Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Taxes

14. Income Taxes

The components of (loss) before income taxes and the provision for income taxes for the years ended December 31, 2012, 2011 and 2010 are as follows:

Loss before income taxes:	2012		2011		2010
United States	$	(30,399,000)	$	(25,483,000)	$	(38,567,000)
Foreign	(1,463,000)		(1,971,000)		(8,392,000)
	$	(31,862,000)	$	(27,454,000)	$	(46,959,000)

There was no current income tax expense for the years ended December 31, 2012, 2011 and 2010.

The significant components of U.S. deferred income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010 are as follows: 

	2012		2011		2010
Deferred tax expense (benefit)	$	10,661,000	$	17,774,000	$	(652,000)
Net operating loss carryforward expired (generated)	26,924,000		187,597,000		(14,168,000)
Valuation allowance (decrease) increase	(37,585,000)		(205,371,000)		14,820,000
Provision for Income taxes	$	-	$	-	$	-

The significant components of Foreign deferred income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010 are as follows:

	2012		2011		2010
Deferred tax benefit	$	(1,041,000)	$	(1,268,000)	$	(823,000)
Net operating loss carryforward expired (generated)	(79,000)		496,000		(1,081,000)
Valuation allowance increase	1,120,000		772,000		1,904,000
Provision for Income taxes	$	-	$	-	$	-

The Company’s effective income tax rate differed from the federal statutory rate as follows:

	2012			2011	2010
U.S. Federal statutory tax rate		(35.0%)		(35.0%)	(35.0%)
Deferred state taxes, net of federal benefit		(3.3%)		(3.1%)	(2.4%)
Common stock warrant liability		(5.3%)		(4.4%)	0.0%
Other, net			0.1%	0.6%	(2.7%)
Change to uncertain tax positions		(1.6%)		(57.5%)	1.6%
Foreign tax rate differential			0.5%	0.8%	2.2%
Expiring attribute carryforward			0.0%	5.4%	1.2%
Adjustments to open deferred tax balance		(5.8%)		(1.7%)	0.3%
Writeoff of tax attributes due to imposition of Section
382 limitation		165.7%		840.9%	0.0%
Tax credits			0.0%	(0.3%)	(0.6%)
Change in valuation allowance		(115.3%)		(745.7%)	35.4%
			0.0%	0.0%	0.0%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of certain assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows:

	U.S.				Foreign
	Years ended December 31,				Years ended December 31,
	2012		2011		2012		2011
Intangible assets	$	130,000	$	200,000	$	694,000	$	325,000
Non-employee stock based compensation	(1,556,000)		(1,556,000)		-		-
Deferred revenue	2,779,000		2,106,000		-		-
Other reserves and accruals	1,621,000		1,121,000		-		-
Research and development tax credit carryforwards			74,000		1,569,000		1,533,000
Property, plant and equipment	1,541,000		1,127,000		541,000		529,000
Amortization of stock-based compensation	8,495,000		7,900,000		-		-
Capitalized research & development expenditures	15,846,000		15,162,000		5,384,000		4,760,000
Section 382 recognized built in loss	(15,202,000)		(1,819,000)		-		-
Net operating loss carryforwards	3,347,000		30,271,000		3,541,000		3,462,000
Total deferred tax asset	17,001,000		54,586,000		11,729,000		10,609,000
Valuation allowance	(17,001,000)		(54,586,000)		(11,729,000)		(10,609,000)
Net deferred tax assets	$	-	$	-	$	-	$	-

The Company has recorded a valuation allowance, as a result of uncertainties related to the realization of its net deferred tax asset, at December 31, 2012 and 2011 of approximately $28.7 million and $65.2 million, respectively. A reconciliation of the current year change in valuation allowance is as follows:

	Total		U.S.		Foreign
Increase in valuation allowance for current year increase in net operating losses:	$	(2,000)	$	-	$	(2,000)
Decrease in valuation allowance for 382 limitations on tax attributes:	(26,924,000)		(26,924,000)		-
Increase in valuation allowance for current year net decrease in deferred tax
assets other than net operating losses:	(10,288,000)		(10,661,000)		373,000
Increase in valuation allowance as a result of foreign currency fluctuation	246,000		-		246,000
Increase in valuation allowance due to current year change of deferred tax assets
as the result of uncertain tax positions.	503,000		-		503,000
Net (decrease) increase in valuation allowance	$	(36,465,000)	$	(37,585,000)	$	1,120,000

The deferred tax assets have been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforwards and other deferred tax assets may not be realized. Included in the valuation allowance as of December 31, 2012 and December 31, 2011 are $0.1 million and $1.9 million, respectively of deferred tax assets resulting from the exercise of employee stock options, which upon subsequent realization of the tax benefits, will be allocated directly to paid-in capital.

