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Income Taxes
 12 Months Ended
Mar. 31, 2023
Income Taxes [Abstract]  
Income Taxes
16. Income Taxes

Domestic and foreign components of income (loss) before income taxes are as follows:

 
  
Years Ended March 31,
  

 
2023
    
2022
    
2021
  
 
                  
United States
  
$
(14,470,000
)
  
$
6,021,000
    
$
13,920,000
  
Foreign
    
11,361,000
      
7,128,000
      
16,943,000
  
(Loss) income before income taxes
    
(3,109,000
)
    
13,149,000
      
30,863,000
  

The income tax expense is as follows:

 
  
Years Ended March 31,
  
 
  
2023
    
2022
    
2021
  
Current tax expense
                  
Federal
  
$
2,483,000
    
$
8,572,000
    
$
5,734,000
  
State
    
396,000
      
1,478,000
      
722,000
  
Foreign
    
3,426,000
      
3,180,000
      
3,364,000
  
Total current tax expense
    
6,305,000
      
13,230,000
      
9,820,000
  
Deferred tax (benefit) expense
                        
Federal
    
(5,037,000
)
    
(6,411,000
)
    
(1,909,000
)
State
    
(705,000
)
    
(659,000
)
    
118,000
  
Foreign
    
535,000
      
(372,000
)
    
1,358,000
  
Total deferred tax benefit
    
(5,207,000
)
    
(7,442,000
)
    
(433,000
)
Total income tax expense
  
$
1,098,000
    
$
5,788,000
    
$
9,387,000
  

Deferred income taxes consist of the following:

 
  
March 31, 2023
    
March 31, 2022
  
Assets
            
Allowance for bad debts
  
$
78,000
    
$
99,000
  
Customer allowances earned
    
4,760,000
      
5,321,000
  
Allowance for stock adjustment returns
    
2,391,000
      
1,651,000
  
Inventory adjustments
    
7,817,000
      
3,815,000
  
Intangibles, net
    809,000       785,000  
Stock options
    
2,770,000
      
2,984,000
  
Operating lease liabilities
    
23,408,000
      
23,894,000
  
Estimate for returns
    
26,670,000
      
25,445,000
  
Accrued compensation
    
2,718,000
      
3,515,000
  
Net operating losses
    
5,351,000
      
4,617,000
  
Tax credits
    
2,012,000
      
2,018,000
  
Other
    
5,046,000
      
3,833,000
  
Total deferred tax assets
  
$
83,830,000
    
$
77,977,000
  
Liabilities
                
Plant and equipment, net
    
(79,000
)
    
(1,051,000
)
Contract assets
    
(12,357,000
)
    
(13,873,000
)
Operating lease assets
    
(25,004,000
)
    
(23,421,000
)
Other
    
(6,864,000
)
    
(5,960,000
)
Total deferred tax liabilities
  
$
(44,304,000
)
  
$
(44,305,000
)
Less valuation allowance
  
$
(7,619,000
)
  
$
(6,816,000
)
Total
  
$
31,907,000
    
$
26,856,000
  

As of March 31, 2023, before tax effect, the Company had federal net operating loss carryforwards of $1,361,000 related to its January 2019 acquisition, state net operating loss carryforwards of $649,000 and foreign net operating loss carryforwards of $19,012,000. The federal net operating loss carryforwards expire beginning in fiscal year 2033, the state net operating loss carryforwards expire beginning in fiscal year 2033, and the foreign net operating loss carryforwards expire beginning in fiscal year 2038. As of March 31, 2023, the Company also had non-US tax credit carryforwards of $2,012,000, which will expire beginning in fiscal year 2034. A full valuation allowance was established on the federal and 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. The net increase in the valuation allowance was $803,000 during the year ended March 31, 2023.

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 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 Canadian operations 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, 2023, 2022, and 2021, the primary components of the Company’s income tax expense were (i) federal income taxes, (ii) state income taxes, (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), and (vi) income taxes associated with uncertain tax positions

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,
  
 
  
2023
    
2022
    
2021
  
Statutory federal income tax rate
    
21.0
%
    
21.0
%
    
21.0
%
State income tax rate, net of federal benefit
    
3.5
%
    
4.1
%
    
2.2
%
Foreign income taxed at different rates
    
(28.7
)%
    
4.9
%
    
1.9
%
Non-deductible executive compensation
    
(9.0
)%
    
7.2
%
    
1.9
%
Change in valuation allowance
    
(25.8
)%
    
5.0
%
    
2.2
%
Uncertain tax positions
    
(1.0
)%
    
6.1
%
    
0.3
%
Research and development credit
    
2.7
%
    
(0.9
)%
    
(0.3
)%
Net operating loss carryback     - %
     (0.4 )%     - %
Other 
   
2.0
%
    
(3.0
)%
    
1.2
%
 
    
(35.3
)%
    
44.0
%
    
30.4
%

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, 2023, the Company is not under examination in any jurisdiction and the years ended March 31, 2018 through 2023 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,
  
 
  
2023
    
2022
    
2021
  
Balance at beginning of period
  
$
1,975,000
    
$
1,104,000
    
$
1,011,000
  
Additions based on tax positions related to the current year
    
53,000
      
352,000
      
249,000
  
Additions for tax positions of prior year
    
-
      
581,000
      
67,000
  
Reductions for tax positions of prior year
    
(64,000
)
    
(62,000
)
    
(223,000
)
Balance at end of period
  
$
1,964,000
    
$
1,975,000
    
$
1,104,000
  

At March 31, 2023, 2022 and 2021, there are $1,616,000, $1,632,000, and $923,000, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits as part of income tax expense. During the years ended March 31, 2023, 2022, and 2021, the Company recognized interest and penalties of approximately $59,000, $112,000, and $(16,000), respectively. The Company had approximately $229,000 and $170,000 for the payment of interest and penalties accrued at March 31, 2023 and 2022, respectively.

With the exception of its earnings from its Singapore subsidiary, the Company intends to indefinitely reinvest its undistributed earnings from foreign subsidiaries in foreign operations. No incremental U.S. Federal tax or withholding taxes have been provided for these earnings.