Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes:

Income Tax Disclosure

15. Income Taxes

The components of loss before income taxes and the provision for income taxes for the years ended December 31, 2013, 2012 and 2011 are as follows:

Loss before income taxes:	2013			2012		2011
United States		$	(61,730,000)	$	(30,399,000)	$	(25,483,000)
Foreign		(1,350,000)		(1,463,000)		(1,971,000)
		$	(63,080,000)	$	(31,862,000)	$	(27,454,000)

Income tax benefit	2013			2012		2011
United States		$	-	$	-	$	-
Foreign		(410,000)		-		-
		$	(410,000)	$	-	$	-

The significant components of U.S. deferred income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011 are as follows:

	2013		2012		2011
Deferred tax (benefit) expense	$	(3,209,000)	$	10,661,000	$	17,774,000
Net operating loss carryforward (generated) expired	(6,536,000)		26,924,000		187,597,000
Valuation allowance increase (decrease)	9,745,000		(37,585,000)		(205,371,000)
Provision for Income taxes	$	-	$	-	$	-

The significant components of foreign deferred income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011 are as follows:

	2013		2012		2011
Deferred tax expense (benefit)	$	1,406,000	$	(1,041,000)	$	(1,268,000)
Net operating loss carryforward expired (generated)	(15,000)		(79,000)		496,000
Valuation allowance (decrease) increase	(1,391,000)		1,120,000		772,000
Provision for Income taxes	$	-	$	-	$	-

The Company’s effective income tax rate differed from the federal statutory rate as follows:

	2013			2012	2011
U.S. Federal statutory tax rate		(35.0%)		(35.0%)	(35.0%)
Deferred state taxes, net of federal benefit			(1.3%)	(3.3%)	(3.1%)
Common stock warrant liability			20.6%	(5.3%)	(4.4%)
Gain on Hypulsion transaction			(1.8%)	0.0%	0.0%
Other, net			0.1%	0.1%	0.6%
Change to uncertain tax positions			(1.3%)	(1.6%)	(57.5%)
Foreign tax rate differential			0.2%	0.5%	0.8%
Expiring attribute carryforward			2.2%	0.0%	5.4%
Adjustments to open deferred tax balance			(0.3%)	(5.8%)	(1.7%)
Writeoff of tax attributes due to imposition of Section
382 limitation			1.5%	165.7%	840.9%
Tax credits			0.0%	0.0%	(0.3%)
Change in valuation allowance			14.5%	(115.3%)	(745.7%)
			(0.6%)	0.0%	0.0%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of certain assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

	U.S.				Foreign
	Years ended December 31,				Years ended December 31,
	2013		2012		2013		2012
Intangible assets	$	59,000	$	130,000	$	999,000	$	694,000
Deferred revenue	3,425,000		2,779,000		-		-
Other reserves and accruals	1,253,000		1,621,000		-		-
Tax credit carryforwards	-		-		84,000		1,569,000
Property, plant and equipment	1,450,000		1,541,000		504,000		541,000
Amortization of stock-based compensation	9,183,000		8,495,000		-		-
Capitalized research & development expenditures	13,775,000		15,846,000		5,195,000		5,384,000
Net operating loss carryforwards	9,883,000		3,347,000		3,556,000		3,541,000
Total deferred tax asset	39,028,000		33,759,000		10,338,000		11,729,000
Valuation allowance	(26,746,000)		(17,001,000)		(10,338,000)		(11,729,000)
Net deferred tax assets	$	12,282,000	$	16,758,000	$	-	$	-
Non-employee stock based compensation	(1,556,000)		(1,556,000)		-		-
Section 382 recognized built in loss	(10,726,000)		(15,202,000)				-
Net deferred tax liability	$	(12,282,000)	$	(16,758,000)	$	-	$	-
Net	$	-	$	-	$	-	$	-

The Company has recorded a valuation allowance, as a result of uncertainties related to the realization of its net deferred tax asset, at December 31, 2013 and 2012 of approximately $37.0 million and $28.7 million, respectively.  A reconciliation of the current year change in valuation allowance is as follows:

	Total		U.S.		Foreign
Increase in valuation allowance for current year increase in net operating losses:	$	6,529,000	$	6,536,000	$	(7,000)
Increase in valuation allowance for current year net increase in deferred tax assets
other than net operating losses:	3,587,000		3,209,000		378,000
Decrease in valuation allowance as a result of foreign currency fluctuation	(798,000)		-		(798,000)
Decrease in valuation allowance as a result of tax attribute expiration	(1,478,000)		-		(1,478,000)
Increase in valuation allowance due to current year change of deferred tax assets
as the result of uncertain tax positions.	514,000		-		514,000
Net increase (decrease) in valuation allowance	$	8,354,000	$	9,745,000	$	(1,391,000)

The deferred tax assets have been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforwards and other deferred tax assets may not be realized. Included in the valuation allowance at December 31, 2013 and December 31, 2012 are $0.1 million of deferred tax assets resulting from the exercise of employee stock options, which upon subsequent realization of the tax benefits, will be allocated directly to paid-in capital. 

