Income Taxes

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and the deferred tax liability at December 31, 2012 and 2011 are presented below (in thousands):



	Year Ended December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	19,853		$	16,007
Federal research credits	2,912			2,912
Deferred rent	313			—
Accrued compensation	76			—
Gross deferred tax assets	23,154			18,919
Less valuation allowance	(23,137		)	(18,858		)
Net deferred tax assets	17			61
Deferred tax liability:
Leasehold improvements and equipment	(17		)	(61		)
Total net deferred tax assets	$	—		$	—

The valuation allowance for deferred tax assets as of December 31, 2012 and 2011 was $23.1 million and $18.9 million, respectively. The net change in the total valuation allowance for the years ended December 31, 2012 and 2011 was an increase of $4.3 million and $3.9 million, respectively. In assessing the realizability of deferred tax assets, management 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 those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax planning strategies in making this assessment. Valuation allowances have been established for the entire amount of the net deferred tax assets as of December 31, 2012 and 2011, due to the uncertainty of future recoverability.

Federal operating loss carryforwards as of December 31, 2012 of approximately $94.5 million and federal research credit carryforwards of approximately $2.9 million expire at various dates from 2020 through 2032. Sections 382 and 383 of the Internal Revenue Code limit a corporation’s ability to utilize its net operating loss carryforwards and certain other tax attributes (including research credits) to offset any future taxable income or tax if the corporation experiences a cumulative ownership change of more than 50% over any rolling three year period. State net operating loss carryforwards (and certain other tax attributes) may be similarly limited. An ownership change can therefore result in significantly greater tax liabilities than a corporation would incur in the absence of such a change and any increased liabilities could adversely affect the corporation’s business, results of operations, financial condition and cash flow.

Based on a preliminary analysis, we believe that, from its inception through December 31, 2011, NewLink experienced Section 382 ownership changes in September 2001 and March 2003 and our subsidiary experienced Section 382 ownership changes in January 2006 and January 2011. These ownership changes limit NewLink's ability to utilize federal net operating loss carryforwards (and certain other tax attributes) that accrued prior to the respective ownership changes of NewLink and our subsidiary. Additional ownership changes may occur in the future as a result of events over which the Company will have little or no control, including purchases and sales of the Company’s equity by our 5% stockholders, the emergence of new 5% stockholders, additional equity offerings or redemptions of the Company’s stock or certain changes in the ownership of any of the Company’s 5% stockholders.

The Company incurred no income tax expense for the years ended December 31, 2012, 2011 and 2010, and for the period from inception through December 31, 2012. Income tax expense differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to changes in the valuation allowance for deferred taxes.