Note 10. Income Taxes

At March 31, 2014, the Company had federal and state net operating loss carryforwards, or NOLs, of approximately $193.0 million which expire in varying years from fiscal 2015 through fiscal 2034. During the year ended March 31, 2014, state NOLs of approximately $1.2 million expired. In addition, at March 31, 2014, the Company had federal and state research and development credit carryforwards of approximately $12.5 million and $5.8 million, respectively, which expire in varying years from fiscal 2015 through fiscal 2034.

The Company acquired Impella, a German company, in May 2005, as a result of which, Impella became the Company’s German subsidiary. The Company’s German subsidiary was audited by the local tax authorities for fiscal years 2008 through 2011. In April 2014, we were notified by German tax authorities that there were no adjustments made as a result of the audit to the German subsidiary’s NOLs to date.

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 analysis in fiscal 2014 to determine whether any changes in the composition of its stockholders 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, our history of net operating losses incurred for most of the Company’s existence, expiration of various federal and state attributes, the uncertainty relative to the Department of Justice investigation and the Company’s PMA application for its Impella products, expansion into new markets, such as Japan, government reimbursement environment for the Company’s products, profitability for recent years and uncertainties around forecasted profit before tax for fiscal 2015. Based on the 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, 2014. The Company will continue to assess the level of the valuation allowance required. If sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release would likely have a material impact on its results of operations.

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


	2014			2013			2012
	(in $000’s)
Income before provision for income taxes:
United States	$	4,267		$	10,202		$	236
Foreign		4,263			6,660			2,307

Income before income taxes	$	8,530		$	16,862		$	2,543

Provision for income taxes:
Current:
Federal	$	(100	)	$	97		$	—
State		(106	)		—			—
Foreign		525			996			259

Total current		319			1,093			259

Deferred:
Federal		825			825			825
State		35			(70	)		(36	)
Foreign		—			—			—

Total deferred		860			755			789

Total income tax provision	$	1,179		$	1,848		$	1,048

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


	2014			2013			2012
Statutory income tax rate		34.0	%		34.0	%		34.0	%
(Decrease) increase resulting from:
Change in valuation allowance		(53.7	)		(11.5	)		(109.7	)
Rate differential on foreign operations		31.1			9.7			54.9
Credits		(20.1	)		(17.0	)		(54.0	)
State taxes, net		12.9			(6.9	)		76.0
Stock based compensation		0.9			0.4			2.0
Permanent differences		0.4			0.0			(40.9	)
Expiry of state NOL carryforwards		—			2.1			78.9
Other		8.4			0.2			—

Effective tax rate		13.9	%		11.0	%		41.2	%

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


	March 31,
	2014			2013
	(in $000’s)
Deferred tax assets
NOL carryforwards and tax credit carryforwards	$	72,430		$	73,833
Stock-based compensation		10,519			10,324
Nondeductible reserves and accruals		6,775			5,137
Amortizable intangibles other than goodwill		3,470			4,138
Capitalized research and development		3,208			5,366
Foreign NOL carryforwards		2,705			4,777
Deferred revenue		1,767			1,567
Depreciation		561			306
Other, net		658			1,222

		102,093			106,670

Deferred tax liabilities
Indefinite lived intangibles		(6,415	)		(5,554	)

		(6,415	)		(5,554	)

Net deferred tax asset		95,678			101,116
Valuation allowance		(102,093	)		(106,670	)

Net deferred tax liability	$	(6,415	)	$	(5,554	)

As of March 31, 2014, the Company has available U.S. federal net operating loss carryforwards of $193.0 million. Of that amount, $46.7 million relates to stock-based compensation tax deductions in excess of stock-based compensation expense for book purposes. These amounts which the Company refers to as APIC NOLs will be credited to additional paid-in capital when such stock-based compensation deductions reduce taxes payable. The APIC NOLs will reduce federal taxes payable if realized in future periods, but APIC NOLs relating to such benefits are not included in deferred tax assets as they are not expected to be able to be used to offset future income tax expense, if applicable.

During fiscal 2014, the Company determined that in its prior year disclosure of the composition of deferred tax assets and liabilities, NOL carryforwards disclosed incorrectly included $14.5 million of APIC NOL amounts related to stock-based compensation tax deductions in excess of book compensation expense. In addition, the prior year disclosure of the ending deferred tax assets related to stock-based compensation expense was understated by approximately $3.5 million due to an error in the calculation of the amount. The Company had a full valuation allowance on all deferred tax assets in the prior year, and as a result, the net overstatement of these deferred tax asset disclosures was completely offset by a related $11.0 million overstatement of the valuation allowance. The Company has corrected each of foregoing prior year presentation items in its deferred tax assets table and income tax rate reconciliation table. This correction is not considered material as it had no impact on the consolidated balance sheets, statements of operations, or statements of cash flows.

As of March 31, 2014, the Company has accumulated a net deferred tax liability of $6.4 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, 2014, 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. Fiscal years 2012 through 2014 remain open to examination in Germany. All tax years remain subject to examination by the Internal Revenue Service and state tax authorities. 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.