17.	Income Taxes

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act:

(i) removes certain net operating loss deduction and carry-back limitations originally imposed by the Tax Cuts and Jobs Act of 2017, (ii) increases IRC §163(j) business interest expense limitations, and (iii) technical correction on recovery period for qualified improvement property (QIP), allowing QIP to be eligible for bonus depreciation. Specifically, the Company may now carry back net operating losses originating in the year ended March 31, 2019 to the year ended March 31, 2017, resulting in an increase to its income tax receivable of $1,002,000 as of March 31, 2020.

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

The income tax expense is as follows:

	Years Ended March 31,
	2020			2019			2018
Current tax expense
Federal	$	5,313,000		$	680,000		$	12,187,000
State		1,454,000			647,000			1,425,000
Foreign		1,566,000			1,723,000			1,194,000

Total current tax expense		8,333,000			3,050,000			14,806,000

Deferred tax (benefit) expense
Federal		(4,516,000	)		(2,087,000	)		949,000
State		(1,567,000	)		(295,000	)		393,000
Foreign		(3,261,000	)		(400,000	)		(23,000	)

Total deferred tax (benefit) expense		(9,344,000	)		(2,782,000	)		1,319,000

Total income tax (benefit) expense	$	(1,011,000	)	$	268,000		$	16,125,000

Deferred income taxes consist of the following:

	March 31, 2020			March 31, 2019
Assets
Allowance for bad debts	$	1,037,000		$	1,005,000
Customer allowances earned		3,549,000			3,177,000
Allowance for stock adjustment returns		1,743,000			2,073,000
Inventory adjustments		5,567,000			3,701,000
Stock options		2,427,000			2,221,000
Operating lease liabilities (1)		19,396,000			-
Estimate for returns		10,839,000			2,107,000
Accrued compensation		1,964,000			1,578,000
Net operating losses		4,091,000			2,088,000
Tax credits		1,343,000			1,495,000
Other		1,620,000			5,776,000
Total deferred tax assets	$	53,576,000		$	25,221,000
Liabilities
Plant and equipment, net		(5,175,000	)		(3,316,000	)
Intangibles, net		(4,700,000	)		(5,390,000	)
Operating lease (1)		(15,371,000	)		-
Other		(3,966,000	)		(3,278,000	)
Total deferred tax liabilities	$	(29,212,000	)	$	(11,984,000	)
Less valuation allowance	$	(5,493,000	)	$	(3,748,000	)
Total	$	18,871,000		$	9,489,000

(1)

Adoption of the new lease standard as of April 1, 2019 (see Note 2) resulted in the recognition of a deferred tax asset for operating lease liabilities and a deferred tax liability for operating lease assets. These temporary differences will reverse over the estimated term of the relevant operating leases. As of March 31, 2019, the deferred tax assets associated with operating leases were reported as other deferred tax assets under legacy US GAAP.

As of March 31, 2020, the Company had state net operating loss carryforwards of $1,689,000 and foreign net operating loss carryforwards of $14,953,000. The state net operating loss carryforwards expire beginning fiscal year 2034, and the foreign net operating loss carryforwards expire beginning fiscal year 2038. As of March 31, 2020, the Company also had investment tax credits carryforward of $1,343,000, which will expire beginning fiscal year 2032. A full valuation allowance was established on the foreign net operating loss and tax credits carryforward as the Company believes it is more likely than not these tax attributes would not be realizable in the future.

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 non-US net operating loss carry-forwards and non-US research and development credits in connection with the Company’s 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, 2020, 2019, and 2018, the primary components of the Company’s income tax expense were: (i) federal income taxes, (ii) the impact of net operating loss carry-backs in connection with the CARES Act, (iii) foreign income taxed at rates that are different from the federal statutory rate, (iv) change in realizable deferred tax items, (v) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), (vi) income taxes associated with uncertain tax positions, (vii) the change in the blended state rate, and (viii) 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,
	2020			2019			2018
Statutory federal income tax rate		21.0	%		21.0	%		31.5	%
State income tax rate, net of federal benefit		(3.7	)%		(3.7	)%		3.6	%
Excess tax benefit from stock compensation		(1.3	)%		0.7	%		(0.7	)%
Foreign income taxed at different rates		13.8	%		-	%		(2.6	)%
Return to provision adjustments		(1.5	)%		-	%		-	%
Warrants		-	%		-	%		(2.1	)%
Non-deductible executive compensation		(4.0	)%		(7.3	)%		1.0	%
Change in valuation allowance		(18.7	)%		(15.3	)%		4.8	%
Net operating loss carryback		4.8	%		-	%		-	%
Effects of mandatory redeemed repatriation		-	%		-	%		1.5	%
Effects of U.S. tax rate changes		-	%		0.3	%		8.0	%
Uncertain tax positions		2.1	%		1.8	%		0.6	%
Research and development credit		1.1	%		1.3	%		(0.2	)%
Non-deductible transaction costs		-	%		(2.1	)%		-	%
Other income tax		(1.4	)%		(0.2	)%		0.2	%
		12.2	%		(3.5	)%		45.6	%

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, 2020, the Company is not under examination in any jurisdiction and the years ended March 31, 2019, 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,
	2020			2019			2018
Balance at beginning of period	$	1,083,000		$	1,219,000		$	1,092,000
Additions based on tax positions related to the current year		362,000			91,000			234,000
Reductions for tax positions of prior year		(434,000	)		(227,000	)		(107,000	)
Balance at end of period	$	1,011,000		$	1,083,000		$	1,219,000

At March 31, 2020, 2019 and 2018, there are $823,000, $938,000 and $1,054,000 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, 2020, 2019, and 2018, the Company recognized approximately $(50,000), $(23,000), and $5,000 in interest and penalties, respectively. The Company had approximately $74,000 and $124,000 for the payment of interest and penalties accrued at March 31, 2020 and 2019, respectively.