11. Income Taxes

The provision for income taxes was $0 during the years ended December 31,2012 and 2011, and $78,000 during the year ended December 31,2010. The Company's effective tax rate was 0.0% during the years ended December 31,2012 and 2011, and 1.0% in the year ended December 31,2010. The Company is subject to US federal and state income taxes. The Company has never been audited and the statute of limitations for tax audit is generally open for the years 2009 and later. However, except in 2009, the Company has incurred net operating losses since inception. Such loss carryforwards would be subject to audit in any tax year in which those losses are utilized, notwithstanding the year of origin. The Company's policy is to recognize interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company has recorded no such expense. As of December 31,2012 and 2011, the Company has recorded no reserves for unrecognized income tax benefits, nor has it recorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions over the next twelve months.

The reconciliation between the federal statutory tax rate of 34% and the Company's effective tax rate is as follows:

		Years Ended December 31,
		2012	2011	2010

Statutory federal tax rate		34%	34%	34%
Permanent items		-	(4%)	(9%)
State income taxes, net of federal benefit		4%	3%	1%
Research and development credit		1%	5%	-
Expired net operating loss carryforwards		(15%)	(10%)	-
Alternative minimum tax		-	-	1%
Change in valuation allowance		(22%)	(27%)	(28%)
Other		(2%)	(1%)	-

	Effective tax rate	0%	0%	(1)%

Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities consist of the following:

			As of December 31,
			2012		2011
				(in thousands)
Deferred tax assets:
	Net operating loss carryforwards		$128,257		$119,719
	General business credits		10,501		10,324
	Alternative Minimum Tax (AMT) credit		418		418
	Other		3,007		1,791
		Gross deferred tax assets	$142,183		$132,252

Deferred tax liabilities:
	In-process research and development		$(22,093)		$(22,093)
	Other		-		(170)
		Deferred tax liabilities	$(22,093)		$(22,263)

		Net deferred tax assets	$120,090		$109,989
	Valuation Allowance		(120,090)		(109,989)

		Net deferred tax assets	$-		$-

The net deferred tax assets (prior to applying the valuation allowance) of $120.1 million and $110.0 million at December 31,2012 and 2011, respectively, primarily consist of net operating loss carryforwards for income tax purposes. Due to the Company's history of operating losses, the Company recorded a full valuation allowance on its net deferred tax assets by increasing the valuation allowance by $10.1 million as it is more likely than not that such tax benefits will not be realized.

At December 31,2012, the Company had net operating loss carryforwards for income tax purposes of approximately $350.0 million available to offset future taxable income, if any. The NOL carryovers and general business tax credits expire in various years beginning in 2013.

Utilization of the NOLs and general business tax credits carryforwards may be subject to a substantial limitation under Section 382 of the Internal Revenue Code of 1986 due to changes in ownership of the Company that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and general business tax credits carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company's formation, it has raised capital through the issuance of common stock on several occasions which, combined with the purchasing stockholders' subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, and it issued a substantial amount of shares of common stock as part of its merger with Transave, Inc. in December 2010. Due to the significant complexity and cost associated with a change in control study, and because there could be additional changes in control in the future, the Company has not yet formally assessed whether there has been one or more changes in control since the Company's formation. If the Company has experienced a change of control at any time since Company formation, utilization of its NOL or general business tax credit carryforwards would be subject to the limitation rules under Section 382. Any limitation may result in expiration of a portion of the NOL or general business tax credit carryforwards before utilization which would reduce the Company's gross deferred tax assets.