Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes

Note 10 Income Taxes

We operate in the following countries in which we are required to file tax returns: U.S., Canada, Israel, Mexico, Taiwan, and Chile.

The (expense) benefit from continuing operations for incomes taxes consists of the following:

 

                         
    For the years ended December 31,  

(in thousands)

  2011     2010     2009  

Current

                       

Federal

  $ —       $ —       $ —    

State

    —         —         —    

Foreign

    (391     (330     (129
   

 

 

   

 

 

   

 

 

 
      (391     (330     (129

Deferred

                       

Federal

    18,043       —         —    

State

    1,220       —         —    

Foreign

    486       348       154  
   

 

 

   

 

 

   

 

 

 
      19,749       348       154  
   

 

 

   

 

 

   

 

 

 

Total, net

  $ 19,358     $ 18     $ 25  
   

 

 

   

 

 

   

 

 

 

 

Deferred income tax assets and liabilities from continuing operations as of December 31, 2011 and 2010 are comprised of the following:

 

                 

(in thousands)

  December 31,
2011
    December 31,
2010
 

Deferred income tax assets:

               

Federal net operating loss

  $ 40,208     $ 29,864  

State net operating loss

    7,254       3,294  

Foreign net operating loss

    2,142       249  

Capitalized research and development expense

    2,884       3,677  

Research and development tax credit

    3,688       2,342  

Amortization and depreciation

    263       241  

Accruals

    202       96  

Other

    14,056       7,787  
   

 

 

   

 

 

 

Deferred income tax assets

    70,697       47,550  

Deferred income tax liabilities:

               

Intangible assets

    (24,182     (1,083

Other

    (123     (66
   

 

 

   

 

 

 

Deferred income tax liabilities

    (24,305     (1,149
   

 

 

   

 

 

 

Net deferred income tax assets

    46,392       46,401  
   

 

 

   

 

 

 

Valuation allowance

    (53,255     (47,341
   

 

 

   

 

 

 

Net deferred income tax liabilities

  $ (6,863   $ (940
   

 

 

   

 

 

 

The change in deferred income tax assets, liabilities and valuation allowances at December 31, 2011 reflect the acquisition of various legal entities, including the tax attributes. The acquisitions were accounted for under U.S. GAAP as stock acquisitions and business combinations. As of December 31, 2011, we have federal, state, and foreign net operating loss carryforwards of approximately $174.5 million, $156.8 million, and $9.0 million, respectively, that expire at various dates through 2031. We have research and development tax credit carryforwards of approximately $4.0 million that expire in varying amounts through 2031. We have determined a full valuation allowance is required against all of our tax assets that we do not expect to be utilized by the turning of deferred income tax liabilities.

Under Section 382 of the Internal Revenue Code of 1986, as amended, certain significant changes in ownership may restrict the future utilization of our income tax loss carryforwards and income tax credit carryforwards in the United States. The annual limitation is equal to the value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted Federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date occurs). This limitation may be increased under the IRC§ 338 Approach (IRS approved methodology for determining recognized Built-In Gain). As a result, federal net operating losses and tax credits may expire before we are able to fully utilize them.

During 2008, we conducted a study to determine the impact of the various ownership changes that occurred during 2007 and 2008. As a result, we have concluded that the annual utilization of our net operating loss carryforwards (“NOLs”) and tax credits is subject to a limitation pursuant to Internal Revenue Code section 382. Under the tax law, such NOLs and tax credits are subject to expiration from 15 to 20 years after they were generated. As a result of the annual limitation that may be imposed on such tax attributes and the statutory expiration period, some of these tax attributes may expire prior to our being able to use them. As we have established a valuation allowance against all of our net deferred tax assets, including such NOLs and tax credits, there is no current impact on these financial statements as a result of the annual limitation. This study did not conclude as to whether eXegenics’ pre-merger NOLs were limited under Section 382. As such, of the $174.5 million of federal net operating loss carryforwards, at least approximately $39.7 million may not be able to be utilized.

