9. Income Taxes

Prior to the Separation, HART’s operating results were historically included in Harvard Bioscience’s income tax returns. For periods up to the date of the Separation, the provision for income taxes has been determined as if HART had filed separate tax returns for the periods presented. Accordingly, the effective tax rate of HART in the future years could vary from its historical effective tax rates depending on the future legal structure of HART and related tax elections. The historical deferred tax assets, including the operating loss and credit carryforwards generated by HART up to the date of Separation, remained with Harvard Bioscience. Net operating loss and tax carryforwards generated by HART after the Separation will remain with HART.

Income taxes for the years ended December 31, 2014 and 2013 differed from the amount computed by applying the U.S. federal income tax rate of 34% to pre-tax loss as a result of the following:

	Years ended December 31,
	2014		2013

	(in thousands)
Computed “expected” income tax benefit	$	(3,761)	$	(2,998)
Increase (decrease) in income taxes resulting from:
2013 pre-Separation losses remaining with Harvard Bioscience		-		2,327
Foreign tax rate and regulation differential		40		13
State income tax benefit, net of federal income tax benefit		(663)		(118)
Non-deductible stock-based compensation expense		94		18
Tax credits		(178)		(50)
Change in valuation allowance allocated to income tax expense		4,468		808
Total income taxes	$	-	$	-

The Company has incurred pre-tax losses for the years ended December 31, 2014 and 2013:

	Years ended December 31,
	2014		2013

	(in thousands)
Domestic	$	(10,780)	$	(8,602)
Foreign		(281)		(215)
Total	$	(11,061)	$	(8,817)

Income taxes are based on the pre-tax losses of $1.8 million domestic and $0.09 million foreign for the period from Separation to December 31, 2013.

The components of HART’s deferred tax asset are as follows:

	Years ended December 31,
	2014		2013
	(in thousands)
Deferred tax assets:
Operating loss and credit carryforwards	$	2,543	$	514
Capitalized research and development		1,612		-
Stock-based compensation		1,086		294
Accrued expenses		27		-
Property, plant and equipment		9		-
Total deferred tax assets		5,277		808
Less: valuation allowance		(5,277)		(808)
Deferred tax assets, net	$	-	$	-

The amounts recorded as deferred tax assets as of December 31, 2014 and 2013 represent the amount of tax benefits of existing deductible temporary differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward period. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets and liabilities. Due to the operating results, the Company’s cumulative loss position and uncertainty surrounding its forecasts, the Company concluded that a full valuation allowance was needed to offset its deferred tax assets at each period end. As previously mentioned, all deferred tax assets prior to the Separation remained with Harvard Bioscience, Inc. The Company has determined that any uncertain tax positions would have no material impact on the consolidated financial statements of the Company.

Tax free distribution

Harvard Bioscience received a Supplemental Ruling to the Private Letter Ruling dated March 22, 2013 from the IRS to the effect that, among other things, the Separation and related distribution of all of the shares of the Company’s common stock by Harvard Bioscience will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 and 368(a)(1)(D) of the Internal Revenue Code continuing in effect. The private letter and supplemental rulings and the tax opinion that Harvard Bioscience received from legal counsel to Harvard Bioscience rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of the HART business, and neither the private letter and supplemental rulings nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter and supplemental rulings do not address all the issues that are relevant to determining whether the Distribution will qualify for tax-free treatment. Notwithstanding the private letter and supplemental rulings and opinion, the IRS could determine the Distribution should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines any of the representations, assumptions or undertakings that were included in the request for the private letter and supplemental rulings are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.

To preserve the tax-free treatment to Harvard Bioscience of the Separation and Distribution, for the two-year period following the Distribution the Company may be limited, except in specified circumstances, from entering into certain transactions pursuant to which all or a portion of the Company’s stock would be acquired, whether by merger or otherwise; issuing equity securities beyond certain thresholds; repurchasing the Company’s common stock; ceasing to actively conduct the Company’s regenerative medicine business; and taking or failing to take any other action that prevents the Separation and Distribution and related transactions from being tax-free.

If the Distribution fails to qualify for tax-free treatment, in general, Harvard Bioscience would be subject to tax as if it had sold the Company’s common stock in a taxable sale for its fair market value, and Harvard Bioscience stockholders who receive shares of HART common stock in the Distribution would be subject to tax as if they had received a taxable Distribution equal to the fair market value of such shares.

Under the tax sharing agreement between Harvard Bioscience and the Company, the Company would generally be required to indemnify Harvard Bioscience against any tax resulting from the Distribution to the extent that such tax resulted from (i) an acquisition of all or a portion of our stock or assets, whether by merger or otherwise, (ii) other actions or failures to act by the Company, or (iii) any of the Company’s representations or undertakings being incorrect or violated. The Company’s indemnification obligations to Harvard Bioscience and its subsidiaries, officers and directors are not limited by any maximum amount. If the Company is required to indemnify Harvard Bioscience or such other persons under the circumstances set forth in the tax sharing agreement, the Company may be subject to substantial liabilities.