Note 10. Income Taxes

At March 31, 2013, the Company had federal and state net operating loss carryforwards, or NOLs, of approximately $188.9 million and $105.9 million, respectively, which expire in varying years from fiscal 2014 through fiscal 2033. During the year ended March 31, 2013, state NOLs of approximately $21.2 million expired. In addition, at March 31, 2013, the Company had federal and state research and development credit carryforwards of approximately $11.6 million and $5.5 million, respectively, which expire in varying years from fiscal 2014 through fiscal 2033.

The Company acquired Impella, a German company, in May 2005, as a result of which, Impella became the Company’s German subsidiary. Impella had pre-acquisition net operating losses of approximately $19.4 million at the time of acquisition (which are denominated in euros and are subject to foreign exchange remeasurement at each balance sheet date presented). The utilization of pre-acquisition net operating losses of Impella in future periods is subject to certain statutory approvals and business requirements. Prior to the last two fiscal years, the German subsidiary has historically incurred net operating losses. During fiscal 2008, the Company had determined that approximately $1.3 million of pre-acquisition operating losses could not be utilized. During fiscal 2013, the Company’s German subsidiary was audited by the local tax authorities for fiscal years 2009 through 2011. Although the tax audit in Germany has not been finalized, there were no adjustments made as a result of the audit to the German subsidiary’s NOLs to date. Based on this knowledge, the Company believes that all of its German NOL’s of $53.8 million should be available for utilization in the future prior to their expiration.

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 statutory maximum carryforward limitations. 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 continue to monitor subsequent ownership changes, which could impose limitations in the future on the use of its NOLs or research and development credit carryforwards.

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence the Company considered included, net operating losses incurred from the Company’s inception to March 31, 2011, expiration of various federal and state attributes, the uncertainty relative to the Department of Justice investigation and the Company’s planned PMA application for its Impella products, profits before tax for fiscal 2012 and 2013 and forecasted profit before tax for fiscal 2014. Based on the its review of all available evidence, the Company determined that the objectively verifiable negative evidence outweighed the positive evidence and it recorded a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2013.

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


	2013			2012			2011
	(in $000’s)
Income (loss) before provision for income taxes:
United States	$	10,202		$	236		$	(6,522	)
Foreign		6,660			2,307			(4,341	)

Income (loss) before income taxes	$	16,862		$	2,543		$	(10,863	)

Provision for income taxes:
Current:
Federal	$	97		$	—		$	(78	)
State		—			—			81
Foreign		996			259			—

Total current		1,093			259			3

Deferred:
Federal		825			825			825
State		(70	)		(36	)		64
Foreign		—			—			—

Total deferred		755			789			889

Total income tax provision	$	1,848		$	1,048		$	892

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


	2013			2012			2011
Statutory income tax rate		34.0	%		34.0	%		34.0	%
(Decrease) increase resulting from:
Credits		(15.3	)		(54.0	)		8.4
Rate differential on foreign operations		9.7			54.9			(0.1	)
Permanent differences		(8.1	)		(46.2	)		0.3
State taxes, net		(7.7	)		62.2			(14.1	)
Change in valuation allowance		(2.0	)		(96.0	)		(33.8	)
Stock based compensation		0.4			2.0			(0.3	)
Expiry of state NOL carryforwards		—			78.9			(2.6	)

Effective tax rate		11.0	%		35.8	%		(8.2	)%

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


	March 31,
	2013			2012
	(in $000’s)
Deferred tax assets
NOL carryforwards and tax credit carryforwards	$	88,304		$	84,831
Stock-based compensation		6,825			7,500
Capitalized research and development		5,366			8,040
Foreign NOL carryforwards		4,777			5,405
Nondeductible reserves and accruals		4,811			4,579
Amortizable intangibles other than goodwill		4,138			4,600
Deferred revenue		1,567			1,132
Depreciation		388			580
Change in unrealized losses on marketable securities		285			285
Other, net		1,488			1,327

		117,949			118,279

Deferred tax liabilities
Indefinite lived intangibles		(5,554	)		(4,799	)

		(5,554	)		(4,799	)

Net deferred tax asset		112,395			113,480
Valuation allowance		(117,949	)		(118,279	)

Net deferred tax liability	$	(5,554	)	$	(4,799	)

The change in the valuation allowance was a decrease of $0.4 million and $2.4 million for fiscal 2013 and 2012, respectively. The decrease in valuation allowance during fiscal 2013 is due primarily to a reduction in capitalized research and development.

As of March 31, 2013, the Company has accumulated a net deferred tax liability of $5.6 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 accrues for the effects of uncertain tax positions and the related potential penalties and interest. At March 31, 2013, 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.