Note 9. Income Taxes

At March 31, 2012, the Company had federal and state net operating loss carryforwards, or NOLs, of approximately $191.2 million and $83.3 million, respectively, which expire in varying years from fiscal 2013 through fiscal 2032. During the year ended March 31, 2012, state NOLs of approximately $59.4 million expired. In addition, at March 31, 2012, the Company had federal and state research and development credit carryforwards of approximately $10.7 million and $5.2 million, respectively, which expire in varying years from fiscal 2013 through fiscal 2032.

The Company acquired Impella, a German-based company, in May 2005. Impella had pre-acquisition net operating losses of approximately $19.4 million at the time of acquisition (which is denominated in Euros and is subject to foreign exchange remeasurement at each balance sheet date presented). With the exception of fiscal 2012, the German subsidiary has incurred net operating losses in each fiscal year since the acquisition. During fiscal 2008, the Company determined that approximately $1.3 million of pre-acquisition operating losses could not be utilized. The utilization of pre-acquisition net operating losses of Impella in future periods is subject to certain statutory approvals and business requirements. To date, there has been no challenge from the German tax authorities regarding the ability to use these German net operating losses.

The future utilization of the Company’s NOLs and research and development credit carryforwards to offset future taxable income may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code due to ownership changes that have occurred previously or that could occur in the future. Ownership changes, as defined in Section 382 of the Internal Revenue Code, can limit the amount of NOL and research and development credit carryforwards that a company can use each year to offset future taxable income and taxes payable. The Company completed a Section 382 study and analysis in fiscal 2008 to determine whether changes in the composition of its stockholders, including the Company’s acquisition of Impella or the Company’s public offering in August 2008, resulted in an ownership change for purposes of Section 382. The Company believes that all of its federal and state NOLs will be available for carryforward to future tax periods, subject to the statutory maximum carryforward limitation of any annual NOL. Any future potential limitation to all or a portion of the NOL or research and development credit carryforwards, before they can be utilized, would reduce the Company’s gross deferred tax assets. The Company will monitor subsequent ownership changes, which could impose limitations in the future.

The Company regularly assesses its ability to realize its deferred tax assets. Assessments of the realization of deferred tax assets require that management consider all available evidence, both positive and negative, and make significant judgments about many factors, including the amount and likelihood of future taxable income. Based on the available evidence and uncertainties surrounding the Company’s ability to generate future taxable income, the Company has recorded valuation allowances to reduce its deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2012 and March 31, 2011.

Income (loss) before provision for income taxes and the provision for income taxes is as follows for the years ended March 31:


	2012			2011			2010
	(in $000’s)
Income (loss) before provision for income taxes:
United States	$	236		$	(6,522	)	$	(7,698	)
Foreign		2,307			(4,341	)		(10,655	)

Income (loss) before income taxes	$	2,543		$	(10,863	)	$	(18,353	)

Provision for income taxes:
Current:
Federal	$	—		$	(78	)	$	(361	)
State		—			81			78
Foreign		259			—			—

Total current		259			3			(283	)

Deferred:
Federal		825			825			811
State		(36	)		64			143
Foreign		—			—			—

Total deferred		789			889			954

Total income tax provision	$	1,048		$	892		$	671

Differences between the federal statutory income tax rate and the effective tax rates are as follows for the years ended March 31:


	2012			2011			2010
Statutory income tax rate		34.0	%		34.0	%		34.0	%
Increase (decrease) resulting from:
Change in valuation allowance		(96.0	)		(33.8	)		(44.1	)
Expiry of state NOL carryforwards		78.9			(2.6	)		—
State taxes, net		62.2			(14.1	)		—
Credits		(54.0	)		8.4			9.0
Rate differential on foreign operations		54.9			(0.1	)		(1.1	)
Permanent differences		(46.2	)		0.3			(1.4	)
Stock based compensation		2.0			(0.3	)		(0.1	)

Effective tax rate		35.8	%		(8.2	)%		(3.7	)%

The components of the Company’s net deferred taxes were as follows:


	March 31,
	2012			2011
	(in $000’s)
Deferred tax assets
NOL carryforwards and tax credit carryforwards	$	84,831		$	82,588
Capitalized research and development		8,040			11,726
Stock-based compensation		7,500			9,455
Foreign NOL carryforwards		5,405			6,533
Amortizable intangibles other than goodwill		4,600			4,757
Nondeductible reserves and accruals		4,579			2,798
Deferred revenue		1,132			764
Depreciation		580			441
Change in unrealized losses on marketable securities		285			294
Other, net		1,327			1,365

		118,279			120,721

Deferred tax liabilities
Indefinite lived intangibles		(4,799	)		(4,010	)

		(4,799	)		(4,010	)

Net deferred tax asset		113,480			116,711
Valuation allowance		(118,279	)		(120,721	)

Net deferred tax liability	$	(4,799	)	$	(4,010	)

The change in the valuation allowance was a decrease of $2.4 million for fiscal 2012 and an increase of $3.7 million for fiscal 2011, respectively. The decrease in valuation allowance during fiscal 2012 is due primarily to the expiration of certain state NOL carryforwards.

As of March 31, 2012, the Company has accumulated a net deferred tax liability of $4.8 million which is the result of the difference in accounting for the Company’s goodwill, which is amortizable over 15 years for tax purposes but not amortized for book purposes. The net deferred tax liability cannot be offset against the Company’s deferred tax assets since it relates to an indefinite-lived asset and is not anticipated to reverse in the same period. The Company also recorded $0.2 million in income taxes in fiscal 2012 for income taxes in Germany that it expects to pay in cash as they are not expected to be offset by its net operating loss carryforwards in Germany.

The Company accrues for the effects of uncertain tax positions and the related potential penalties and interest. At March 31, 2012, the Company had no unrecognized tax benefits. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the unrecognized tax positions will increase or decrease during the next 12 months; however, it is not expected that the change will have a significant effect on the Company’s results of operations or financial position.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. The Company has accumulated significant losses since its inception in 1981. All tax years remain subject to examination by major tax jurisdictions, including the federal government and the Commonwealth of Massachusetts. However, because the Company has net operating loss and tax credit carryforwards which may be utilized in future years to offset taxable income, those years may also be subject to review by relevant taxing authorities if the carryforwards are utilized.