Income Taxes

In accordance with the guidance pursuant to accounting for income taxes, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax asset will be realized.

The components of the provision for income taxes are presented in the following table:



	Year Ended December 31,
	2013			2012		2011
Current:
Federal	$	—		$	—	$	—
State	(1,000		)	7,000		1,000
	$	(1,000	)	$	7,000	$	1,000
Deferred:
Federal	$	15,000		$	20,000	$	19,000
State	17,000			3,000		7,000
	$	32,000		$	23,000	$	26,000
	$	31,000		$	30,000	$	27,000

The reconciliation of income taxes attributable to operations computed at the statutory tax rates to income tax expense (recovery), using a 35% statutory tax rate, is:



	Year Ended December 31,
	2013			2012			2011
Income (benefit) taxes at statutory rates	$	(23,118,000	)	$	(6,894,000	)	$	(5,352,000	)
State income tax, net of federal benefit	(1,651,000		)	(1,234,000		)	(1,378,000		)
Change in valuation allowance	8,819,000			7,415,000			7,679,000
IRC Section 382/383 limitation	675,000			18,000			918,000
Fair value warrant	16,129,000			(811,000		)	(3,090,000		)
Stock compensation	279,000			603,000			(147,000		)
Change in state tax rate	(623,000		)	438,000			125,000
Other	(479,000		)	495,000			1,272,000
	$	31,000		$	30,000		$	27,000

The income tax expense (recovery) has been recorded as a general and administrative expense, as its effect is immaterial.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2013 and 2012 are shown below:



	As of December 31,
	2013			2012
Deferred tax assets:
Capitalized research expense	$	2,782,000		$	3,191,000
Net operating loss carryforwards	48,846,000			43,233,000
Research and development and other tax credits	1,877,000			1,134,000
Other	8,641,000			6,569,000
	62,146,000			54,127,000
Valuation allowance	(61,061,000		)	(52,185,000		)
Total deferred tax assets	1,085,000			1,942,000
Deferred tax liabilities:
Acquired intangibles	(1,096,000		)	(1,532,000		)
Investment in affiliated entity	(123,000		)	(511,000		)
Net deferred tax liabilities	$	(134,000	)	$	(101,000	)

We have established a valuation allowance for all deferred tax assets including those for net operating loss (“NOL”) and tax credit carryforwards. Such a valuation allowance is recorded when it is more likely than not that the deferred tax assets will not be realized. The Company maintains a deferred tax liability related to goodwill that is not netted against the deferred tax assets, as reversal of the taxable temporary difference cannot serve as a source of income for realization of the deferred tax assets, because the deferred tax liability will not reverse until the asset is sold or written down due to impairment.

As of December 31, 2013, the Company had federal, California and Pennsylvania tax net operating loss carry forwards of approximately $122.4 million, $38.9 million and $75.6 million, respectively, net of the net operating losses that will expire due to IRC Section 382 limitations. The federal net operating loss carry forwards will begin to expire in 2018 unless previously utilized. The California net operating loss carry forwards will begin to expire in 2014 and the Pennsylvania net operating loss carry forwards will begin to expire in 2021.

In addition, we had federal and state research tax credit carryforwards of approximately $2.0 million net of IRS Section 382 limitation and $2.1 million, respectively. The federal tax credit carryforwards will begin to expire in 2018. The California research tax credits do not expire.

Utilization of the NOL and tax credit carryforwards will be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and similar state provisions due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes will limit the amount of NOL and tax credit carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stock holders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period.

The Company is in the process of updating the Section 382/383 study for the Company and VGX, both of which experienced ownership changes under Section 382 as a result of the Merger on June 1, 2009. Based upon the preliminary results of the study, it is estimated that approximately $28.3 million of tax benefits related to NOL and tax credit carryforwards will expire unused. Accordingly, the related NOL and R&D credit carryforwards have been removed from deferred tax assets accompanied by a corresponding reduction of the valuation allowance. Upon completion of the study, deferred tax assets relating to NOL and R&D credit carryforwards for the Company and VGX may need to be adjusted with a corresponding adjustment to the valuation allowance. Due to the existence of the valuation allowance, limitations created by current and future ownership changes, if any, related to our operations in the United States will not impact our effective tax rate. Any additional ownership changes, may further limit the ability to use the net operating losses and credits carryovers.

The following table summarizes the activity related to our unrecognized tax benefits:



	Year ended December 31,
	2013		2012			2011
Balance at beginning of the year	$	1,896,000	$	1,829,000		$	629,000
Increases related to current year tax positions	305,000		72,000			158,000
Increases (Decreases) related to prior year tax positions	215,000		(5,000		)	1,042,000
Balance at end of the year	$	2,416,000	$	1,896,000		$	1,829,000

The amount of unrecognized tax benefit that, if recognized and realized would affect the effective tax rate is $2.0 million as of December 31, 2013. The Company has not recorded any interest and penalties on the unrecognized tax positions as the Company has continued to generate net operating losses after accounting for the unrecognized tax benefits. The Company does not anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company and its subsidiaries are subject to United States federal income tax as well as income tax in multiple state jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for years before 2010; state and local income tax examinations before 2009; and foreign income tax examinations before 2010. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount. The Company is not currently under Internal Revenue Service (“IRS”), state or local tax examination.

On September 13, 2013, the U.S. Treasury Department released final income tax regulations on the deduction and capitalization of expenditures related to tangible property. These final regulations apply to tax years beginning on or after January 1, 2014, and may be adopted in earlier years. The Company does not intend to early adopt the tax treatment of expenditures to improve tangible property and the capitalization of inherently facilitative costs to acquire tangible property as of January 1, 2013. The tangible property regulations will require the Company to make additional tax accounting method changes as of January 1, 2014; however, management does not anticipate the impact of these changes to be material to the Company’s consolidated financial position, its results of operations or its footnote disclosures.