Income Taxes

3 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Taxes

6. Income Taxes

The Company accounts for income taxes under FASB ASC 740-10-25 (“ASC 740-10-25”), Accounting for Income Taxes. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company files U.S. federal and state tax returns and has determined that its major tax jurisdictions are the United States and Connecticut. The tax years ended in 2004 through 2010 remain open and subject to examination by the appropriate governmental agencies in the United States and Connecticut.

Section 382 of the Internal Revenue Code imposes limitations on the use of U.S. federal net operating losses (“NOLs”) upon a 50% or more change in ownership in the Company within a three-year period. As a result of the registered direct offering that the Company completed in May 2011 (Note 8), a significant change in the ownership of the Company occurred, which limits on an annual basis the Company’s ability to utilize its federal NOLs. The Company’s NOLs will continue to be available to offset taxable income (until such NOLs are either used or expire) subject to the Section 382 annual limitation. If the Section 382 annual limitation amount is not fully utilized in a particular tax year, then the unused portion from that particular tax year will be added to the Section 382 annual limitation in subsequent years. The Company completed a formal Section 382 analysis and believes that approximately $55,890 of the $106,860 federal losses (prior to the Section 382 limitation) will expire unused due to Section 382 limitations. The maximum annual limitation under Section 382 is approximately $2,496 for twenty (20) years. The limitation could be further restricted if ownership changes occur in future years. To the extent the Company’s use of NOL carryforwards is limited, future income could be subject to corporate income tax earlier than it would if the Company was able to use NOL carryforwards, which could result in decreased net income. In addition to the NOL limitation, the 382 limitation also limited approximately $1,815 of federal research and development credit carryovers.

The Company’s effective tax rate for the three months ended December 31, 2010 and 2011 was 0% and differs from the federal statutory rate of 34% primarily due to the effects of state income taxes and valuation allowance.