12.

Income Taxes

The components of the net deferred tax assets are as follows at December 31:


	2012			2011
	(in thousands)
Operating loss carryforwards	$	21,753		$	19,119
Tax credit carryforwards		317			330
Other temporary differences		2,921			2,070

		24,991			21,519
Less valuation allowance		(24,991	)		(21,519	)

Net deferred tax asset	$	—		$	—

The primary factors affecting the Company’s income tax rates were as follows:


	2012			2011
Tax benefit at U.S. statutory rates		(34	%)		(34	%)
State tax benefit		(5.3	%)		(5.3	%)
Credit		(0.2	%)		(1.0	%)
Permanent differences		1.4	%		3.5	%
Expiring state NOL’s		3.3	%		3.4	%
Changes in valuation allowance		34.8	%		33.4	%

		0	%		0	%

As of December 31, 2012, the Company has federal and state net operating loss carryforwards totaling $60,886,000 and $25,160,000 respectively, which expire through 2032. The net operating losses include Federal and State excess benefits related to stock options of $707,000 that will be charged to additional paid-in capital when utilized. In addition, the Company has federal and state research and development credits of $223,000 and $143,000, respectively, which expire through 2032. Ownership changes, as defined by Section 382 of the Internal Revenue Code, may have limited the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years. Because of the Company’s limited operating history and its recorded losses, management has provided, in each of the last two years, a 100% valuation allowance against the Company’s net deferred tax assets.

On January 3, 2013, the American Taxpayer Relief Act of 2012 was signed into law reinstating the federal research and development credit for the 2012 and 2013 years. Under ASC 740-10-25 the effects are recognized as a component of income tax expense or benefit from continuing operations in the financial statements for the interim or annual period that includes the enactment date. The benefit related to the 2012 federal research and development credit $61,000 will be recorded during 2013.

At December 31, 2012 the Company has $1,082,000 of unrecognized tax benefits, $923,000 of which would affect the effective tax rate. The Company has not recognized an adjustment to the deficit accumulated during the development stage for unrecognized tax benefits because a full valuation allowance has been recorded against net operating loss carry forwards. Since the Company’s net deferred tax assets and the unrecognized tax benefits would not result in a cash payment, the Company has not accrued for any interest and penalties relating to these unrecognized tax benefits. Should the Company incur interest and penalties related to income taxes, those amounts would be included in income tax expense. Total amounts of unrecognized tax benefits are not expected to significantly increase or decrease within 12 months of the reporting date.

The Company is subject to taxation in the U.S. and various states. Based on the history of net operating losses all jurisdictions and tax years are open for examination until the operating losses are utilized or the statute of limitations expires.