Note 20 - Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

20. Income Taxes

As of December 31, 2011, we had available for federal income tax reporting purposes net operating loss carryforwards in the approximate amount of $105,000,000, expiring from 2012 through 2031, which are available to reduce future earnings which would otherwise be subject to federal income taxes. Our ability to use such net operating losses may be limited by change in control provisions under Internal Revenue Code Section 382. Approximately $3,475,000 of these net operating losses is related to deductions resulting from exercises of employee stock options. The tax benefit related to these stock options would be credited to additional paid-in capital when realized. In addition, as of December 31, 2011, we had federal research and development credits in the approximate amount of $3,500,000, which are available to reduce the amount of future federal income taxes. These credits expire from 2012 through 2031.  We have capital losses of approximately $5,000,000 that were generated during 2011 that will expire if unused by 2016.

We have New Jersey operating loss carryforwards in the approximate amount of$52,000,000, expiring from 2013 through 2017, which are available to reduce future earnings, which would otherwise be subject to state income tax. As of December 31, 2011, approximately $4,000,000 of these New Jersey loss carryforwards had been approved for future sale under a program of the New Jersey Economic Development Authority, which we refer to as the NJEDA. In order to realize these benefits, we must apply to the NJEDA each year and must meet various requirements for continuing eligibility. In addition, the program must continue to be funded by the State of New Jersey, and there are limitations based on the level of participation by other companies. As a result, future tax benefits will be recognized in the financial statements as specific sales are approved. We sold tax benefits and received cash of $601,000 in 2011 and $701,000 in 2010 (for 2009 and 2010). In addition, as of December 31, 2011, we had New Jersey research and development credits in the approximate amount of $880,000, which are available to reduce the amount of future New Jersey income taxes. These credits expire from 2012 through 2017.

Management has established a full valuation allowance against the net deferred tax assets at December 31, 2011 since it is more likely than not that these future tax benefits will not be realized. For the year ended December 31, 2011 the valuation allowance increased by approximately $3,425,000.

Income tax benefits recorded are summarized as follows:

	2011			2010			2009
Proceeds from sale of New Jersey tax benefits	$	(601,000	)	$	(701,000	)	$	--
Federal research and development credit benefit		--			--			(69,000	)
Federal alternative minimum tax expense		--			--			0
State tax expense		--			--			2,000
Total income tax benefit	$	(601,000	)	$	(701,000	)	$	(67,000	)

The reconciliation for the benefit from income taxes and the amount computed by applying the federal statutory income tax rate (34%) is summarized as follows:

Pre-tax book loss at statutory rate	$	(2,617,000	)	$	(11,300,000	)	$	(4,572,000	)
Change in valuation allowance		3,377,000			6,348,000			5,293,000
Permanent tax differences		(427,000	)		5,931,000			6,000
State taxes		(1,223,000	)		(2,192,000	)		(958,000	)
Other		289,000			512,000			164,000
Recorded income tax benefit	$	(601,000	)	$	(701,000	)	$	(67,000	)

Deferred tax assets are summarized as follows:

	December 31,
Deferred Tax Asset:	2011			2010
Federal net operating loss carryforwards	$	35,594,000		$	33,169,000
State net operating loss carryforwards		3,082,000			1,906,000
Capital losses		1,985,000			--
Tax credits carryforward		3,833,000			4,224,000
Deferred revenue		3,240,000			5,389,000
Fixed asset		1,951,000			1,923,000
Stock options		1,489,000			1,152,000
Deferred compensation		197,000			552,000
Accrued vacation		226,000			239,000
Patent costs		833,000			896,000
Inventory reserve		475,000			510,000
Deferred financing costs		126,000			305,000
Embedded conversion feature		--			3,654,000
Investment in China joint venture		--			1,682,000
Investment in Tarsa		1,972,000			846,000
		55,003,000			56,447,000
Valuation allowance		(52,882,000	)		(53,290,000	)
Deferred tax asset		2,121,000			3,157,000
Deferred Tax Liability:
Embedded conversion feature		(2,121,000	)		(3,157,000	)
Total deferred tax liabilities		(2,121,000	)		(3,157,000	)
Net deferred tax assets	$	--		$	--

On January 1, 2007, we adopted the provisions of ASC 740-10-25. ASC 740-10-25 provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company records tax related interest and penalty in the tax provision. The Company has not recognized any tax related interest or penalty in the statement of operations due to its net operating loss carryforwards.

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefit:

	2011			2010		2009
Balance at January 1	$	380,000		$	-	$	-
Additions/reductions based on tax positions related to the current year		(35,000	)		20,000		-
Additions/reductions based on tax positions related to the prior years		93,000			360,000		-
Balance at December 31	$	438,000		$	380,000	$	-

The Company expects that $50,000 of the unrealized tax benefits will expire in the next twelve months.  All of the unrealized tax benefits would impact the tax rate when settled.

The Company’s 2007, 2008 and 2009 federal tax returns remain subject to examination by the IRS and the Company’s 2006, 2007, 2008 and 2009 New Jersey tax returns are also open to potential examination. In addition, net operating losses arising from prior years are also subject to examination at the time that they are utilized in future years. None of the Company’s federal or state tax returns are currently under examination.