Estimated fair value of stock option grants is determined using the Black-Scholes options pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in these employee stock options. Additionally, option valuation models require the input of highly subjective assumptions including the expected volatility of the stock price. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models may not provide a reliable single measure of the fair value of its share-based awards. 50 We considered the fair value of our common stock and the exercise price of the grant as variables in the Black-Scholes option-pricing model to determine employee stock-based compensation. This model requires the input of assumptions on each grant date, some of which are highly subjective, including the expected term of the option, expected stock price volatility and expected forfeitures. We determined the expected term of our options based upon historical exercises, post-vesting cancellations and the contractual term of the option. We concluded that it was not practicable to calculate the volatility of our share price due to the fact that our securities were not publicly traded and therefore there is no readily determinable market value for our stock. Therefore, we based expected volatility on the historical volatility of a publicly traded peer entity for the same expected term of our options. We intend to continue to consistently apply this process using the same or similar entities until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified entity is no longer similar to us. In this latter case, more suitable entities whose share prices are publicly available would be utilized in the calculation. We based the risk-free rate for the expected term of the option on the U.S. Treasury Constant Maturity Rate as of the grant date. We determined the forfeiture rate based upon our historical experience with pre-vesting option cancellations. If we had made different assumptions and estimates than those described above, the amount of our recognized and to be recognized stock-based compensation expense, net income (loss) and net income (loss) per share amounts could have been materially different. We believe that we have used reasonable methodologies, approaches and assumptions consistent with the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, to determine the fair value of our common stock. We have reviewed key factors and events between each date below and have determined that the combination of the factors and events described above reflect a true measurement of the fair value of our common stock over an extended period of time.
Valuation of Deferred Tax Assets
Our deferred tax assets are comprised primarily of net operating loss carryforwards ("NOLs") and research and development credits. At
June 30, 2010, we had NOLs of approximately $69.5 millionwhich will begin to expire in 2020. At June 30, 2010, we had research tax credit carryforwards of $2.4 millionwhich begin expiring in 2023. At June 30, 2010, we had federal alternative minimum tax ("AMT"), credit carryforwards of $77,000. The federal AMT credit carryforwards do not expire. A valuation allowance of $31 millionhad been recorded at June 30, 2010. During the third quarter of 2011, we determined that it would be more likely than not that the cumulative net operating loss and other deferred tax benefits would be recoverable by us, creating a $31 millionincome tax benefit due to the deferred tax asset recorded on our balance sheet as of March 31, 2011. This determination was based on the following factors:
? For the twelve quarters ending
statements of operations reflected cumulative income before taxes of
million. The quarter ending
significant positive results (which results were record revenues of
million and income before taxes of
? The Company had utilized a significant portion of its net operating loss
carryforwards in tax returns filed in the three years ending
anticipated utilization of an additional portion of such carryforwards for its
return for fiscal 2011.
? The significant growth in revenues and earnings the Company has experienced
over the past three years is forecasted to continue. The Company has achieved
or exceeded its forecast in each of the past four years as it has progressed
toward significant scale and profitability.
? The Company's market segment is extremely positively impacted by the HITECH
Act which provides significant funding through 2014 to providers for
acquisition and "meaningful use" of EHR technology systems as part of the
Federal government's initiatives to facilitate improvements in healthcare
delivery and mitigate costs.
? The above factors are somewhat tempered by the current state of the U.S.
economy, which is experiencing slow to modest growth. However, the healthcare
sector appears to have been less affected than other sectors of the economy
due in part to the impact of certain government initiatives.
The determination of when to adjust the valuation allowance requires significant judgment on the part of management based on our evaluation of the weight of positive and negative evidence, historical experience, knowledge of current business factors and our belief of what could occur in the future. Although realization is not assured, we concluded that it is more likely than not that the deferred tax assets as of
March 31, 2011, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations. Our assessment remains the same through the three year period ended in June 30, 2013. The amount of the deferred tax assets considered realizable; however, could be reduced in the near term if actual future earnings are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.