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Note 6 - Income Taxes

9 Months Ended

12 Months Ended

Sep. 30, 2013

Dec. 31, 2012

6. Income Taxes

Because of our historically significant net operating losses, we have not paid income taxes since inception. We maintain deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets are comprised primarily of net operating loss carryforwards and also include amounts relating to nonqualified stock options and research and development credits. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of our future profitability and our ability to utilize the deferred tax assets. Utilization of operating losses and credits may be subject to substantial annual limitations due to ownership change provisions of Section 382 of the Internal Revenue Code. The annual limitation may result in the expiration of net operating losses and credits before utilization.

8. Income Taxes

At December 31, 2012, we have a consolidated federal net operating loss (“NOL”) carryforward of approximately $69.8 million, available to offset against future taxable income which expires in varying amounts in 2013 through 2032. Additionally, we have approximately $764,000 in research and development (“R&D”) tax credits that expire in 2022 through 2031 unless utilized earlier. No income taxes have been paid to date.

As a result of the Merger discussed in Note 5, our NOL carryforward increased substantially due to the addition of historical NOL carryforwards for Dauphin Technology, Inc. However, Section 382 of the Internal Revenue Code contains provisions that may limit our utilization of NOL and R&D tax credit carryforwards in any given year as a result of significant changes in ownership interests that have occurred in past periods or may occur in future periods.

Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities included the following at December 31, 2012 and 2011:

	2012			2011
Deferred tax assets:
Net operating loss carryforward	$	24,429,472		$	24,872,082
Research and development tax credit carryforward		763,965			763,690
Stock-based compensation expense		2,097,194			1,991,769
Total deferred tax assets		27,290,631			27,627,541

Deferred tax liabilities
Depreciation		(16,125	)		(36,311	)
Total deferred tax liabilities		(16,125	)		(36,311	)

Net deferred tax assets		27,274,506			27,591,230
Valuation allowance		(27,274,506	)		(27,591,230	)
	$	-		$	-

We have established a full valuation allowance equal to the amount of our net deferred tax assets due to uncertainties with respect to our ability to generate sufficient taxable income to realize these assets in the future. A reconciliation of the income tax benefit on losses at the U.S. federal statutory rate to the reported income tax expense is as follows:

	2012			2011			2010
U.S. federal statutory rate applied to pretax loss	$	(725,948	)	$	(797,921	)	$	(934,092	)
Permanent differences		2,674			4,216			(77,200	)
Research and development credits		-			32,675			59,959
Change in valuation allowance		723,274			761,030			951,333
Reported income tax expense	$	-		$	-		$	-

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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