INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

INCOME TAXES

NOTE 14 - INCOME TAXES

A reconciliation of income taxes at the U.S. Federal statutory rate to the provision for income taxes is as follows (in thousands):

	Year Ended December 31,
	2011			2010			2009
Benefit at U.S. Federal statutory rate	$	(15,165	)	$	(9,548	)	$	(10,901	)
State taxes—deferred	(1,725		)	(2,115		)	(1,713		)
Increase in valuation allowance	16,580			12,213			12,916
Tax credits	(54		)	(50		)	(498		)
Other	364			(500		)	196
Provision for income taxes	$	—		$	—		$	—

Significant components of the Company’s deferred tax assets are as follows (in thousands):

	Year Ended December 31,
	2011			2010
Deferred tax assets:
Federal and state net operating loss carry-forwards	$	62,231		$	44,751
Federal and state research credits	3,395			2,828
Depreciation and amortization	4,867			2,563
Accruals and reserves	2,685			7,781
Deferred revenue	8,745			8,439
Other	1,325			306
Total gross deferred tax assets	83,248			66,668
Less valuation allowance for deferred tax assets	(83,248		)	(66,668		)
Net deferred tax assets	$	—		$	—

The valuation allowance for deferred tax assets increased by approximately $16.6 million, $12.2 million and $12.9 million during the years ended December 31, 2011, 2010 and 2009, respectively. There is significant doubt regarding the Company’s ability to utilize its net deferred tax assets and, therefore, has recorded a full valuation allowance.

The Company has significant federal and state net operating loss carryforwards and federal and state research and development tax credit carryforwards. As of December 31, 2011, the Company had federal and state net operating losses of approximately $157.5 million and $124.0 million, respectively. The Company also had federal and state research and development tax credit carry-forwards of approximately $2.6 million and $1.3 million, respectively. The net operating loss carryforwards will begin expiring in 2026 for federal purposes and 2018 for state purposes if the Company has not used them prior to that time, and our federal tax credits will begin expiring in 2028 unless previously used. The state tax credits carryforward indefinitely. Additionally, the Company’s ability to use any net operating loss and credit carryforwards to offset taxable income or tax, respectively, in the future will be limited under Internal Revenue Code Sections 382 and 383 if the Company has a cumulative change in ownership of more than 50% within a three-year period. Such an ownership change may have been triggered by the completion of the initial public offering, follow-on offering and other transactions that have occurred, coupled with any future offering that the Company may undertake to fulfill the need to raise substantial additional funding to finance our operations. The Company completed a Section 382/383 analysis for federal net operating loss carryforwards with respect to a potential ownership change in December 2011 and concluded that it did not have an ownership change. In the event such an ownership change occurs in the future, the Company will be limited regarding the amount of net operating loss carryforwards and research tax credits that could be utilized annually in the future to offset taxable income or tax, respectively. Any such annual limitation may significantly reduce the utilization of the net operating loss carryforwards and research tax credits before they expire. In addition, California and certain states have suspended use of net operating loss carryforwards for certain taxable years, and other states are considering similar measures. As a result, the Company may incur higher state income tax expense in the future.

The Company evaluates its uncertain tax positions in a two-step process. The Company first determines whether it is more-likely-than-not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.

The Company did not have a liability related to unrecognized tax benefits as of December 31, 2011 and 2010 due to operating losses but has reduced its deferred tax assets by $420,000 and $476,000, respectively. Further, because the Company has recorded a full valuation allowance on its net deferred assets, the effect of implementing ASC 740 has been a reduction of the allowance by the amount above. A reconciliation of the beginning and ending amount of gross unrecognized tax benefit is as follows:

	Years Ended December 31,
	2011			2010
Balance at beginning of year	$	476		$	420
Increases related to tax positions taken during the current year	—			56
Increases related to tax positions taken during a prior period	(56		)	—
Balance at end of year	$	420		$	476

No interest or penalties were accrued for 2011, 2010 or 2009. The Company is currently open for audit by the United States Internal Revenue Service and state tax jurisdictions for 2006 through 2011.