Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Mar. 31, 2013
Income Taxes  
Income Taxes

8. Income Taxes

        Current income tax provision is the amount of income taxes reported or expected to be reported on our income tax return. The provision for current income taxes for the year ended March 31, 2013 was $0.7 million, which was all related to foreign taxes. The Company did not have current federal income taxes for the year ended March 31, 2013.

        Actual income tax expense differed from the amount computed by applying statutory corporate income tax rates to loss from operations before income taxes. A reconciliation of income tax (benefit) expense to the federal statutory rate follows (in thousands):

  Year Ended March 31,  
  2013   2012   2011  

Federal income tax at the statutory rate

  $ (7,436 ) $ (6,317 ) $ (12,997 )

State taxes, net of federal effect

    (661 )   (727 )   (1,390 )

Foreign taxes

    675     313     461  

R&D tax credit

    (1,157 )   (455 )   (367 )

Impact of state rate change

    838     (693 )   1,541  

Warrant liability

    (299 )   (5,301 )   9,981  

Expiring NOL

        9,765     6,278  

Valuation allowance

    (1,877 )   3,423     (4,343 )

Excess tax benefit—stock compensation



    228     178     1,076  

Income tax expense (benefit)

  $ 694   $ 186   $ 240  

        The Company's deferred tax assets and liabilities consisted of the following at March 31, 2013 and 2012 (in thousands):

  2013   2012  

Deferred tax assets:



  $ 1,754   $ 1,492  

Warranty reserve

    866     597  

Deferred revenue

    532     466  

Net operating loss ("NOL") carryforwards

    211,724     215,545  

Tax credit carryforwards

    18,295     17,013  

Depreciation, amortization and impairment loss

    3,997     4,252  


    5,498     5,434  

Deferred tax assets

    242,666     244,799  

Valuation allowance for deferred tax assets

    (232,555 )   (234,432 )

Deferred tax assets, net of valuation allowance

    10,111     10,367  

Deferred tax liabilities:


Federal benefit of state taxes

    (10,111 )   (10,367 )

Net deferred tax assets

  $   $  

        Because of the uncertainty surrounding the timing of realizing the benefits of favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against its net deferred income tax assets. The change in valuation allowance for Fiscal 2013, 2012 and 2011 was $1.9 million, $3.4 million and $4.3 million, respectively.

        The Company's NOL and tax credit carryforwards for federal and state income tax purposes at March 31, 2013 were as follows (in thousands):

  Amount   Expiration

Federal NOL

  $ 592,005   2018 - 2033

State NOL

  $ 283,866   2013 - 2033

Federal tax credit carryforwards

  $ 9,577   2018 - 2033

State tax credit carryforwards

  $ 8,718   Indefinite

        The NOLs and federal and state tax credits can be carried forward to offset future taxable income, if any. Utilization of the NOLs and tax credits are subject to an annual limitation of approximately $57.3 million due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The federal tax credit carryforward is a research and development credit, which may be carried forward. The state tax credits consist of a research and development credit can be carried forward indefinitely.

        Tax benefits arising from the disposition of certain shares issued upon exercise of stock options within two years of the date of grant or within one year of the date of exercise by the option holder ("Disqualifying Dispositions") provide the Company with a tax deduction equal to the difference between the exercise price and the fair market value of the stock on the date of exercise. Approximately $27.7 million of the Company's federal and state NOL carryforwards as of March 31, 2013 were generated by Disqualifying Dispositions of stock options and exercises of nonqualified stock options. In accordance with the reporting requirements under ASC 718, we did not include approximately $10.4 million of excess windfall tax benefits resulting from stock option exercises as components of our gross deferred tax assets and corresponding valuation allowance disclosures, as tax attributes related to those windfall tax benefits should not be recognized until they result in a reduction of taxes payable. The tax effected amount of gross unrealized net operating loss carry forwards excluded under ASC 718 was approximately $10.4 million at March 31, 2013. When realized, those excess windfall tax benefits are credited to additional paid-in capital.

        Accounting Standards Codification ("ASC") 740, Income Taxes clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on management's evaluation, the total amount of unrecognized tax benefits related to research and development credits as of March 31, 2013 and 2012 was $2.4 million and $2.1 million, respectively. There were no interest or penalties related to unrecognized tax benefits as of March 31, 2013 or March 31, 2012. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2013 and March 31, 2012 was $2.4 million and $2.1 million, respectively. However, this impact would be offset by an equal increase in the deferred tax valuation allowance as the Company has recorded a full valuation allowance against its deferred tax assets because of uncertainty as to future realization. The fully reserved recognized federal and state deferred tax assets related to research and development credits balance as of March 31, 2013 and 2012 was $9.6 million and $9.1 million, and $8.7 million and $7.9 million, respectively.

        A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows (in thousands):

Balance at March 31, 2010

  $ 1,806  

Gross increase related to prior year tax positions


Gross increase related to current year tax positions


Lapse of statute of limitations


Balance at March 31, 2011

  $ 1,973  

Gross increase related to prior year tax positions


Gross increase related to current year tax positions


Lapse of statute of limitations


Balance at March 31, 2012

  $ 2,148  

Gross decrease related to prior year tax positions

    (100 )

Gross increase related to prior year tax positions


Gross increase related to current year tax positions


Lapse of statute of limitations


Balance at March 31, 2013

  $ 2,418  

        The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for the years before 2008. However, net operating loss carryforwards remain subject to examination to the extent they are carried forward and impact a year that is open to examination by tax authorities. The Company's evaluation was performed for the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2013. The Company settled its Internal Revenue Service examination of its U.S. federal tax return for the fiscal year ended March 31, 2010 during the third quarter of the fiscal year ended March 31, 2012, with no findings that resulted in a change to the Company's financial statements. When applicable, the Company accounts for interest and penalties generated by tax contingencies as interest and other expense, net in the statements of operations.