Uncertain Income Tax Positions

We file federal income tax returns in the U.S., Canada, Chile, Mexico, Israel, and Taiwan jurisdictions, as well as with various U.S. states and the Ontario province in Canada. We are subject to tax audits in all jurisdictions for which we file tax returns. Tax audits by their very nature are often complex and can require several years to complete. There are currently no tax audits that have commenced with respect to income returns in any jurisdiction.

 

U.S. Federal: Under the tax statute of limitations applicable to the Internal Revenue Code, we are no longer subject to U.S. federal income tax examinations by the Internal Revenue Service for years before 2007. However, because we are carrying forward income tax attributes, such as net operating losses and tax credits from 2007 and earlier tax years, these attributes can still be audited when utilized on returns filed in the future.

State: Under the statutes of limitation applicable to most state income tax laws, we are no longer subject to state income tax examinations by tax authorities for years before 2007 in states in which we have filed income tax returns. Certain states may take the position that we are subject to income tax in such states even though we have not filed income tax returns in such states and, depending on the varying state income tax statutes and administrative practices, the statute of limitations in such states may extend to years before 2007.

Foreign: Under the statutes of limitations applicable to our foreign operations, we are no longer subject to tax examination for years before 2007 in jurisdictions where we have filed income tax returns.

As of December 31, 2011, December 31, 2010, and December 31, 2009, the total amount of gross unrecognized tax benefits was approximately $5.3 million, $5.4 million, and $6.8 million, respectively. Accrued interest and penalties on such unrecognized tax benefits was $0 in each period. There are no accrued interest and penalties resulting from such unrecognized tax benefits as a result of net operating loss carryforwards. There are no net unrecognized tax benefits that, if recognized, would impact the effective tax rate as of December 31, 2011 as a result of valuation allowances.

The following table rolls forward our gross unrecognized income tax benefits.

 

                         
(in thousands)   2011     2010     2009  

Unrecognized tax benefits at beginning of period

  $ 5,413     $ 6,818     $ 3,619  

Gross increases – tax positions in prior period

    257       —         3,199  

Gross decreases – tax positions in prior period

    (420     (1,405     —    
   

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits at end of period

  $ 5,250     $ 5,413     $ 6,818  
   

 

 

   

 

 

   

 

 

 

Other Income Tax Disclosures

The significant elements contributing to the difference between the federal statutory tax rate and the effective tax rate for continuing operations are as follows:

 

                         
    For the years ended December 31,  
    2011     2010     2009  

Federal statutory rate

    35.0     35.0     35.0

State income taxes, net of federal benefit

    3.6       3.5       3.8  

Foreign income tax

    (1.9     (1.2     (0.2

Acquired in-process research and development

    —         —         (3.2

Research and development tax credits

    0.2       8.3       8.2  

OID

    0.1       5.2       6.1  

Other items including valuation allowance and permanent items

    37.9       (50.7     (49.7
   

 

 

   

 

 

   

 

 

 

Total

    74.9     0.1     0.0
   

 

 

   

 

 

   

 

 

 

The following table reconciles our losses from continuing operations before income taxes between U.S. and foreign jurisdictions:

 

                         
    For the years ended December 31,  

(in thousands)

  20110     2010     2009  

Pre-tax loss

                       

U.S.

  $ (24,089   $ (11,213   $ (23,848

Foreign

    (1,733     (767     (215
   

 

 

   

 

 

   

 

 

 

Total

  $ (25,822   $ (11,980   $ (24,063
   

 

 

   

 

 

   

 

 

 

 

We may benefit from tax holidays in Israel as a result of our acquisition of FineTech. These tax holidays are on approved investments and are scheduled to expire, in whole or in part, at varying times within the next one to eight years. Some of these holidays may be extended when certain conditions are met, or terminated if certain conditions are not met. If the tax holidays are not extended, or if we fail to satisfy the conditions of the reduced tax rate, then our effective tax rate would increase in the future.