Income Taxes

For the year ended March 31, loss before income taxes consisted of the following:



(In thousands)	2018			2017			2016
Loss before income taxes
United States	$	(11,926	)	$	(10,967	)	$	(3,874	)
Foreign	325			(518		)	115
Total loss before income taxes	$	(11,601	)	$	(11,485	)	$	(3,759	)

For the year ended March 31, income tax expense (benefit) consisted of the following:



(In thousands)	2018			2017		2016
Income tax expense (benefit)
Current:
Federal	$	66		$	10	$	(2	)
State and local	(446		)	5		(52		)
Foreign	73			107		59
Deferred:
Federal	(2,985		)	96		19
State and local	41			10		10
Foreign	—			8		(28		)
Total income tax expense (benefit)	$	(3,251	)	$	236	$	6

The following table presents the principal components of the difference between the effective tax rate for continuing operations to the U.S. federal statutory income tax rate for the years ended March 31:



(In thousands)	2018			2017			2016
Income tax benefit at the US Federal statutory rate	$	(3,654	)	$	(4,019	)	$	(1,317	)
Benefit for state taxes	(642		)	(142		)	(54		)
Impact of foreign operations	38			158			(9		)
Indefinite life assets	335			102			26
Officer life insurance	(5		)	(6		)	(197		)
Change in valuation allowance	3,328			4,007			1,555
Change in liability for unrecognized tax benefits	40			9			(29		)
Impact of Tax Act, net	(3,287		)	—			—
Meals and entertainment	81			163			100
Equity	476			—			—
Other	39			(36		)	(69		)
Total income tax expense (benefit)	$	(3,251	)	$	236		$	6

On December 22, 2017, the President of the United States of America signed into law the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act contains significant changes to corporate taxes, including a permanent reduction of the corporate tax rate from 35% to 21% effective January 1, 2018. The reduction in the corporate rate requires a revaluation of certain tax-related assets and liabilities. As a result of the revaluation of our deferred tax assets and liabilities and the ability to offset indefinite lived deferred tax liabilities with certain deferred tax assets, we recorded a tax benefit of approximately $3.3 million.

On December 22, 2017 the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB No. 118 allows registrants to record provisional amounts for a period up to one year from the date of enactment of the Tax Act when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. It is uncertain if and to what extent various states will enact legislation to conform to the Tax Act. Because legislative guidance and accounting interpretations are expected in the future, we consider the accounting of the deferred tax remeasurement including the ability to offset indefinite lived deferred tax liabilities with certain deferred tax assets to be incomplete and therefore only consider amounts related to these items to be reasonably estimated as of March 31, 2018. We expect to refine and compete the accounting for the Tax Act during Fiscal 2019 as we obtain, prepare, and analyze additional information and as additional legislative, regulatory, and accounting guidance and interpretations become available.

Our tax provision includes a provision for income taxes in certain foreign jurisdictions where subsidiaries are profitable, but only a minimal benefit is reflected related to U.S. and certain foreign tax losses due to the uncertainty of the ultimate realization of future benefits from these losses. The 2018 tax provision results primarily from a reduction in the deferred rate and the ability to offset indefinite lived deferred tax liabilities with certain deferred tax assets due to passage of the Tax Act. The 2018 tax provision differs from the statutory rate primarily due to the impact of the Tax Act, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects including a benefit of $0.4 million related to a settlement with the California Franchise Tax Board and other U.S. permanent book to tax differences.

The 2017 tax provision primarily results from state taxes, taxes withheld in foreign jurisdictions and foreign tax expense. The 2017 tax provision differs from the statutory rate primarily due to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, state taxes and other U.S. permanent book to tax differences.

The 2016 tax provision differs from the statutory rate primarily due to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, death benefits on company owned life insurance, state taxes and other U.S. permanent book to tax differences.

Deferred tax assets and liabilities as of March 31, are as follows:



(In thousands)	2018			2017
Deferred tax assets:
Accrued liabilities	$	2,720		$	3,892
Allowance for doubtful accounts	143			126
Inventory valuation reserve	20			38
Federal losses and credit carryforwards	42,713			64,953
Foreign net operating losses	623			392
State losses and credit carryforwards	9,592			9,474
Deferred revenue	652			704
Goodwill and other intangible assets	286			1,332
Other	96			152
	56,845			81,063
Less: valuation allowance	(54,260		)	(80,013		)
Total	2,585			1,050
Deferred tax liabilities:
Property and equipment & software amortization	(412		)	(772		)
Indefinite-lived goodwill & intangible assets	(2,277		)	(3,459		)
Total	(2,689		)	(4,231		)
Total deferred tax liabilities	$	(104	)	$	(3,181	)

