8. Income Taxes

The components of the Company’s deferred tax assets at December 31, 2013 and 2012 are as follows: (Amounts in thousands):


	Years ended December 31,
	2013			2012
Net operating loss carryforwards	$	74,533		$	72,072
Research and development credits		2,171			1,978
Stock based compensation		434			263
Capital loss carryforwards		1,360			1,593
Accruals and reserves		83			33

Total Deferred tax assets		78,581			75,939
Valuation allowance		(78,581	)		(75,939	)

Net deferred tax asset	$	—		$	—

After consideration of the available evidence, both positive and negative, the Company has determined that a full valuation allowance at December 31, 2013 and 2012, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The valuation allowance increased by approximately $2,642,000 and decreased by approximately $195,000 for the years ended December 31, 2013 and 2012, respectively. For the year ended December 31, 2013, the increase was due primarily to the increase in the federal net operating loss. For the year ended December 31, 2012 the decrease was due primarily to the decrease in Massachusetts research and development credit carry-forwards and decrease in Massachusetts net operating loss carry-forwards due to discontinued operations in the state.

At December 31, 2013, the Company had net operating loss carry-forwards of approximately $212,591,000 for U.S. income tax purposes, which will begin to expire in 2020 and state operating loss carry-forwards of $38,606,000 in California that will begin to expire in 2017. The Company also had tax credits of $2,371,000 related to federal research and development activities which begin to expire in 2021. The Company also had tax credits of $794,000 related to state research and development activities which have no expiration. The Company recorded a capital loss carryover of approximately $4,000,000 in 2009 that generated a deferred tax asset of $1,360,000, which will expire at the end of 2014 if not utilized.

The future utilization of the net operating loss carry-forwards and credit carry-forwards may be subject to an annual limitation due to ownership changes that could have occurred in the past or that may occur in the future under the provisions of IRC Section 382 or 383 of the internal revenue code.

The Company provides for income taxes under the liability method in accordance with the FASB’s guidance on accounting for income taxes. As all of the Company’s deferred tax assets have been reserved for in a valuation allowance, no provision for (benefit from) income taxes have been recorded in the accompanying financial statements.

A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:


	Years ended December 31,
	2013			2012
Federal Statutory Rate		34.00	%		34.00	%
State Income taxes		0.31			1.46
Warrants		0.00			0.02
Federal NOL adjustment		(0.48	)		(0.01	)
State NOL expired or adjusted		—			(29.83	)
Permanent Items: Capital Loss		—			—
Permanent Items		0.16			(1.03	)
Stock Compensation		(0.31	)		(0.54	)
Federal Research Credits		1.64			(7.01	)
State rate change		(3.38	)		—
Miscellaneous		(0.03	)		0.51
(Increase)/ Decrease In Valuation Allowance		(31.91	)		2.43

Provision for income taxes		0.00	%		0.00	%

The provisions of ASC 740 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2013, the Company had unrecognized tax benefits of $748,036.

The change in unrecognized tax benefits from December 31, 2011 is as follows:


Unrecognized tax benefits as of 12/31/11	$	—
Increase in prior year unrecognized tax benefits		654,701
Increase in current year unrecognized tax benefits		19,179

Unrecognized tax benefits as of 12/31/12		673,880
Increase in prior year unrecognized tax benefits		40,472
Increase in current year unrecognized tax benefits		33,684

Unrecognized tax benefits as of 12/31/13	$	748,036

The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.

There are currently no federal or state audits in progress, tax years still subject to examination for Federal and the State authorities include all prior years due to the existence of net operating loss carry-forwards.

It is the Company’s practice to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2013 the Company has no accrued interest and penalties related to uncertain tax positions.