10. Income Taxes

There is no provision for income taxes because the Company has incurred operating losses since inception. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of the changes in the valuation allowance. Significant components of the Company’s deferred tax assets at December 31, 2012 and 2011 are as follows:


	December 31,
(in thousands)	2012			2011
Net operating loss carryforwards	$	42,715		$	18,283
Start-up and organizational costs		44,262			40,047
Research and development credit carryforwards		18,388			8,885
Stock compensation		991			702
Capitalized acquisition costs		13,270			6,400
Deferred revenue		1,388			—
Depreciation		331			170
Other		998			306

		122,343			74,793
Less valuation allowance		(122,343	)		(74,793	)

Net deferred tax assets	$	—		$	—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2012, the Company has aggregate net operating loss carryforwards for federal tax purposes of approximately $111.5 million available to offset future federal taxable income to the extent permitted under the Internal Revenue Code of 1986, as amended, or IRC, expiring in varying amounts through 2031. Additionally, the Company has approximately $20.0 million of research and development credits at December 31, 2012, expiring in varying amounts through 2031, which may be available to reduce future taxes. The research and development credit expired at the end of December 31, 2011, as a result, the Company cannot recognize a benefit for the year ended December 31, 2012 related to the credits generated by qualified research expenditures, or QRE’s, paid or incurred after December 31, 2011. The credit was reinstated in January 2013; a resulting benefit for the credit will be recorded in the first quarter of 2013.

Under the IRC Section 382, certain substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that can be utilized in any one year to offset future taxable income. The net operating loss carryforwards for the year ended December 31, 2012 includes approximately $4.1 million resulting from excess tax deductions from stock options. Pursuant to ASC 740, the deferred tax asset relating to excess tax benefits generated from exercises of stock options was not recognized for financial statement purposes.

Section 382 of the IRC provides limits to which a corporation that has undergone a change in ownership (as defined) can utilize any net operating loss, or NOL, and general business tax credit carryforwards it may have. The Company commissioned an analysis to determine whether Section 382 could limit the use of its carryforwards in this manner. After completing the analysis, it was determined an ownership change had occurred in February 2007. As a result of this change, the Company’s NOL’s and general business tax credits from February 23, 2007 and prior would be completely limited under IRC Section 382. The deferred tax assets related to NOL’s and general business credits have been reduced by $11.2 million and $636 thousand, respectively, as a result of the change. The losses may be further limited under Section 382 as the analysis has not been updated through 2012.

The Company has provided a valuation allowance for the full amount of these net deferred tax assets, since it is more likely than not that these future benefits will not be realized. However, these deferred tax assets may be available to offset future income tax liabilities and expenses. The valuation allowance increased by $47.6 million primarily due to net operating loss carryforwards, start-up and organizational costs, and the increase in research and development credits.

A reconciliation of income tax expense/(benefit) at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows:


	Year ended December 31,
(in thousands)	2012			2011			2010
Federal income tax at statutory rates		34.0	%		34.0	%		34.0	%
State income tax, net of federal tax benefit		4.6	%		6.0	%		4.3	%
Research and development credits		9.7	%		11.1	%		0.0	%
Stock compensation		(1.0	)%		(0.5	)%		(0.1	)%
Uncertain tax position adjustment		0.0	%		0.0	%		(15.4	)%
Change in warrant value		2.1	%		3.7	%		(9.3	)%
Federal R&D tax grant		0.0	%		0.0	%		0.8	%
Other		0.0	%		0.0	%		1.5	%
Increase in valuation allowance		(49.4	)%		(54.2	)%		(15.8	)%

Effective tax rate		0.0	%		0.0	%		0.0	%

The Company adopted ASC740, “Accounting for Uncertain Tax Positions” on January 1, 2007. ASC740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” ASC 740 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. The Company did not establish any additional reserves for uncertain tax liabilities upon adoption of ASC 740. A summary of the company’s adjustments to its uncertain tax positions in the years ended December 31, 2012, 2011, and 2010 are as follows:


(in thousands)
Balance at December 31, 2009	$	238
Increase/Decrease for tax positions related to the current year		—
Increase/Decrease for tax positions related to prior years		37
Decreases for settlements with applicable taxing authorities		—
Decreases for lapses of statute of limitations		—

Balance at December 31, 2010		275
Increase/Decrease for tax positions related to the current year		—
Increase/Decrease for tax positions related to prior years		—
Decreases for settlements with applicable taxing authorities		—
Decreases for lapses of statute of limitations		—

Balance at December 31, 2011	$	275
Increase/Decrease for tax positions related to the current year		—
Increase/Decrease for tax positions related to prior years		—
Decreases for settlements with applicable taxing authorities		—
Decreases for lapses of statute of limitations		—

Balance at December 31, 2012	$	275

The Company has not recognized any interest and penalties in the statement of operations because of the Company’s net operating losses and tax credits that are available to be carried forward. When necessary, the Company will account for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. The Company does not expect the amounts of unrecognized benefits will change significantly within the next twelve months.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state jurisdictions for the years ended December 31, 1999 through 2012.