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INCOME TAXES - Note 7 | 12 Months Ended
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Mar. 31, 2018
Notes to Financial Statements |
INCOME TAXES - Note 7 | 7. INCOME TAXES The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. Among numerous provisions, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Accordingly, deferred tax assets were adjusted down by about $23 million in the period ended December 31, 2017. However, because the Company recorded a full valuation allowance, the decrease in deferred tax assets from the tax rate change was fully offset by a corresponding decrease in valuation allowance, and therefore, resulted in no impact to the tax expense. The one-time transition tax is based on the Company's total post-1986 earnings and profits (E&P) for which U.S. income taxes have been previously deferred. The Company recorded no one-time transition tax liability for its foreign subsidiaries as the Company's preliminary calculations concluded it does not have any untaxed foreign accumulated earnings as of the measurement dates. In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The Company has made a reasonable estimate of the effects on its existing deferred tax balances. The Company will continue to make and refine its calculations as additional analysis and more thorough understanding of the tax law is completed. For the years ended March 31, 2018, 2017 and 2016, the Company recorded a (benefit) provision for income taxes of approximately $66.3 million, ($0.1) million and ($0.8) million, respectively. The components of the consolidated (benefit) provision for income taxes for fiscal 2018, 2017 and 2016 consisted of the following (in thousands):
|  |  | March 31,
Current: |  |  | 2018 |  |  | 2017 |  |  | 2016
Federal |  | $ | (395) |  | $ | (7) |  | $ | 97
State |  |  | 256 |  |  | 588 |  |  | 551
Foreign |  |  | 185 |  |  | 112 |  |  | 71
Total current tax provision |  |  | 46 |  |  | 693 |  |  | 719
Deferred |  |  |  |  |  |  |  |  |
Federal |  |  | 59,837 |  |  | 1,506 |  |  | 95
State |  |  | 6,664 |  |  | (1,095) |  |  | (854)
Foreign |  |  | (253) |  |  | (1,230) |  |  | (807)
Total deferred tax (benefit) provision |  |  | 66,248 |  |  | (819) |  |  | (1,566)
Income tax (benefit) provision |  | $ | 66,294 |  | $ | (126) |  | $ | (847)
The Company's income (loss) from continuing operations before income taxes included ($19.7) million, ($8.4) million and ($6.9) million of foreign subsidiary loss for the fiscal years ended March 31, 2018, 2017 and 2016, respectively. The Company is permanently reinvesting the earnings of its profitable foreign subsidiaries. The Company intends to reinvest these profits in expansion of overseas operations. If the Company were to remit these earnings, the tax impact would be immaterial. Deferred tax assets and (liabilities) were comprised of the following (in thousands):
|  |  | March 31,
|  |  | 2018 |  |  | 2017
Net operating loss carryforwards |  | $ | 40,465 |  | $ | 36,427
Research and development and other credit carryforwards |  |  | 11,761 |  |  | 8,614
Stock-based compensation |  |  | 6,389 |  |  | 6,942
Reserves and allowances |  |  | 3,181 |  |  | 3,266
Fixed assets and intangibles |  |  | 378 |  |  | (3,688)
Net non-current deferred tax assets |  |  | 62,174 |  |  | 51,561
Valuation allowance |  |  | (62,174) |  |  | (2,934)
Total |  | $ | - |  | $ | 48,627
The Company assesses the realizability of deferred tax assets based on the available evidence, including a history of taxable income and estimates of future taxable income. In assessing the realizability of deferred tax assets, The Company considers whether it is more likely than not that all or some portion of deferred tax assets will not be realized. During the year ended March 31, 2018, the Company recorded a full valuation allowance against its deferred tax assets as it considered the cumulative losses in recent periods to be a substantial negative evidence. At March 31, 2018, management determined that a valuation allowance of approximately $62.2 million was needed compared with approximately $2.9 million as of March 31, 2017. At March 31, 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $157.6 million and $27.5 million, respectively, which expire at various dates between 2029 and 2037. In addition, at March 31, 2018, the Company had research and development credit carryforwards for federal and California tax reporting purposes of approximately $7.2 million and $9.1 million, respectively. The federal income tax credit carryforwards will expire at various dates between 2021 and 2038, while the California income tax credits will carry forward indefinitely. A reconciliation of the Company's provision (benefit) for income taxes to the amounts computed using the statutory U.S. federal income tax rate is as follows (in thousands):
|  |  | Years Ended March 31,
|  |  | 2018 |  |  | 2017 |  |  | 2016
Tax provision at statutory rate |  | $ | (11,790) |  | $ | (1,652) |  | $ | (2,029)
State income taxes before valuation allowance, |  |  |  |  |  |  |  |  |
net of federal effect |  |  | (1,042) |  |  | 108 |  |  | 9
Foreign tax rate differential |  |  | (1,188) |  |  | 885 |  |  | (769)
Research and development credits |  |  | (2,189) |  |  | (1,484) |  |  | (1,253)
Change in valuation allowance |  |  | 56,663 |  |  | (287) |  |  | (1,555)
Compensation/option differences |  |  | (4,965) |  |  | (246) |  |  | (471)
Non-deductible compensation |  |  | 1,132 |  |  | 1,079 |  |  | 944
Tax Act rate change impact |  |  | 22,630 |  |  | - |  |  | -
Acquisition costs |  |  | - |  |  | 54 |  |  | 230
Expiring California loss carry-forwards |  |  | - |  |  | - |  |  | 1,626
Foreign loss not benefited |  |  | 6,847 |  |  | 780 |  |  | 2,342
Other |  |  | 196 |  |  | 637 |  |  | 79
Total income tax provision |  | $ | 66,294 |  | $ | (126) |  | $ | (847)
For fiscal year ended March 31, 2018, a blended statutory U.S. federal income tax rate of 34% for 9 months and 21% for 3 months was used. For other years, the statutory federal rate of 34% was used. The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|  |  | Unrecognized Tax Benefits
|  |  | 2018 |  |  | 2017 |  |  | 2016
Balance at beginning of year |  | $ | 3,331 |  | $ | 2,881 |  | $ | 2,420
Gross increases - tax position in prior period |  |  | - |  |  | - |  |  | 82
Gross increases - tax position related to the current year |  |  | 649 |  |  | 450 |  |  | 379
Balance at end of year |  | $ | 3,980 |  | $ | 3,331 |  | $ | 2,881
At March 31, 2018, the Company had a liability for unrecognized tax benefits of $4.0 million, all of which, if recognized, would favorably affect the company's effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company's policy for recording interest and penalties associated with tax examinations is to record such items as a component of operating expense income before taxes. During the fiscal years ended March 31, 2018, 2017 and 2016, the Company did not recognize any interest or penalties related to unrecognized tax benefits. Utilization of the Company's net operating loss and tax credit carryforwards can become subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carryforwards before utilization. The Company has performed an analysis of its changes in ownership under Section 382 of the Internal Revenue Code. The Company currently believes that the Section 382 limitation will not limit utilization of the carryforwards prior to their expiration, with the exception of certain acquired loss and tax credit carryforwards. The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. The Company is currently under examination by the Internal Revenue Service for the fiscal year ended March 31, 2016 and by the Illinois Department of Revenue for the fiscal years ended March 31, 2015 and 2016. It is too early to predict the outcome of the ongoing examinations. The tax years fiscal 1999 through fiscal 2018 generally remain subject to examination by federal and most state tax authorities.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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