19.	Income Taxes

On December 22, 2017, comprehensive tax reform legislation known as the Act was signed into law. The Act amends the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses.

Also on December 22, 2017, the SEC provided guidance (Staff Accounting Bulletin 118 (“SAB 118”)) which provided for a one-year measurement period that allowed businesses time to evaluate the financial statement implications of the Act and to analyze its impact on financial statements issued during the measurement period. This was in recognition of the fact that the ultimate impact of the Act on a business’ financial statements could differ, perhaps materially, from the amounts originally estimated due to further refinement of tax calculations, changes in interpretations and assumptions related to the Act, guidance issued by taxing authorities and regulatory bodies, and actions businesses could take as a result of the Act. During the year ended March 31, 2018, the Company recorded provisional amounts by applying the guidance in SAB 118, as it had not yet completed the accounting for the tax effects of enactment of the Act. The Company recorded a one-time provisional non-cash tax charge of $2,709,000 due to the revaluation of deferred tax assets and liabilities. The one-time transition tax was estimated and recorded as a one-time provisional income tax expense of $530,000 at March 31, 2018. As the measurement under SAB 118 ended during the year ended March 31, 2019, the Company completed its accounting analysis of the cumulative foreign earnings, transitional tax liability, and non-cash tax charge for deferred revaluation under the Act. The year ended March 31, 2019 included a reduction of $50,000 to the provisional transition tax amount and a $102,000 increase to non-cash charge due to the revaluation of deferred tax assets and liabilities previously reported under SAB 118.

The income tax expense is as follows:

	Years Ended March 31,
	2019			2018			2017
Current tax expense				(As Adjusted)			(As Adjusted)
Federal	$	680,000		$	12,187,000		$	10,085,000
State		647,000			1,425,000			395,000
Foreign		1,723,000			1,194,000			1,455,000
Total current tax expense		3,050,000			14,806,000			11,935,000
Deferred tax (benefit) expense
Federal		(2,087,000	)		949,000			4,261,000
State		(295,000	)		393,000			2,174,000
Foreign		(400,000	)		(23,000	)		(384,000	)
Total deferred tax (benefit) expense		(2,782,000	)		1,319,000			6,051,000
Total income tax expense	$	268,000		$	16,125,000		$	17,986,000

Deferred income taxes consist of the following at March 31:

	2019			2018
Assets				(As Adjusted)
Allowance for bad debts	$	1,005,000		$	1,044,000
Customer allowances earned		3,177,000			2,871,000
Allowance for stock adjustment returns		2,073,000			2,038,000
Inventory obsolescence reserve		3,701,000			1,666,000
Stock options		2,221,000			1,728,000
Estimate for returns		2,107,000			876,000
Accrued compensation		1,578,000			1,152,000
Net operating losses		2,088,000			1,079,000
Tax credits		1,495,000			1,363,000
Other		5,776,000			2,091,000
Total deferred tax assets	$	25,221,000		$	15,908,000
Liabilities
Plant and equipment, net		(3,316,000	)		(1,025,000	)
Intangibles, net		(5,390,000	)		(3,560,000	)
Other		(3,278,000	)		(3,072,000	)
Total deferred tax liabilities	$	(11,984,000	)	$	(7,657,000	)
Less valuation allowance	$	(3,748,000	)	$	(1,779,000	)
Net deferred tax assets	$	9,489,000		$	6,472,000
Net long-term deferred income tax liability		(257,000	)		(226,000	)
Net long-term deferred income tax asset		9,746,000			6,698,000
Total	$	9,489,000		$	6,472,000

At March 31, 2019, the Company had state net operating loss carryforwards of $1,472,000. The net operating loss carryforwards expire beginning in fiscal year 2034.

Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with the Company’s recent acquisitions have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted.

For the years ended March 31, 2019, 2018, and 2017, the primary components of the Company’s income tax expense were (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) change in realizability of deferred tax items, (iii) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), (iv) income taxes associated with uncertain tax positions, (v) the change in the blended state rate, and (vi) the excess tax benefit relating to share-based compensation.

The difference between the income tax expense at the federal statutory rate and the Company’s effective tax rate is as follows:

	Years Ended March 31,
	2019			2018			2017
				(As Adjusted)			(As Adjusted)
Statutory federal income tax rate		21.0	%		31.5	%		35.0	%
State income tax rate, net of federal benefit		(3.7	)%		3.6	%		2.3	%
Excess tax benefit from stock compensation		0.7	%		(0.7	)%		(1.4	)%
Foreign income taxed at different rates		-	%		(2.6	)%		(0.7	)%
Warrants		-	%		(2.1	)%		(2.4	)%
Non-deductible executive compensation		(7.3	)%		1.0	%		0.8	%
Change in valuation allowance		(15.3	)%		4.8	%		-	%
Effects of mandatory redeemed repatriation		-	%		1.5	%		-	%
Effects of U.S. tax rate changes		0.3	%		8.0	%		-	%
Uncertain tax positions		1.8	%		0.6	%		(0.2	)%
Research and development credit		1.3	%		(0.2	)%		-	%
Non-deductible transaction costs		(2.1	)%		-	%		-	%
Other income tax		(0.2	)%		0.2	%		(1.7	)%
		(3.5	)%		45.6	%		31.7	%

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2019, the Company is not under examination in any jurisdiction and the years ended March 31, 2018, 2017, and 2016 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Years Ended March 31,
	2019			2018			2017
Balance at beginning of period	$	1,219,000		$	1,092,000		$	1,181,000
Additions based on tax positions related to the current year		91,000			234,000			141,000
Additions for tax positions of prior year		-			-			106,000
Reductions for tax positions of prior year		(227,000	)		(107,000	)		-
Settlements		-			-			(336,000	)
Balance at end of period	$	1,083,000		$	1,219,000		$	1,092,000

At March 31, 2019, 2018 and 2017, there are $938,000, $1,054,000 and $840,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of income tax expense. During the years ended March 31, 2019, 2018, and 2017, the Company recognized approximately $(23,000), $5,000, and $51,000 in interest and penalties, respectively. The Company had approximately $124,000 and $146,000 for the payment of interest and penalties accrued at March 31, 2019 and 2018, respectively.