Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.23.1
INCOME TAXES
 12 Months Ended
Mar. 31, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
Pre-tax loss reflected in the consolidated statements of operations for the years ended March 31, 2023, 2022 and 2021 is as follows (in thousands):
Year Ended March 31,
2023 2022 2021
U.S. $ (38,004) $ (31,489) $ (36,648)
Foreign 2,001  550  1,428 
Total $ (36,003) $ (30,939) $ (35,220)

Income tax provision consists of the following (in thousands):
Year Ended March 31,
2023 2022 2021
Current tax expense
   Federal $ —  $ —  $ (76)
   State 70  477  339 
   Foreign 2,045  1,381  747 
      Total current tax expense 2,115  1,858  1,010 
Deferred tax expense
   Federal 23  9  (577)
   State 108  22  9 
   Foreign (306) (548) (203)
      Total deferred tax expense (benefit) (175) (517) (771)
Income tax provision $ 1,940  $ 1,341  $ 239 
The income tax provision differs from the amount computed by applying the federal statutory rate of 21% to loss before income taxes as follows (in thousands):
For the year ended March 31,
2023 2022 2021
Expense (benefit) at the federal statutory rate $ (7,560) $ (6,493) $ (7,396)
Equity compensation 1,945  195  345 
Permanent items 1,498  1,941  1,295 
Foreign taxes 586  1,761  (129)
State income taxes (373) (402) (969)
Valuation allowance 5,096  (4,899) 5,444 
Uncertain tax positions (3,791) (6,349) (6,695)
Tax reform —  —  — 
Credit monetization —  (2,100) — 
Expiration of attributes 5,734  18,345  9,862 
Research and development credits (1,582) (2,094) (1,829)
Other 387  1,436  311 
Income tax provision $ 1,940  $ 1,341  $ 239 

Significant components of deferred tax assets and liabilities are as follows (in thousands):
As of March 31,
2023 2022
Deferred tax assets
Loss carryforwards $ 56,675  $ 59,636 
Deferred revenue 28,389  29,485 
Capitalized research and development 23,949  16,289 
Tax credits 15,894  16,085 
Disallowed interest 13,162  12,296 
Other accruals and reserves not currently deductible for tax purposes 4,494  4,450 
Lease obligations 2,384  2,514 
Inventory 2,715  1,701 
Accrued warranty expense 495  447 
Acquired intangibles 961  853 
Gross deferred tax assets 149,118  143,756 
Valuation allowance (143,704) (138,365)
   Total deferred tax assets, net of valuation allowance $ 5,414  $ 5,391 
Deferred tax liabilities
Depreciation $ (2,009) $ (1,921)
Lease assets (2,128) (2,439)
Other (548) (1,048)
   Total deferred tax liabilities $ (4,685) $ (5,408)
           Net deferred tax assets (liabilities) $ 729  $ (17)

The valuation allowance increased by $5.3 million during the year ended March 31, 2023, increased by $4.9 million during the year ended March 31, 2022, and decreased by $5.4 million during the year ended March 31, 2021, respectively.
A reconciliation of the gross unrecognized tax benefits is as follows (in thousands):
For the year ended March 31,
2023 2022 2021
Beginning Balance $ 99,603  $ 101,119  $ 107,282 
Increase in balances related to tax positions in current period 2,778  2,785  2,560 
Increase in balances related to tax positions in prior period —  4,881  — 
Increase in balances related to acquisitions —  —  511 
Decrease in balances related to tax positions in prior period (817) (1,020) (522)
Decrease in balances due to lapse in statute of limitations (5,221) (8,162) (8,712)
Ending balance $ 96,343  $ 99,603  $ 101,119 

During fiscal 2023, excluding interest and penalties, there was a $3.3 million change in the Company's unrecognized tax benefits. Including interest and penalties, the total unrecognized tax benefit at March 31, 2023 was $97.0 million, of which $78.3 million, if recognized, would favorably affect the effective tax rate. At March 31, 2023, accrued interest and penalties totaled $1.2 million. The Company's practice is to recognize interest and penalties related to income tax matters in the income tax provision in the consolidated statements of operations. As of March 31, 2023, $90.3 million of unrecognized tax benefits were recorded as a contra deferred tax asset in other long-term assets in the consolidated balance sheets and $7.2 million (including interest and penalties) were included in other long-term liabilities in the consolidated balances sheets.
The Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates. The Company's U.S. tax returns have been audited for years through 2002 by the Internal Revenue Service. In other major jurisdictions, the Company is generally open to examination for the most recent three to five fiscal years. During the next 12 months, it is reasonably possible that approximately $3.5 million of tax benefits, inclusive of interest and penalties, that are currently unrecognized could be recognized as a result of the expiration of applicable statutes of limitations. Upon recognition of the tax benefit related to the expiring statutes of limitation $2.9 million will be offset by the establishment of a related valuation allowance. The net tax benefit recognized in the income statement is estimated to be $0.6 million.
As of March 31, 2023, the Company had federal net operating loss and tax credit carryforwards of approximately $246.5 million and $48.2 million, respectively. The net operating loss and tax credit carryforwards expire in varying amounts in fiscal year 2024 if not previously utilized, and $12.8 million are indefinite-lived net operating loss carryforwards. These carryforwards include $11.1 million of acquired net operating losses and $4.4 million of acquired credits, the utilization of which is subject to various limitations due to prior changes in ownership.
Certain changes in stock ownership could result in a limitation on the amount of both acquired and self generated net operating loss and tax credit carryovers that can be utilized each year. If the Company has previously undergone, or should it experience in the future, such a change in stock ownership, it could severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges.
Due to its history of net losses and the difficulty in predicting future results, Quantum believes that it cannot rely on projections of future taxable income to realize the deferred tax assets. Accordingly, it has established a full valuation allowance against its U.S. and certain foreign net deferred tax assets. Significant management judgement is required in determining the Company's deferred tax assets and liabilities and valuation allowances for purposes of assessing its ability to realize any future benefit from its net deferred tax assets. The Company intends to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. The Company's income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, its valuation allowance.