9.	INCOME TAXES

In determining the provision for income taxes for the

first

nine

months of fiscal

2019,

the Company calculated income tax expense based on the estimated annual tax rate for the year, compared to the prior year when the Company calculated income tax expense based on actual quarterly results. The annual effective tax rate was adjusted for discrete items recorded during both periods. The estimated annual tax rate for the year was used in the current period since the Company is forecasting profits for the full fiscal year

2019.

The Company recorded income tax expense of

$0.6

million and

$1.2

million in the

third

quarter of fiscal

2019

and

2018,

respectively. The Company’s effective tax rate decreased to

17%

during the

third

quarter of fiscal

2019

compared to

115%

for the same period in the prior year. The difference in the effective tax rate is primarily due applying an annual effective tax rate to the forecasted profits in the

third

quarter of fiscal

2019

compared to calculating income tax expense based on actual quarterly results for the same period of fiscal

2018.

The Company recorded income tax expense of

$3.3

million and

$2.7

million for the

first

nine

months of fiscal

2019

and

2018,

respectively. The Company’s effective tax rate was

37%

compared to (

227%

) for the same period in the prior year. The change in the effective tax rate is primarily due to forecasted profits for the

first

nine

months of fiscal

2019

compared to the pre-tax loss for the same period of fiscal

2018.

When calculating income tax expense for the

first

nine

months of fiscal

2019,

the Company considered the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted

December 22, 2017.

The Tax Act imposed a deemed repatriation tax on accumulated earnings of foreign subsidiaries, reduced the U.S. corporate tax rate to

21%

and introduced a new tax on global intangible low taxed income (“GILTI”). On

August 1, 2018,

the IRS and U.S. Department of Treasury issued proposed regulations on the

one

-time transition tax under Section

965.

As of

October 31, 2018,

the Company has

not

completed its accounting for all the tax effects of the

2017

Tax Act. However, the Company made what it believes to be a reasonable estimate of certain effects of the

2017

Tax Act. During the

third

quarter of fiscal

2019,

the Company maintained its provisional estimate of the fiscal

2018

deemed repatriation tax of

$10.0

million. This additional income tax expense was partially offset by net operating losses and tax credits. Subsequent to the close of the

third

quarter fiscal

2019,

the Company completed its calculations of the Transition Tax and finalized its U.S. federal income tax return. The provisional tax expense for the Transition Tax is anticipated to be reduced from

$2.0

million to

$0.7

million. Due to the complexities of the calculations and the pending authoritative guidance the Company considers all tax reform related amounts as provisional. The Company expects final accounting related to the remeasurement of its existing deferred tax assets under SAB

118

to be complete during the

fourth

quarter of fiscal year

2019.

The Company elected to pay the estimated repatriation tax liability over a period of

eight

years as permitted by the Tax Act.

The Company included a provision for GILTI in the Company’s tax expense for the

first

nine

months of fiscal

2019.

The provisional GILTI estimate considered the proposed regulations released on

September 13, 2018

by the U.S. Department of Treasury. Cash taxes and the Company’s effective tax rate were only slightly impacted by GILTI since the Company has sufficient tax credits to offset the additional liability. The Company has

not

recorded deferred taxes related to these GILTI provisions and has

not

yet determined its policy election with respect to whether it will treat GILTI as a current-period expense when incurred (the “period cost method”) or factor such amount into the measurement of deferred taxes (the “deferred method”). This decision will be made by year end as we evaluate the impact of proposed regulations and notices.

The Company adopted ASU

2016

Income taxes (Topic

740

) Intra-entity Transfers of Assets Other Than Inventory

during the

three

months ended

April 30, 2018,

which required all income tax effects of intra-entity transfers of assets other than inventory to be recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) when the transfer occurs. As a result of the adoption, the Company recorded

$9.6

million to accumulated deficit and deferred tax asset at

February 1, 2018

to account for the intra-entity sale of Intellectual Property that occurred in the fiscal year

2018.

The gross amount of unrecognized tax benefits was

$1.2

million at

October 31, 2018,

including interest and penalties. During the quarter the balance was reduced by

$0.5

million after a tax dispute was resolved with the tax authority in one of our foreign jurisdictions. The unrecognized tax benefits were reduced by

$0.9

million with an accompanying reduction of deferred tax assets, as a result of the netting required under ASU

2013

11.

The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within

twelve

months of the reporting date.

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of

October 31, 2018,

the Company has accrued approximately

$0.1

million of interest and penalty expense relating to unrecognized tax benefits.

The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-

not

standard. Management assesses historic, current and future financial projections by jurisdiction to draw its conclusion. During fiscal

2017,

a valuation allowance for U.S. federal and state deferred tax assets was established. For the quarter ended

October 31, 2018,

the Company continues to maintain a full valuation allowance on its U.S. federal and state deferred tax assets. At

October 31, 2018

and

January 31, 2018,

the valuation allowance attributable to deferred tax assets was

$35.4

million and

$33.7

million, respectively.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

	●	India for fiscal years ended March 31, 2010, 2013, 2014

	●	Netherlands for fiscal year ended January 31, 2016

●

Germany for fiscal years ended

January 31, 2015,

2016,

2017

●

Tennessee for fiscal years ended

January 31, 2014,

2015,

2016,

2017

During fiscal

2019,

the Company closed the following audits with

adjustment:

	●	Iowa for fiscal year ended January 31, 2014

●

Kentucky for fiscal year ended

January

31,

2016