Before the imposition of IRC Section 382 limitations described below, at December 31, 2013, the Company has unused federal and state net operating loss carryforwards of approximately $741 million, of which $117 million was generated from the operations of acquired companies prior to the dates of acquisition and $624 million was generated by the Company subsequent to the acquisition dates and through December 31, 2013. The net operating loss carryforwards if unused will expire at various dates from 2017 through 2033.

Under Internal Revenue Code (IRC) Section 382, the use of loss carryforwards may be limited if a change in ownership of a company occurs. If it is determined that due to transactions involving the Company’s shares owned by its 5 percent shareholders a change of ownership has occurred under the provisions of IRC Section 382, the Company's federal and state net operating loss carryforwards could be subject to significant IRC Section 382 limitations. 

Based upon IRC Section 382 studies, Section 382 ownership changes occurred in 2013, 2012 and 2011 that resulted in $728 million of the Company's $741 million of federal and state net operating loss carryforwards being subject to IRC Section 382 limitations.  As a result of IRC Section 382 limitations, $715 million of the $728 million net operating loss carryforwards that are limited will expire prior to utilization. As a result of the IRC Section 382 limitations these net operating loss carryforwards that will expire unutilized are not reflected in the Company’s gross deferred tax asset as of December 31, 2013.

The ownership changes also resulted in net unrealized built in losses per IRS Notice 2003-65 which should result in recognized built in losses during the five year recognition period of approximately $40.7 million.  This will translate into unfavorable book to tax add backs in the Company's 2013 to 2018 U.S. corporate income tax returns that resulted in a gross deferred tax liability of $10.7 million at December 31, 2013 with a corresponding reduction to the valuation allowance.  This gross deferred tax liability will offset certain existing gross deferred tax assets (i.e. capitalized research expense).  This has no impact on the Company's current financial position, results of operations, or cash flows because of the full valuation allowance.

IRC Section 382 also limits the ability for a Company to utilize research credit carryforwards.  Approximately $15.6 million of research credit carryforwards are subject to IRC Section 382 limitations and as a result of the IRC Section 382 limitations, the entire $15.6 million will expire prior to utilization. 

At December 31, 2013, the Company has unused foreign net operating loss carryforwards of approximately $16.6 million. The net operating loss carryforwards if unused will expire at various dates from 2014 through 2031.  At December 31, 2013, the Company has scientific research and experimental development expenditures of $20.8 million available to offset future taxable income.  These expenditures have no expiry date.  At December 31, 2013, the Company has Canadian ITC credit carryforwards of $0.5 million available to offset future income tax.  These credit carryforwards if unused will expire at various dates from 2014 through 2025.  Approximately $2.3 million of the foreign net operating loss carryforwards and $0.4 million of the Canadian ITC credit carryforwards represent unrecognized tax benefits and are therefore, not reflected in the Company's deferred tax asset as of December 31, 2013.

As of December 31, 2013, the Company has no un-repatriated foreign earnings.

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

	2013		2012		2011
Unrecognized tax benefits balance at beginning of year	$	1,579,000	$	2,046,000	$	17,893,000
Reductions for tax positions of prior years	(471,000)		(503,000)		(15,875,000)
Currency Translation	(75,000)		36,000		28,000
Unrecognized tax benefits balance at end of year	$	1,033,000	$	1,579,000	$	2,046,000

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the year ended December 31, 2013 the company recognized a $0.4 million benefit due to a reduction in interest and penalties as a result of the expiration of the associated statute of limitations.  The company had $0.8 million and $1.2 million of interest and penalties accrued at December 31, 2013 and December 31, 2012, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business the company is subject to examination by taxing authorities.  Open tax years in the U.S. range from 2010 to 2013, and open tax years in foreign jurisdictions range from 2006 to 2013.  However, upon examination in subsequent years, if net operating losses carryforwards and tax credit carryforwards are utilized, the U.S. and foreign jurisdictions can reduce net operating loss carryforwards and tax credit carryforwards utilized in the year being examined if they do not agree with the carryforward amount.  As of December 31, 2013, the Company was not under audit in the U.S. or non-U.S. taxing jurisdictions.  No significant changes to the amount of unrecognized tax benefits are anticipated within the next twelve months.