9. Income Taxes

The Company utilizes the liability method of accounting for deferred income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets because, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company's policy is to record interest and penalties on uncertain tax positions as income tax expense. As of December 31, 2013, the Company does not believe any material uncertain tax positions are present. Accordingly, interest and penalties have not been accrued due to an uncertain tax position and the fact the Company has reported tax losses since inception.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A reconciliation of the statutory U.S. federal rate to the Company's effective tax rate is as follows:

	Years ended December 31,

	2013			2012			2011
Percent of pre-tax income:
U.S. federal staturtory income tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		—			—			3.4	%
Permanent items		(2.2	)%		(1.0	)%		(0.6	)%
Research and development credit		2.7	%		1.0	%		0.7	%
Change in valuation allowance		(35.5	)%		(35.0	)%		(33.3	)%


Effective income tax rate		—			—			5.2	%

Significant components of the Company's deferred tax assets/liabilities for 2013 and 2012 consist of the following:

	December 31,

	2013			2012
Deferred tax assets/(liabilities)
Federal net operating loss carryforwards	$	30,084		$	29,464
State and local net operating loss carryforwards		5,026			4,825
License and technology payments		6,407			5,566
Share-based compensation		1,396			476
Depreciation		(7	)		(11	)
Federal research and development credit carryforwards		2,966			1,562
State research and development credit carryforwards		1,483			781


Deferred income tax assets		47,355			42,663
Valuation allowance		(47,355	)		(42,663	)


Net deferred tax assets (liabilities)		—			—

In assessing the reliability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Due to the Company's history of losses, and lack of other positive evidence, the Company has determined that it is more likely than not that its deferred tax assets will not be realized, and therefore, the deferred tax assets are fully offset by a valuation allowance at December 31, 2013 and 2012.

Deferred tax assets relating to employee share-based compensation deductions were reduced to reflect exercises of non-qualified stock option grants and vesting of restricted stock. Although certain of these deductions were reported on the corporate tax returns and increased net operating losses, these related tax benefits were not recognized for financial reporting purposes. The Company has unrealized excess tax benefits related to stock based compensation costs of $0.8 million that it expects to credit to stockholder's equity in future periods.

The following table summarizes carryforwards of net operating losses and tax credits as of December 31, 2013:

	Amount

Federal net operating losses	$	85,955	2033
Research and development credits	$	2,966	2033

The federal, state, and local net operating loss carryforwards will start to expire in 2027. Utilization of the net operating losses and general business tax credits carryforwards may be subject to a substantial limitation under Sections 382 and 383 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 net operating losses 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 stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

The Company believes that it had undergone at least one ownership change during 2007, but has not completed a study to determine the impact of the ownership change on its ability to utilize the aforementioned carryforwards. The amount of net operating losses and credits incurred during the year of ownership change amounted to $4.5 million and $0.1 million, respectively. As such, the net operating losses and credits at the time of the ownership change would have been no greater than $4.5 million and $0.1 million, respectively. Accordingly, the Company's ability to utilize its carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, the Company may not be able to take full advantage of these carryforwards for federal or state income tax purposes. No other ownership changes have been identified in any years subsequent to 2007.