Before the imposition of IRC Section 382 limitations described below, the Company has unused federal and state net operating loss carryforwards of approximately $723 million, of which $70.3 million was generated from the operations of H Power during the period May 31, 1989, through the date of the H Power acquisition, $2.7 million was generated by Cellex through the date of the Cellex acquisition, $44.1 million was generated by General Hydrogen through the date of the General Hydrogen acquisition, and $605.9 million was generated by the Company from operations through December 31, 2012. The net operating loss carryforwards if unused will expire at various dates from 2017 through 2032.

Under Internal Revenue Code (IRC) Section 382, the use of loss carryforwards may be limited if a change in ownership of a company occurs. If it is determined that due to transactions involving the Company’s shares owned by its 5 percent or greater shareholders a change of ownership has occurred under the provisions of IRC Section 382, the Company's federal and state net operating loss carryforwards could be subject to significant IRC Section 382 limitations.

Based upon an IRC Section 382 study, a Section 382 ownership change occurred in 2012 and 2011 that resulted in all of the Company’s federal and state net operating loss carryforwards being subject to IRC Section 382 limitations and as a result of IRC Section 382 limitations, all but approximately $8.8 million of the net operating loss carryforwards will expire prior to utilization. As a result of the IRC Section 382 limitations, these net operating loss carryforwards that will expire unutilized are not reflected in the Company’s gross deferred tax asset as of December 31, 2012.

The ownership change also resulted in Net Unrealized Built in Losses per IRS Notice 2003-65 which should result in Recognized Built in Losses during the five year recognition period of approximately $40 million. This translates into unfavorable book to tax add backs in the Company's 2013 to 2017 U.S. corporate income tax returns that resulted in a gross deferred tax liability of $15.2 million at December 31, 2012 with a corresponding reduction to the valuation allowance. This gross deferred tax liability will offset certain existing gross deferred tax assets (i.e. capitalized research expense). This has no impact on the Company's current financial position, results of operations, or cash flows because of the full valuation allowance.

IRC Section 382 also limits the ability for a Company to utilize capital loss and research credit carryforwards. Approximately $15.5 million of federal capital loss carryforwards are subject to IRC Section 382 limitations and as a result of the IRC Section 382 limitations, the entire $15.5 million will expire prior to utilization. Approximately $15.6 million of Research Credit are subject to IRC Section 382 limitations and as a result of the IRC Section 382 limitations, the entire $15.6 million will expire prior to utilization.

At December 31, 2012, the Company has unused foreign net operating loss carryforwards of approximately $17.8 million. The net operating loss carryforwards if unused will expire at various dates from 2015 through 2032. At December 31, 2012 the company has Scientific Research and Experimental Development expenditures of $22.3 million available to offset future taxable income. These expenditures have no expiry date. At December 31, 2012 the company has Canadian ITC credit carryforwards of $2.4 million available to offset future income tax. These credit carryforwards if unused will expire at various dates from 2013 through 2027. Approximately $3.6 million of the foreign net operating loss carryforwards, approximately $0.8 million of the Scientific Research and Experimental Development expenditures and $0.9 million of the Canadian ITC credit carryforwards represent unrecognized tax benefits and are therefore, not reflected in the Company's deferred tax asset as of December 31, 2012.

As of December 31, 2012, the Company has no unrepatriated foreign earnings.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2012		2011		2010
Unrecognized tax benefits balance at beginning of year	$	2,046,000	$	17,893,000	$	18,570,000
Reductions for tax positions of prior years	(503,000)		(15,875,000)		(716,000)
Currency Translation	36,000		28,000		39,000
Unrecognized tax benefits balance at end of year	$	1,579,000	$	2,046,000	$	17,893,000

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the year ended December 31, 2012, the Company recognized $0 in interest and penalties. The Company had $1.2 million in interest and penalties accrued at December 31, 2012.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities. Open tax years in the U.S. range from 2009 to 2012. Open tax years in the foreign jurisdictions range from 2005 to 2012. However, upon examination in subsequent years, if net operating loss carryforwards and tax credit carryforwards are utilized, the U.S. and foreign jurisdictions can reduce net operating loss carryforwards and tax credit carryforwards utilized in the year being examined if they do not agree with the carryforward amount. As of December 31, 2012, the Company was not under audit in the U.S. or non-U.S. taxing jurisdictions. No significant changes to the amount of unrecognized tax benefits are anticipated within the next twelve months.