Note 13 - Income Taxes

12 Months Ended

Dec. 31, 2011

Notes To Financial Statements

Income Tax Disclosure [Text Block]

Note 13.          Income Taxes

Deferred income taxes reflect the net tax effects of (1) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (2) operating losses and tax credit carryforwards.

The tax effects of significant components comprising the Company’s deferred taxes as of December 31, 2011 and 2010 were as follows:

	As of December 31,
	2011			2010
Gross deferred tax assets (liabilities):
Net operating loss carryforwards	$	11,560,200		$	10,879,800
Stock compensation		588,000			561,400
Accrued expenses		15,100			17,900
Fixed and intangible assets		49,300			45,900
Deferred gross profit, related party		45,800			—
Other		1,800			17,200
Gross deferred tax assets		12,260,200			11,522,200
Less valuation allowance		(12,260,200	)		(11,522,200	)
Net deferred tax assets		—			—
Deferred tax liabilities		—			—
Net deferred tax assets/liabilities	$	—		$	—

ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Because of the Company’s history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance at December 31, 2011 and 2010 for financial reporting purposes. The Company’s valuation allowance for deferred tax assets increased by $738,000, $1,360,600 and $1,029,400 during the years ended December 31, 2011, 2010 and 2009, respectively. The increases in the deferred tax assets in 2011, 2010 and 2009 were primarily the result of increasing net operating loss carryforwards during those years.

The Company has unrecognized research and development tax credits totaling approximately $70,300 and $77,600 as of December 31, 2011 and 2010, respectively, as these deferred tax assets did not meet the “more likely than not” recognition threshold. The change in unrecognized tax benefits during 2011 and 2010 was due to unrecognized research and development tax credits expiring unutilized. During 2011, 2010 and 2009, there was no interest or penalty recognized.

At December 31, 2011, the Company had gross unrecognized tax benefits of $1,364,600. The increase in unrecognized tax benefits during 2011 was due to the Company unrecognizing net operating losses  related to the debt conversion inducement expense as this deferred tax asset did not meet the "more likely than not" recognition threshold. The decrease in unrecognized tax benefits during 2011, 2010, and 2009 was due to unrecognized research and development tax credits expiring unutilized. The accrued interest and penalties on unrecognized tax benefits were $0 at December 31, 2011, 2010, and 2009.

The total amount of unrecognized tax benefits that would, if recognized, affect the effective tax rate is $1,364,6 00, of which $5,300 will decrease within 12 months due to research and development tax credits expiring unused.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at January 1, 2011	$	77,600
Addition based on tax positions taken during a prior period		1,294,300
Reductions based on tax positions taken during a prior period		(7,300	)
Balance at December 31, 2011	$	1,364,600

The Company’s operating losses and tax credit carryforwards as of December 31, 2011 are as follows:

	Amount		Expiration Years
Net operating losses, federal	$	37,782,400		2012-2031
Net operating losses, state		147,200		2030-2031
Tax credits, federal		70,300		2012-2021

The Company’s ability to utilize the carryforwards may be limited in the event of an ownership change as defined in current income tax regulations.

The effective tax rate of the Company’s provision (benefit) for income taxes differs from the federal statutory rate as follows:

	Year Ended December 31,
	2011			2010			2009
Statutory rate		34.00	%		34.00	%		34.00	%
State tax		0.35	%		—			—
Net operating loss carryforward adjustments		—			—			(1.46	)%
Change in valuation allowance		(29.66	)%		(17.65	)%		(27.27	)%
Permanent items		(0.56	)%		(0.30	)%		(0.30	)%
True up of debt conversion expense		—			(16.79	)%		—
True up of original issued discount related to convertible notes payable		—			—			(3.23	)%
Other		(4.13	)%		0.74	%		(1.74	)%
Total		0.00	%		0.00	%		0.00	%

The Company files income tax returns in the U.S. All of the Company’s tax returns for years with unexpired net operating loss carryforwards may be subject to examination in the event that the Company utilizes the net operating losses from those years in its future tax returns.