13. Income Taxes

The components of the provision for income taxes for the years ended December 31, 2011 and 2010 are as follows:

 

		2011				2010
Current		$	—			$	(733,437	)
Deferred			(2,545,834	)			(3,502,706	)
Valuation Allowance			2,545,834				3,502,706
Total provision for income taxes		$	—			$	(733,437	)

At December 31, 2011 and 2010, the Company had temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective income tax bases, as measured by enacted state and federal tax rates, as follows:

 

		2011				2010
Deferred tax assets:
Net operating loss carryforward		$	13,681,361			$	11,345,514
Bad debt reserve			58,765				55,914
Inventory reserve			24,540				96,263
Sales return allowance			74,478				45,806
Accrued vacation			32,232				43,771
Deferrals of compensation to Directors & Officers			9,596				12,794
Deferred grant revenue			13,194				—
Uniform capitalization (UNICAP)			6,418				2,486
Non-qualified stock compensation			414,630				166,832
Total deferred tax assets			14,315,214				11,769,380
Less valuation allowance			(14,315,214	)			(11,769,380	)
Total net deferred taxes		$	—			$	—

 

The following is a reconciliation of tax computed at the statutory federal rate to the income tax benefit in the statements of operations for the years ended December 31, 2011 and 2010:

 

		2011				2010
Income tax benefit computed at statutory federal rate of 34%		$	(2,610,815	)		$	(2,903,125	)
State income tax benefits, net of federal expense/benefit			(278,743	)			(309,951	)
Change in valuation allowance			2,545,834				3,052,706
Non-deductible expenses			231,465				133,032
Therapeutic discovery tax credit			—				733,437
Other			112,259				27,338
Total		$	—			$	733,437

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 future taxable income, and tax planning strategies in making this assessment. Based upon the levels of historical taxable income and projections of future taxable income over which the deferred tax assets are deductible, the Company believes that it is more likely than not that it will not be able to realize the benefits of some of these deductible differences.

Accordingly, a valuation allowance of $14,315,214 and $11,769,380 has been provided in the accompanying financial statements as of December 31, 2011 and 2010, respectively. The 2011 net change in valuation allowance related to deferred tax assets was an increase of $2,545,834 primarily relating to net operating loss carryforwards. The 2010 net change in valuation allowance related to deferred tax assets was an increase of $3,052,706 primarily relating to net operating loss carryforwards.

At December 31, 2011, the Company has federal and state tax net operating loss carryforwards of approximately $36,480,000. The federal and state tax loss carryforward will expire through 2032, unless previously utilized. The Company also has federal research and development tax credit carryforwards of approximately $551,000. The federal tax credit carryforward will expire through 2022, unless previously utilized.

Pursuant to Internal Revenue Service Code Sections 382 and 383, use of the Company's net operating losses and credit carryforwards are limited due to a cumulative change in ownership of more than 50% that occurred in 2009. As a result of the 50% change in ownership, the annual amount of pre-change net operating losses that may be used in periods subsequent to the change in ownership is approximately $172,000. The impact of this limitation is factored into management's valuation allowance placed against the Company's deferred tax assets.

For the years ended December 31, 2011 and 2010, the Company incurred $59,967 and $106,719, respectively, of additional unrecognized tax benefits that resulted in a decrease to the deferred tax asset valuation allowance, related to research and development credits. The entire amount of this unrecognized tax benefit, if recognized, would result in an increase to the deferred tax asset valuation allowance, and would not have an impact on the effective tax rate.

The Company files its income tax returns in the U.S. federal jurisdiction and in Florida. With few exceptions, the Company is no longer subject to federal or state income tax examinations by tax authorities for years before 2007.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

Balance as of December 31, 2009		$	384,276
Additions based on tax positions related to the current year			106,719
Additions for the tax positions of prior years			—
Reductions for the tax positions of prior years			—
Balance as of December 31, 2010		$	490,995
Additions based on tax positions related to the current year			59,967
Additions for the tax positions of prior years			—
Reductions for the tax positions of prior years			—
Balance as of December 31, 2011		$	550,962

Included in the balance at December 31, 2011 and 2010, are $550,962 and $490,995, respectively, of tax positions for which there is uncertainty about the validity of certain credits. The disallowance of the credits would impact the amount of gross deferred tax assets reflected in the accompanying footnotes.

During the years 2011 and 2010 the Company did not recognize any interest and penalties. Due to the potential offset of the Company's operating loss carryforward for any future activity, the amount attributed to interest and penalties would be immaterial.

On November 1, 2010, we received notification that we were awarded federal grant funding for three of its therapeutic development programs under the Qualifying Therapeutic Discovery Project. The Qualifying Therapeutic Discovery Project, was recently enacted by Congress as part of the Patient Protection and Affordable Care Act of 2010, which was designed to provide grants or tax credits to qualified biotechnology companies that demonstrate the potential to either 1) develop new therapies to treat areas of unmet medical needs; 2) prevent, detect or treat chronic or acute diseases and conditions; 3) reduce long-term health care costs in United States; or 4) significantly advance the goal of curing cancer within the 30 year period beginning on May 21, 2010. We applied for funding on three of its programs: Prevention of Tooth Decay using Smart Replacement Therapy, Novel Antibiotics for the Treatment of Healthcare Associated Infections and Rapid and Sensitive Identification of Novel Diagnostic Biomarkers for Cancer and Infectious Diseases. We received a non-taxable cash grant award totaling $733,437 under the program which was recorded as income tax benefits for the year. As of December 31, 2010, we had recorded income tax receivables totaling $362,218. A payment of $371,219 was made to us in November 2010 and remaining grant award amount of $362,218 was received in February, 2011.