Income Taxes

The Company's geographical breakdown of its income (loss) before provision for income taxes is as follows:




	Year Ended March 31,
(in thousands)	2012	2011	2010

Domestic	$(3,534)	$(3,232)	$(1,824)
Foreign	85	401	219
Loss before provision for taxes	$(3,449)	$(2,831)	$(1,605)

The components of the provision for income taxes are as follows:




	Years Ended March 31,
(in thousands)	2012		2011		2010
Current
Federal		$—	$1		$(9)
State	—		(2	)	(2	)
Foreign	69		56		—
Total current provision	$69		$55		$(11)
Deferred
Federal	—		—		—
State	—		—		—
Foreign	29		94		10
Total deferred provision	$29		$94		$10
Total	$98		$149		$(1)

Reconciliations of the provisions for income taxes at the statutory rates to the Company's provisions for income taxes are as follows:




	2012		2011		2010
Expected U.S. Federal tax expense (benefit)	(34	)%	(34	)%	(34	)%
State taxes	(4.3	)%	(4.3	)%	(4.3	)%
Foreign taxes	2.0	%	5.2	%	3.6	%
Change in valuation allowance	34.1	%	41	%	(157	)%
Research and experimentation credit	(3.2	)%	(9.2	)%	(12.3	)%
Expiration of net operating losses	—		—	%	171.2	%
Stock-based compensation expense	8.0	%	6.1	%	28.9	%
Other	0.2	%	0.5	%	3.8	%
Actual effective tax rate	2.8	%	5.3	%	(0.1	)%

Significant components of the Company's net deferred tax assets are as follows at March 31:




(in thousands)	2012			2011			2010
Deferred Tax Assets:
Net operating loss carryforwards	$	17,572		$	19,035		$	19,572
Accruals and allowances recognized in different periods	373			162			391
Research and experimentation credit carryforwards	5,013			4,937			5,619
Property and equipment	109			138			173
Stock-based compensation expense	855			688			498
Other	—			—			—
Total deferred assets	23,922			24,960			26,253
Less valuation allowance	(23,532		)	(24,519		)	(25,733		)
Total deferred assets	390			441			520
Deferred tax liabilities-currency translation adjustment	(129		)	(137		)	(139		)
Deferred tax liabilities-Other	—			—			(2		)
Net deferred tax asset	$	261		$	304		$	379

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, including the Company's historical operating performance and the recorded cumulative net losses in prior fiscal periods, the Company has provided a full valuation allowance against its U.S. deferred tax assets and United Kingdom deferred tax assets. The Company's valuation allowance decreased by $1.0 million and $1.2 million in the years ended March 31, 2012 and 2011, respectively, and increased by $1.2 million in the year ended March 31, 2010.

As of March 31, 2012, the Company had U.S. federal, state, and foreign net operating loss carryforwards of approximately $48.5 million, $13.5 million, and $4.3 million, respectively. Of these amounts, $2.3 million and $1.4 million represent federal and state tax deductions in excess of recognized stock option compensation, respectively, and will be recorded as an adjustment to additional paid-in capital when they reduce taxes payable. If unused, the federal net operating loss carryforwards will begin to expire in 2013, the state net operating loss carryforwards will begin to expire in 2016. Foreign net operating losses may be carried forward indefinitely.

As of March 31, 2012, the Company had U.S. federal and state tax credit carryforwards of approximately $3.0 million and $3.1 million, respectively. The federal credit will expire beginning in 2018, if not utilized. California state research and development credits can be carried forward indefinitely. For those foreign subsidiaries where the Company intends to permanently reinvest earnings, no U.S. income or foreign tax withholding has been provided for in deferred income taxes. There is no unrecognized deferred tax liability related to undistributed earnings due to cumulative losses sustained by these foreign subsidiaries.

As of March 31, 2012, the Company did not have any gross unrecognized tax benefit. As of March 31, 2011, the Company had gross unrecognized tax benefits of approximately $103,000, all of which would impact the effective tax rate if recognized. As of March 31, 2010, the Company had gross unrecognized tax benefits of approximately $119,000, of which $2,000 would impact the effective tax rate if recognized. There was no interest accrued at March 31, 2012. While it is often difficult to predict the final outcome of any particular uncertain tax position, management does not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:




	Years Ended March 31,
	2012			2011			2010
Balance at April 1	$	103,000		$	119,000		$	125,000
Additions based on tax positions taken during a prior period
Reductions based on tax positions taken during a prior period	—			(16,000		)	(6,000		)
Additions based on tax positions taken during the current period
Reductions based on settlements with taxing authorities	(103,000		)
Balance at March 31	$	—		$	103,000		$	119,000

The Company files consolidated and separate income tax return in the U.S. federal jurisdiction and in certain state jurisdictions as well as foreign jurisdictions including France, Germany, and the United Kingdom. The Company is subject to income tax examinations for fiscal years after 2008 for France, fiscal years after 2007 for Germany, and fiscal years after 2005 for the United Kingdom. As a result of net operating loss carryforwards, the Company is subject to audit for fiscal years 1998 and forward for federal purposes and 2001 and forward for California purposes.

Recently enacted tax laws may also affect the tax provision on the company's financial statements. On February 20, 2009, the State of California passed a new law to allow taxpayers to make an election to adopt a single sales factor apportionment formula starting with the 2011 taxable year. As of March 31, 2012, the Company has not considered changing its sales factor apportionment in California. Should the Company decide to make an election in 2013 to use single sales factor, the Company will need to adjust the blended state rate used to calculate the tax effect of its deferred tax assets and liabilities, and record any impact to the financial statements in the period such decision is made. Management of the Company believes that any related change to the blended state rate will not have a material impact to the Company's financial statements.

During the year ended March 31, 2012, the German tax authorities closed a tax audit of the Company's subsidiary in Germany for the fiscal years 2005 to 2007, which resulted in a net tax expense of approximately $82,000. During the year ended March 31, 2012, the Company also paid approximately $570,000 of the withholding tax which it believes to be fully refundable, and has received approximately $496,000 of the refund from the German tax authorities as of March 31, 2012.