11. Income Taxes

Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):


	December 31,
	2012			2011
Deferred Tax Assets:
Net operating Losses	$	37,162		$	26,699
Research & Other Credits		2,008			2,029
Deferred Revenue		—			1,559
Other		1,030			750

Total Deferred Tax Assets		40,200			31,037
Valuation Allowance		(40,200	)		(31,037	)

Net Deferred Tax Assets	$	—		$	—

A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 2012, 2011, and 2010 is as follows:


	Years Ended December 31,
	2012			2011			2010
Statutory rate		-34.0	%		-34.0	%		-34.0	%
Valuation Allowance		33.4	%		31.0	%		40.8	%
Nondeductible Warrant Expense		-0.1	%		0.0	%		0.0	%
Nondeductible Stock Compensation		0.6	%		2.6	%		3.2	%
R&D expense adjustment related to Grants received		0.0	%		0.0	%		-10.4	%
Other		0.1	%		0.4	%		0.4	%

Effective tax rate		0.0	%		0.0	%		0.00	%

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $9.2 million, $0.8 million and $2.6 million during 2012, 2011 and 2010, respectively.

At December 31, 2012, the Company had federal net operating loss carryforwards of approximately $93.3 million, which expire in the years 2025 through 2032, and state net operating loss carryforwards of approximately $93.3 million, which expire in the years 2015 through 2032.

At December 31, 2012, the Company had federal research and development credit carryforwards of approximately $1.7 million, which expire in the years 2022 through 2031 and state research and development credit carryforwards of approximately $1.8 million. The state research and development credit carryforwards can be carried forward indefinitely.

During 2010, the Company completed a Section 382 study in accordance with the Internal Revenue Code of 1986, as amended and similar state provisions. The study concluded that the Company has experienced several ownership changes since inception. This causes the Company ‘s utilization of its net operating loss and tax credit carryforwards to be subject to substantial annual limitations. These results are reflected in the above carryforward amounts and deferred tax assets. The Company’s ability to utilize its net operating loss and tax credit carryforwards may be further limited as a result of subsequent ownership changes. All such limitations could result in the expiration of carryforwards before they are utilized.

The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Beginning at January 1, 2010	$	850
Additions based on tax positions related to current year		172

Balance at December 31, 2010		1,022
Additions based on tax positions related to current year		3

Balance at December 31, 2011		1,025
Additions based on tax positions related to prior year		39
Additions based on tax positions related to current year		5

Balance at December 31, 2012	$	1,069

There were no interest or penalties related to unrecognized tax benefits. Substantially all of the unrecognized tax benefit, if recognized, would affect the Company’s tax expense. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months

The Company files income tax returns in the U.S. federal jurisdiction and California. The United States federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service (IRS). The California corporation income tax returns beginning with the 2000 tax year remain subject to examination by the California Franchise Tax Board.