		2.4		3.1
Valuation allowance	(17.4	)	192.5		(256.1	)
Goodwill impairment	(19.0	)	—		(2.1	)
Deferred tax adjustments	(0.1	)	8.3		1.4
Foreign tax credit	—		3.3		(0.3	)
Equity compensation	(0.8	)	(6.4	)	(0.6	)
Capitalized transaction costs	—		(2.7	)	—
Other	(0.1	)	(3.2	)	(2.7	)
Effective income tax rate	0.3	%	226.7	%	(223.5	)%

(1) See Note 1 for restatement information.

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



	March 31,
(in thousands)	2015 (as restated ⁽¹⁾)			2014 (as restated ⁽¹⁾)
Deferred income tax assets:
Allowance for doubtful accounts	$	17		$	33
Alternative minimum tax credit carryforward	697			697
Foreign tax credit carryforward	824			785
Depreciation	1,025			940
Deferred revenue	1,227			950
Compensation accruals	887			2,323
Inventory reserves	3,492			1,903
Warranty reserves	196			92
Net operating loss carryforward	35,380			29,510
Restructuring reserve	1,048			—
Other	1,679			1,413
Gross deferred tax assets	46,472			38,646
Valuation allowance	(39,667		)	(29,414		)
Net deferred income tax assets	6,805			9,232
Deferred income tax liabilities:
Inventory step-up	—			(379		)
Intangibles and goodwill	(6,851		)	(9,026		)
Net deferred income tax liabilities	$	(46	)	$	(173	)

(1) See Note 1 for restatement information.

Classified in Consolidated Balance Sheets as follows:



	March 31,
(in thousands)	2015 (as restated ⁽¹⁾)			2014 (as restated ⁽¹⁾)
Deferred income tax assets	$	1,043		$	1,449
Deferred income tax liability	(1,089		)	(1,622		)
Net deferred income tax liabilities	$	(46	)	$	(173	)

(1) See Note 1 for restatement information.

In addition to the deferred tax assets listed in the table above, the Company has $1.5 million and $1.3 million of unrecorded tax benefits at March 31, 2015, and 2014, 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 carryforwards, which are discussed below.

In fiscal year 2015, the Company continues to maintain a full valuation allowance on deferred tax assets. The Company recorded an income tax benefit of $0.2 million that resulted from foreign tax and state tax based on gross margin.

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 $8.3 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 domestic 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.

The Company has, on a tax effected basis, approximately $1.5 million in tax credit carryforwards and $30.9 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, on a tax effected basis and net of federal tax benefits, are $6.0 million. The state net operating loss carryforwards begin to expire in fiscal year 2016.

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 2014 and 2015 is as follows:



(in thousands)
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
Additions based on positions related to fiscal year 2015	—
Additions for tax positions of years prior to fiscal year 2015	1
Reductions for tax positions of years prior to fiscal year 2015	—
Reductions as a result of expirations of applicable statutes of limitations	—
Settlements	—
Unrecognized tax benefits at March 31, 2015	$	2,956

If the unrecognized tax benefit balances at March 31, 2015, and 2014, were recognized, it would affect the effective tax rate.

The Company recognized interest and penalties of $6,000, $3,000 and $12,000 as a component of income tax expense as of March 31, 2015, 2014, and 2013, respectively. As of March 31, 2015, and 2014, accrued interest and penalties were $1,000 and $1,000, 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	2011	-	2014
U.S. State	2010	-	2014
Foreign	2010	-	2014