INCOME TAXES

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

4. INCOME TAXES

The components of deferred income taxes at December 31 are as follows (in thousands):

	December 31,
	2011			2010
Accruals and reserves	$	2		$	78
Valuation allowance		(2	)		(78	)
Total current		-			-
NOL, AMT and general business credit carryforwards		53,801			50,698
Difference in basis of fixed assets		93			81
Accruals and reserves		898			888
Difference in basis of intangibles		443			460
Valuation allowance		(55,235	)		(52,127	)
Total non current		-			-
Total deferred income taxes	$	-		$	-

ASC 740 requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period-to-period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, we take into account all evidence with regard to the utilization of a deferred tax asset including past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets and has established a valuation allowance of approximately $55 million and $52 million at December 31, 2011 and 2010, respectively. The valuation allowance at both 2011 and 2010 includes approximately $2.7 million for net operating loss carry forwards that relate to stock compensation expense for income tax reporting purposes that upon realization, would be recorded as additional paid-in capital. The valuation allowance reduces deferred tax assets to an amount that management believes will more likely than not be realized.

The components of the income tax provision (benefit) are as follows (in thousands):

							As a
							Development
							Stage Company
	Years Ended December 31						August 5, 2004 -
	2011			2010			December 31, 2011
Provision (benefit) for income taxes
Current	$	(158	)	$	(181	)	$	(2,461	)
Deferred		-			-			1,106
Income tax provision (benefit)	$	(158	)	$	(181	)	$	(1,355	)

The 2011 and 2010 income tax benefits result from Arizona state income tax legislation passed in 2010 that provides for the refund of seventy five percent of the 2011 and 2010 Arizona state research and development tax credit for entities that would otherwise not be able to utilize their 2011 and 2010 Arizona research and development tax credits to reduce 2011 or 2010 Arizona state income taxes currently payable.

The results of the Company’s Phase 3 Chrysalin fracture repair human clinical trial, which were received in 2006, resulted in a change in our planned clinical pathway and timeline for our Chrysalin fracture repair indication. This change, when factored with our current significant net operating loss carryforwards and current period net loss, resulted in a revision of our estimate of the need for a valuation allowance for the previously recorded deferred tax asset related to an AMT credit carryover from tax year 2003. Due to the uncertainty that the deferred tax asset would be realized, we recorded a valuation allowance for the full amount of the deferred tax asset ($1,106,000) at December 31, 2006. Federal tax legislation enacted in the fourth quarter of 2009, allowed for the carryback of net operating losses incurred in 2008 to the 2003 tax year and eliminated for 2003, the AMT limit on use of more than 90% of a net operating loss to offset currently taxable income. This change generated a refund of $1,009,000 for the AMT tax paid for tax year 2003 and a reversal of the previously established valuation allowance for the 2003 AMT credit and was recorded in income taxes at December 31, 2009.

We have accumulated approximately $134 million in federal and $56 million in state net operating loss carryforwards (“NOLs”) and approximately $5 million of research and development and alternative minimum tax credit carryforwards. The federal NOLs expire between 2023 and 2031. The Arizona state NOL’s expire between 2012 and 2016. The availability of these NOL’s to offset future taxable income could be limited in the event of a change in ownership, as defined in Section 382 of the Internal Revenue Code.

The AzERx and CBI acquisitions were treated as tax free reorganizations under Internal Revenue Code Section 368 and therefore resulted in a carryover basis and no income tax benefit for the related acquisition costs, including in-process research and development costs.

A reconciliation of the difference between the provision (benefit) for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows for the years ended December 31, 2011 and 2010 and for the period of August 5, 2004 through December 31, 2011 (in thousands):

							As a
							Development
							Stage Company
	Years Ended December 31						August 5, 2004 -
	2011			2010			December 31, 2011
Income tax provision (benefit) at statutory rate	$	(3,356	)	$	(3,758	)	$	(50,981	)
State income taxes		(454	)		(508	)		(5,793	)
Purchased in-process research and development		-			-			12,533
Research credits		(366	)		(408	)		(5,947	)
Change in uncertain tax position reserve		-			-			(363	)
Expiration of state NOL		867			914			3,031
Other		118			171			1,549
Change in valuation allowance		3,033			3,408			44,616
Net provision (benefit)	$	(158	)	$	(181	)	$	(1,355	)