Income Taxes - Note 13

12 Months Ended

Dec. 31, 2013

Income Taxes Disclosure

Income Taxes

(13) Income Taxes

The components of loss before income taxes for the years ended December 31, 2013, 2012 and 2011 includes the following (in thousands):

		Years ended December 31,
		2013		2012		2011
United States	$	(9,748)	$	(18,735)	$	(36,249)
Foreign		(3,574)		-		-
Loss before income taxes	$	(13,322)	$	(18,735)	$	(36,249)

The Company has recorded income tax expense for the years ended December 31, 2013, 2012 and 2011 of $182,000, $0, and $18,000, respectively. The income tax expense for the years ended December 31, 2013 and 2011 was primarily related to a non-cash charge for state income taxes and to the Company's Canadian subsidiary based in the Canadian province of Quebec, respectively.

Income tax differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before income tax expense (benefit) as a result of the following (in thousands):

		Years ended December 31,
		2013		2012		2011
Computed "expected" tax benefit	$	(4,529)	$	(6,370)	$	(12,325)
Expiration of tax attributes		-		-		360
IRC §382 adjustment		6,575		59,822		94,442
Change in the valuation allowance for deferred tax assets
attributable to operations and other adjustments		2,840		(42,124)		(70,514)
U.S. and foreign credits		(12,237)		(10,231)		(11,732)
State income taxes, net of federal tax effect		182		-		-
Equity based compensation expense		678		513		578
Intellectual property		5,440		-		-
Foreign tax rate differences		940		-		-
Other		293		(1,610)		(791)
	$	182	$	-	$	18

The tax effects of temporary differences that give rise to the deferred tax assets at December 31, 2013 and 2012 are presented below (in thousands):

		2013		2012
Deferred tax assets:
Net operating loss carryforward	$	132,101	$	140,416
Research credit carryforward		68,277		49,960
Capital loss carryforward		4,186		4,169
Non-recourse debt		27,769		32,619
Acquired intellectual property		29,452		29,287
Capitalization of inventory		9,429		13,146
Stock compensation expense		2,935		5,631
Accrued compensation		3,117		2,105
Other		555		273
Total deferred tax assets		277,821		277,606
Less valuation allowance		(277,821)		(277,606)
Deferred tax assets		-		-
Deferred tax liabilities		-		-
Net deferred tax asset (liability)	$	-	$	-

Carryfowards

At December 31, 2013, the Company had U.S. federal net operating loss carryforwards of approximately $381.0 million which begin to expire in 2018, U.S. federal research credit carryforwards of $68.3 million, which begin to expire in 2030, and U.S. federal capital loss carryforwards of $10.7 million which begin to expire in 2015. The Company's domestic tax loss carryforwards for alternative minimum tax purposes is approximately the same as the Company's regular tax loss carryforwards. The Company also has New Jersey state net operating loss and capital loss carryforwards of approximately $369.9 million and $18.1 million, respectively, which begin to expire in 2014, and other domestic state net operating loss carryforwards and tax credit carryforwards in varying amounts depending on the different state laws.

The Company uses the "with-and-without" approach in determining the order in which tax attributes are utilized. Using the "with-and-without" approach, the Company will only recognize a tax benefit from stock-based awards in additional paid-in capital if an incremental tax benefit is realized after all other net operating loss carryforwards currently available to the Company have been utilized, but prior to the utilization of other tax attributes.

The U.S. federal net operating loss carryforwards of approximately $381.0 million include approximately $10.1 million of excess tax benefits related to share-based payments that are presented on a tax effected basis within the deferred tax assets. Since this amount was recorded through additional paid-in capital, the related valuation allowance on these net operating loss carryforwards will be reversed through additional paid-in capital when these excess tax benefits are realized. Also, included in the U.S. federal net operating loss carryforwards are excess tax benefits related to share-based payments of approximately $24.5 million that are not recognized as a deferred tax asset as the amounts would not have resulted in a reduction in current taxes payable if all other net operating loss carryforwards currently available to the Company were utilized. The benefit of these deductions will be recognized through additional paid-in capital at the time the tax deduction results in a reduction of current taxes payable.

Section 382 of the Internal Revenue Code can potentially limit a company's ability to use net operating loss, tax credits, capital loss, and other tax attributes in periods subsequent to a change in ownership. The Company periodically updates its Section 382 study to assess whether the Company has undergone certain greater than 50% changes of ownership as defined in Section 382 of the Internal Revenue Code.  This study concluded that the Company had an ownership change in 2010. As a result, the Company determined that certain net operating loss, tax credit and capital loss carryforwards will expire prior to their utilization due to the expected annual Section 382 limitation, and accordingly the net operating loss, tax credit, and capital loss carryforwards on the above deferred tax asset table have been reduced.

Valuation Allowance

The Company determines the need for a valuation allowance by assessing the probability of realizing deferred tax assets, taking into consideration all available positive and negative evidence, including historical operating results, expectations of future taxable income, carryforward periods available to the Company for tax reporting purposes, various income tax strategies and other relevant factors. Significant judgment is required in making this assessment and to the extent future expectations change, the Company would have to assess the recoverability of its deferred tax assets at that time.

At December 31, 2013 and 2012, the Company maintained a full valuation allowance on its deferred tax assets. The Company has a history of cumulative losses. The Company's cumulative loss position was significant negative evidence in assessing the need for a valuation allowance. The valuation allowance for deferred tax assets increased by $215,000 in 2013 and decreased by $49.1 million in 2012.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands):

	Unrecognized
		Tax Benefits
Balance as of January 1, 2012	$	4,614
Additions for current year tax positions		-
Reductions for prior year tax positions		-
Balance as of December 31, 2012		4,614
Additions for current year tax positions		-
Reductions for prior year tax positions		(677)
Balance as of December 31, 2013	$	3,937

The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits will not change during the next 12 months. However, changes in the occurrence, expected outcomes and timing of those events could cause the Company's current estimate to change materially in the future.

Due to the Company's net operating loss carryforwards, any adjustment related to an unrecognized tax benefit would not be expected to result in a cash tax liability. Accordingly, the Company has not accrued for interest or penalties for the U.S. (both Federal and State) as of December 31, 2013 and 2012. Assuming the continued existence of a full valuation allowance on the Company's deferred tax assets, future recognition of any of the Company's unrecognized tax benefits would not impact the effective tax rate.

The Company files income tax returns in the United States and various foreign jurisdictions. Of the major jurisdictions, the Company is subject to examination in: the United States for U.S. federal purposes for 2010 and forward and for New Jersey for 2011 and forward. In August 2012, the IRS completed its examination of the Company's U.S. federal income tax returns for the year ended December 31, 2009.  In May 2013, the State of New Jersey completed its examination of the Company's New Jersey income tax returns through the year ended December 31, 2010. There were no adjustments as a result of these examinations.