Income Taxes

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Income Taxes

Note 7 – Income Taxes

The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the year-to-date pre-tax income (loss). In determining the estimated annual effective income tax rate, we analyze various factors including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards and available tax planning alternatives. Discrete items including the effect of changes in tax laws, tax rates and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur. 

During the period, we completed our analysis of the net operating loss limitation provisions of the IRC Section 382 analysis. We determined that our net operating loss and tax credit carry forwards as of June 30, 2011 are $150,185,000 and $69,769,000, respectively, which were previously presented in our Fiscal Year 2011 10-K as $180,393,000 and $121,440,000. As we maintained a full valuation allowance against the deferred tax assets, the update did not affect the Condensed Consolidated Balance Sheet, the Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows.

For the six months ended December 31, 2011, we recorded income tax expense of $5,651,000 that represents an estimated annual effective tax rate of approximately 12%.  The difference between the estimated annual effective tax rate and the federal statutory rate of 35% was primarily attributable to the reversal of valuation allowance through the use of federal net operating loss carryovers and research credits that are not subject to any use limitations.

For the six months ended December 31, 2010, we did not record an income tax expense due to our history of operating losses.

We are required to reduce our deferred tax assets by a valuation allowance if it is more likely than not that some or all of our deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, we assess the likelihood that we will be able to recover our deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, we determined that, based on all available evidence, there was substantial uncertainty as to whether we will recover recorded net deferred taxes in future periods. Accordingly, we recorded a valuation allowance against all of our net deferred tax assets at both June 30, 2011 and December 31, 2011. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Should the actual timing differences differ from our estimates, the amount of our valuation allowance could be materially impacted.

As of June 30, 2011 and December 31, 2011, we had unrecognized tax positions that would impact our effective tax rate of approximately $1,726,000.  We do not expect any material change to the unrecognized tax benefits during the next twelve months.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although there have been no such assessments historically.  In the event we receive an assessment for interest and/or penalties, it would be classified in the financial statements as income tax expense.  All tax years in major jurisdictions remain open due to the taxing authorities’ ability to adjust operating loss carry forwards.