INCOME TAXES - Note 2

12 Months Ended

Mar. 31, 2013

Notes to Financial Statements

INCOME TAXES - Note 2

2. INCOME TAXES

For the years ended March 31, 2013, 2012 and 2011, the Company recorded a provision (benefit) for income taxes of $9,733,000, ($62,354,000) and $55,000, respectively. The provision for the year ended March 31, 2013 was attributable to federal and state current and deferred taxes.  For the year ended March 31, 2012, the Company recorded a benefit for income taxes of $62.4 million which was primarily attributable to the release of a significant portion of the valuation allowance related to the Company's deferred tax assets.  The provision for the year ended March 31, 2011 was attributable to foreign and state current tax. The components of the consolidated provision for income taxes for fiscal 2013, 2012 and 2011 consisted of the following (in thousands):

		March 31,
Current:		2013		2012		2011
Federal	$	-	$	-	$	-
State		473		76		53
Foreign		-		(8)		2
		473		68		55
Deferred
Federal	$	7,465	$	(56,665)	$	-
State		1,795		(5,757)		-
Foreign		-		-		-
Total deferred tax provision (benefit)		9,260		(62,422)		-
Income tax provision (benefit)	$	9,733	$	(62,354)	$	55

The Company's income before income taxes included $0, $0 and $3,000 of foreign subsidiary income for the fiscal years ended March 31, 2013, 2012 and 2011, respectively.

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

		March 31,
Current deferred tax assets		2013		2012
Net operating loss carryforwards	$	4,795	$	6,518
Inventory valuation		18		45
Reserves and allowances		2,182		1,167
Net current deferred tax assets		6,995		7,730
Net operating loss carryforwards		48,002		54,783
Research and development and other credit carryforwards		3,026		2,436
Fixed assets and intangibles		(2,468)		(1,172)
Net non-current deferred tax assets		48,560		56,047
Valuation allowance		(3,107)		(2,070)
Total	$	52,448	$	61,707

As of March 31, 2013 and 2012, 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, 2012, management determined that it was more likely than not that the deferred tax assets would be realized with respect to most federal and state deferred tax assets, except for certain net operating loss and tax credit carryforwards. As a result a tax benefit of approximately $62.1 million was recorded. At March 31, 2013, management evaluated the need for a valuation allowance and determined that that an additional valuation allowance of approximately $1.0 million was needed. The net change in the valuation allowance for the years ended March 31, 2013 and 2012 was an increase of $1.0 million and a decrease of $65.0 million, respectively.

The Company's state income taxes payable have been reduced by the tax benefits associated with employee stock option transactions. These benefits, credited directly to stockholders' equity, amounted to $49,000 for the year ended March 31, 2013 and $0 for the year ended March 31, 2012.

At March 31, 2013, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $149.3 million and $95.4 million, respectively, which expire at various dates beginning in 2014 and continuing through 2032. The net operating loss carryforwards include approximately $6.7 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, 2013, the Company had research and development credit carryforwards for federal and state tax reporting purposes of approximately $2.4 million and $3.7 million, respectively. The federal credit carryforwards will expire at various dates beginning in 2021 and continuing through 2033, while the California credits will carry forward indefinitely. A reconciliation of the tax provision to the amounts computed using the statutory U.S. federal income tax rate of 34% is as follows (in thousands):

		Years Ended March 31,
		2013		2012		2011
Tax provision at statutory rate	$	8,048	$	2,337	$	2,226
State income taxes before valuation allowance,
net of federal effect		846		408		372
Research and development credits		(385)		(211)		(128)
Change in valuation allowance		1,038		(65,042)		(2,147)
Loss from change in fair value of warrant liability		-		-		(57)
Compensation/option differences		(207)		(87)		(291)
Non-deductible compensation		403		220		75
Other		(10)		21		5
	$	9,733	$	(62,354)	$	55

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
		2013		2012		2011
Balance at beginning of year	$	2,483	$	1,726	$	1,743
Gross increases - tax position in prior period		73		111		-
Gross decreases - tax position in prior period		-		-		(157)
Gross increases - tax positions related to the current year		468		646		140
Settlements		-		-		-
Lapse of statue of limitations		-		-		-
Balance at end of year	$	3,024	$	2,483	$	1,726

At March 31, 2013, the company had a liability for unrecognized tax benefits of $3.0 million, all of which, if recognized, would affect 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 1995 through fiscal 2013 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, 2013, 2012 and 2011, 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.