INCOME TAXES
The total provision (benefit) for income taxes consists of the following for the fiscal years ending (dollars in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Current | $ | (261 | ) | | $ | 36 |
| | $ | 49 |
|
Deferred | — |
| | — |
| | — |
|
| $ | (261 | ) | | $ | 36 |
| | $ | 49 |
|
| | | | | |
| 2017 | | 2016 | | 2015 |
Federal | $ | (283 | ) | | $ | 15 |
| | $ | — |
|
State | 22 |
| | 21 |
| | 49 |
|
| $ | (261 | ) | | $ | 36 |
| | $ | 49 |
|
A reconciliation of the statutory federal income tax rate and effective income tax rate is as follows:
|
| | | | | | | | |
| Fiscal Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal tax rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State taxes, net | 3.5 | % | | 2.8 | % | | 3.6 | % |
Federal tax credit | — | % | | — | % | | 0.2 | % |
State tax credit | — | % | | — | % | | 0.1 | % |
Change in valuation reserve | (37.6 | )% | | (29.1 | )% | | (37.0 | )% |
Permanent items | (0.5 | )% | | (7.5 | )% | | (0.1 | )% |
Change in tax contingency reserve | 1.0 | % | | (0.1 | )% | | — | % |
Federal Refunds | 1.4 | % | | — | % | | — | % |
Other, net | 0.3 | % | | (0.3 | )% | | (1.0 | )% |
Effective income tax rate | 2.1 | % | | (0.2 | )% | | (0.2 | )% |
The net deferred tax assets and liabilities reported in the accompanying consolidated financial statements include the following components (dollars in thousands):
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
Inventory, accruals and reserves | $ | 4,016 |
| | $ | 3,686 |
|
Other | 54 |
| | 187 |
|
Deferred revenue | (141 | ) | | 73 |
|
Valuation allowance | (3,929 | ) | | (3,946 | ) |
Total net current deferred tax assets and liabilities | $ | — |
| | $ | — |
|
Federal and state operating loss carry-forwards | 23,927 |
| | 19,727 |
|
Tax credit carry-forwards | 1,403 |
| | 1,475 |
|
Non-qualified stock options | 3,265 |
| | 3,125 |
|
Deferred revenue | (51 | ) | | (31 | ) |
Fixed assets | (1,360 | ) | | (1,493 | ) |
Intangible assets | (1,034 | ) | | (1,297 | ) |
Valuation allowance | (26,150 | ) | | (21,506 | ) |
Total net long-term deferred tax assets and liabilities | $ | — |
| | $ | — |
|
Total net deferred tax assets | $ | — |
| | $ | — |
|
Orion is eligible for tax benefits associated with the excess of the tax deduction available for exercises of non-qualified stock options, or NQSOs, over the amount recorded at grant. The amount of the benefit is based upon the ultimate deduction reflected in the applicable income tax return. Benefits of $0 were recorded in fiscal 2017, fiscal 2016 and fiscal 2015, as a reduction in taxes payable and a credit to additional paid in capital based on the amount that was utilized in the current year.
As of March 31, 2017, Orion has federal net operating loss carryforwards of approximately $65,746,000, of which $2,977,000 are associated with the exercise of NQSOs that have not yet been recognized by Orion in its financial statements. Orion also has state net operating loss carry-forwards of approximately $56,231,000, of which $3,324,000 are associated with the exercise of NQSOs. Orion also has federal tax credit carry-forwards of approximately $1,403,000 and state tax credits of $724,000. Orion's net operating loss and tax credit carry-forwards will begin to expire in varying amounts between 2030 and 2037. For the fiscal year ended March 31, 2017, Orion has recorded a valuation allowance of $30,078,000, equaling the net deferred tax asset due to the uncertainty of its realization value in the future. For the fiscal years ended March 31, 2017 and March 31, 2016, the valuation allowance against Orion's net federal and net state deferred tax assets increased $4,627,000 and $5,740,000, respectively. Orion considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event that Orion determines that the deferred tax assets are able to be realized, an adjustment to the deferred tax asset would increase income in the period such determination is made.
Generally, a change of more than 50% in the ownership of Orion's stock, by value, over a three year period constitutes an ownership change for federal income tax purposes as defined under Section 382 of the Internal Revenue Code. As a result, Orion's ability to use its net operating loss carry-forwards, attributable to the period prior to such ownership change, to offset taxable income can be subject to limitations in a particular year, which could potentially result in increased future tax liability for Orion. There was no limitation of net operating loss carry-forwards that occurred for fiscal 2017, fiscal 2016, or fiscal 2015.
Orion records its tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where Orion believes that a tax position is supportable for income tax purposes, the item is included in their income tax returns. Where treatment of a position is uncertain, a liability is recorded based upon the expected most likely outcome taking into consideration the technical merits of the position based on specific tax regulations and facts of each matter. These liabilities may be affected by changing interpretations of laws, rulings by tax authorities, or the expiration of the statute of limitations.
Orion files income tax returns in the United States federal jurisdiction and in several state jurisdictions. The Company's federal tax returns for tax years beginning April 1, 2013 or later are open. For states in which Orion files state income tax returns, the statue of limitations is generally open for tax years ended March 31, 2013 and forward.
State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state effect of any federal changes remains subject to examination by various states for a period of up to two years after formal notification to the states. Orion currently has no state income tax return positions in the process of examination, administrative appeals or litigation.
Orion has settled with the Wisconsin Department of Revenue with respect to an assessment regarding the proper classification of our products for tax purposes under Wisconsin law. The issue under review is whether the installation of our lighting systems is considered a real property construction activity under Wisconsin law. We have resolved this matter with the Wisconsin Department of Revenue in fiscal 2017 for the amount of $460,000.
Uncertain tax positions
As of March 31, 2017, the balance of gross unrecognized tax benefits was approximately $113,000, all of which would reduce Orion’s effective tax rate if recognized.
Orion has classified the amounts recorded for uncertain tax benefits in the balance sheet as other liabilities (non-current) to the extent that payment is not anticipated within one year. Orion recognizes penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and interest are included in the unrecognized tax benefits. Orion had the following unrecognized tax benefit activity (dollars in thousands):
|
| | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized tax benefits as of beginning of fiscal year | $ | 227 |
| | $ | 212 |
| | $ | 210 |
|
Additions based on tax positions related to the current period positions | 2 |
| | 15 |
| | 2 |
|
Reduction for tax positions of prior years | $ | (116 | ) | | $ | — |
| | $ | — |
|
Unrecognized tax benefits as of end of fiscal year | $ | 113 |
| | $ | 227 |
| | $ | 212 |
|