INCOME TAXES - Note 9

12 Months Ended

Mar. 31, 2015

Notes to Financial Statements

INCOME TAXES - Note 9

9. INCOME TAXES

For the years ended March 31, 2015, 2014 and 2013, the Company recorded a provision for income taxes of approximately $2.8 million, $2.2 million and $9.4 million, respectively. The provision in each year was attributable to federal and state current and deferred taxes.  The components of the consolidated provision for income taxes for fiscal 2015, 2014 and 2013 consisted of the following (in thousands):

		March 31,
Current:		2015		2014		2013
Federal	$	92	$	-	$	-
State		457		276		434
Foreign		1		-		-
Total current tax provision		550		276		434
Deferred
Federal	$	2,602	$	1,578	$	7,185
State		(363)		365		1,780
Foreign		-		-		-
Total deferred tax provision		2,239		1,943		8,965
Total income tax provision	$	2,789	$	2,219	$	9,399

The Company's income from continuing operations before income taxes included $3.5 million, $0.8 million and $0 of foreign subsidiary loss for the fiscal years ended March 31, 2015, 2014 and 2013, respectively.

Deferred tax assets were comprised of the following (in thousands):

		March 31,
Current deferred tax assets		2015		2014
Net operating loss carryforwards	$	2,179	$	333
Inventory valuation		14		33
Reserves and allowances		2,394		1,791
Net current deferred tax assets		4,587		2,157
Net operating loss carryforwards		44,228		51,598
Research and development and other credit carryforwards		5,414		4,488
Fixed assets and intangibles		(1,705)		(2,819)
Net non-current deferred tax assets		47,937		53,267
Valuation allowance		(4,901)		(5,562)
Total	$	47,623	$	49,862

As of March 31, 2015 and 2014, management assessed the realizability of deferred tax assets based on the available evidence, including a history of taxable income and estimates of future taxable income. At March 31, 2015, management evaluated the need for a valuation allowance and determined that a valuation allowance of approximately $4.9 million was needed. At March 31, 2014, management evaluated the need for a valuation allowance and determined that a valuation allowance of approximately $5.6 million was needed. The net change in the valuation allowance for the years ended March 31, 2015 and 2014 was a decrease of $0.7 million and an increase of $2.5 million, respectively.

At March 31, 2015, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $142.8 million and $66.7 million, respectively, which expire at various dates between 2016 and 2035. The net operating loss carryforwards include approximately $30.9 million resulting from employee exercises of non-qualified stock options or disqualifying dispositions, the tax benefits of which, when realized, will be accounted for as an addition to additional paid-in capital rather than as a reduction of the provision for income taxes. In addition, at March 31, 2015, the Company had research and development credit carryforwards for federal and California tax reporting purposes of approximately $3.3 million and $5.1 million, respectively. The federal income tax credit carryforwards will expire at various dates between 2021 and 2035, while the California income tax credits will carry forward indefinitely. A reconciliation of the Company's provision for income taxes to the amounts computed using the statutory U.S. federal income tax rate of 34% is as follows (in thousands):

		Years Ended March 31,
		2015		2014		2013
Tax provision at statutory rate	$	1,599	$	1,285	$	7,768
State income taxes before valuation allowance,
net of federal effect		269		196		822
Research and development credits		(725)		(1,534)		(385)
Change in valuation allowance		(1,480)		1,264		1,038
Compensation/option differences		(331)		(264)		(207)
Non-deductible compensation		746		605		403
Acquisition costs		-		230		-
Expiring CA NOLs		1,484		240		-
Foreign loss not benefited		1,192		271		-
Other		35		(74)		(40)
Total income tax provision	$	2,789	$	2,219	$	9,399

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
		2015		2014		2013
Balance at beginning of year	$	2,165	$	3,024	$	2,483
Gross increases - tax position in prior period		27		-		73
Gross decreases - tax position in prior period		-		(1,081)		-
Gross increases - tax positions related to the current year		228		222		468
Settlements		-		-		-
Lapse of statute of limitations		-		-		-
Balance at end of year	$	2,420	$	2,165	$	3,024

At March 31, 2015, the company had a liability for unrecognized tax benefits of $2.4 million, all of which, if recognized, would decrease 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 files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. The Company has not been under examination by income tax authorities in federal, state or other foreign jurisdictions. The 1996 through fiscal 2015 tax years generally remain subject to examination by federal and most state tax authorities.

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 year ended March 31, 2015, 2014 and 2013, 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. Management 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 of Contactual, Inc.