At March 31, 2018, we had $198.7 million of a federal net operating loss carryforwards that expire, if unused, in fiscal years 2031 to 2038. Included in this net operating loss is $4.4 million of tax deductions in excess of recorded windfall tax benefits associated with stock-based compensation that was recognized upon the implementation of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, that amended several aspects of accounting for share-based payment transactions, including income tax consequences. Our Hong Kong, Malaysia, Singapore and Philippine subsidiaries have $0.3, $0.1, $0.1 and $0.1 million of net operating loss carryforwards respectively. The losses for Hong Kong, Malaysia and Singapore can be carried forward indefinitely while the losses for the Philippines have a 3 year carryforward. At March 31, 2018 our India subsidiary had $0.1 million of minimum alternative tax credits reported as other noncurrent assets on our consolidated balance sheet. Our India subsidiary operates in a “Special Economic Zone (“SEZ”)”. One of the benefits associated with the SEZ is that the India subsidiary is not subject to regular India income taxes during its first 5 years of operations.

At March 31, 2018 we also had $134.7 million of state net operating loss carryforwards that expire, if unused, in fiscal years 2019 through 2038.

We recorded valuation allowances related to certain deferred income tax assets due to the uncertainty of the ultimate realization of the future benefits from those assets. At March 31, 2018, the total valuation allowance against deferred tax assets of $54.3 million was comprised of a valuation allowance of $53.7 million for federal and state deferred tax assets, and a valuation allowance of $0.6 million associated with deferred tax assets in Hong Kong, Malaysia, Singapore and the Philippines. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. We have recorded a valuation allowance offsetting substantially all of our deferred tax assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, we will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax code. Because of our losses in current and prior periods, management believes that it is more-likely-than-not that we will not realize the benefits of these deductible differences. The amount of the valuation allowance, however, could be reduced in the near term. The exact timing will be based on the level of profitability that we are able to achieve and our visibility into future results. Our recorded tax rate may increase in subsequent periods following a valuation release. Any valuation allowance release will not affect the amount of cash paid for income taxes.

The undistributed earnings of our foreign subsidiaries are not subject to U.S. federal and state income taxes unless such earnings are distributed in the form of dividends or otherwise to the extent of current and accumulated earnings and profits. The undistributed earnings of foreign subsidiaries are permanently reinvested and totaled $1.7 million and $1.3 million as of March 31, 2018 and 2017, respectively. We made the determination of permanent reinvestment on the basis of sufficient evidence that demonstrates we will invest the undistributed earnings overseas indefinitely for use in working capital, as well as foreign acquisitions and expansion. The determination of the amount of the unrecognized deferred U.S. income tax liability related to the undistributed earnings is not practicable.

We use the with-and-without approach for ordering tax benefits derived from the share-based payment awards. Using the with-and-without approach, actual income taxes payable for the period are compared to the amount of tax payable that would have been incurred absent the deduction for employee share-based payments in excess of the amount of compensation cost recognized for financial reporting. As a result of this approach, tax net operating loss carryforwards not generated from share-based payments in excess of cost recognized for financial reporting are considered utilized before the current period's share-based deduction.

We recorded a liability for unrecognized tax positions. The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the years ended March 31:



(In thousands)	2018			2017			2016
Balance at April 1	$	988		$	1,617		$	1,755
Reductions:
Relating to tax settlements	—			—			(85		)
Relating to positions taken during prior year	(300		)	(604		)	—
Relating to lapse in statute	(1		)	(25		)	(53		)
Balance at March 31	$	687		$	988		$	1,617

As of March 31, 2018, we had a liability of $0.7 million related to uncertain tax positions, the recognition of which would affect our effective income tax rate.

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of zero to $0.3 million as a result of the expiration of various statutes of limitations. We are routinely audited and the outcome of tax examinations could also result in a reduction in unrecognized tax benefits. Other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.

We recognize interest accrued on any unrecognized tax benefits as a component of income tax expense. Penalties are recognized as a component of general and administrative expenses. We recognized interest and penalty expense of less than $0.1 million for the years ended March 31, 2018, 2017 and 2016. As of March 31, 2018 and 2017, we had approximately $0.8 million and $0.8 million of interest and penalties accrued.

In the U.S. we file consolidated federal and state income tax returns where statutes of limitations generally range from three to five years. Although we have resolved examinations with the IRS through tax year ended March 31, 2010, U.S. federal tax years are open from 2006 forward due to attribute carryforwards. The statute of limitations is open from fiscal year 2011 forward in certain state jurisdictions. We also file income tax returns in international jurisdictions where statutes of limitations generally range from three to seven years. Years beginning after 2007 are open for examination by certain foreign taxing authorities.