Note 15. Income Taxes

The Company provides for income taxes based upon management’s estimate of taxable income or loss for each respective period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences would result in deductible or taxable amounts in future years, when the reported amounts of the assets are recovered or liabilities are settled, respectively.

In each period since inception, the Company has recorded a valuation allowance for the full amount of its net deferred tax assets, as the realization of the net deferred tax assets is uncertain. As a result, the Company has not recorded any federal or state income tax benefit in the statements of operations; however, state income tax expense has been recorded for state minimum taxes.

The Company periodically reviews its filing positions for all open tax years in all U.S. Federal, state and international jurisdictions where the Company is or might be required to file tax returns or other required reports.

The Company applies a two-step approach to recognizing and measuring uncertain tax positions. The Company evaluates the tax position for recognition by determining if the weight of available evidence indicates that it is “more likely than not” that the position will be sustained on audit, including resolution of related appeals or litigation process, if any. The term “more likely than not” means a likelihood of more than 50 percent. If the tax position is not more likely than not to be sustained in a court of last resort, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the more likely than not criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the Company’s results of operations, financial position and cash flows. The Company has not identified any uncertain tax positions at December 31, 2016 or December 31, 2015.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at December 31, 2016 and 2015, respectively, and has not recognized interest or penalties during the years ended December 31, 2016 and 2015, respectively, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within in the next 12 months.

The components of income tax expense are as follows:

	Years Ended December 31,
	2016		2015
Current:
Federal	$	—	$	—
State		10,118		10,189
Total current income tax expense	$	10,118	$	10,189

Deferred:
Federal	$	—	$	—
State		—		—
Total deferred income tax expense	$	—	$	—
Total income tax expense	$	10,118	$	10,189

The Company’s actual income tax expense for the years 2016 and 2015 differ from the expected amount computed by applying the statutory federal income tax rate of 34% to loss before income taxes as follows:

	Years Ended December 31,
	2016			2015
Computed tax (benefit) at 34%	$	(8,850,007	)	$	(7,271,785	)
State taxes, net of federal benefit		(462,609	)		(918,079	)
Stock-based compensation		210,367			102,699
Expiring state net operating loss ("NOL") carryforwards		94,962			(20,086	)
Return to provision		248,263			(27,934	)
Other		25,718			44,679
Research and development tax credit - state		(453,071	)		(300,213	)
Research and development tax credit - federal		(341,785	)		(342,681	)
Change in valuation reserve		9,538,280			8,743,589
	$	10,118		$	10,189

Deferred tax assets and liabilities comprise the following:

	Years Ended December 31,
	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	37,114,445		$	28,795,562
Research and development credits		2,132,050			1,435,314
Deferred revenue		177,683			17,396
Inventory reserve		99,583			104,182
Fixed assets and intangibles		193,833			50,128
Change in fair value of warrant liability		—			111,993
Accrued NuvoGen liability		3,176,449			3,282,756
Capitalized research and development		—			27,583
Accrued expense		351,505			—
Other		233,438			115,792
		43,478,986			33,940,706
Valuation allowance		(43,478,986	)		(33,940,706	)
Deferred tax asset, net	$	—		$	—

As of December 31, 2016, the Company has estimated federal and state NOL carryforwards of approximately $102,162,333 and $61,744,268 for federal and state income tax purposes, respectively. The Company’s federal NOLs are scheduled to expire from 2021 through 2036. The Company’s state NOLs are scheduled to expire from 2027 through 2036. The Company’s federal and state tax credit carryforwards begin expiring in 2021 and 2017, respectively. The Company’s federal NOL carryforwards have the following expiration dates:

	Year of Expiration	2016 Bonus Amount
Federal NOL carryforwards
	2021	$	211,806
	2023		1,635,651
	2024		1,217,290
	2025		1,409,498
	2026		1,175,594
	2027		1,676,458
	2028		3,037,785
	2029		3,753,314
	2030		623,235
	2031		5,435,312
	2032		10,913,787
	2033		12,095,966
	2034		14,190,409
	2035		21,079,240
	2036		23,706,988
		$	102,162,333

For financial reporting purposes, valuation allowances of $43,478,986 and $33,940,706 at December 31, 2016 and 2015, respectively, have been established to offset deferred tax assets relating mainly to NOLs and research and development credits. The increase in the valuation allowance of $9,538,280 for the year ended December 31, 2016 was due primarily to increased operating losses. The Company has established a valuation allowance against the entire tax asset. As a result, the Company does not recognize any tax benefit until it is in a taxpaying position and, therefore, more likely than not to realize the tax benefit. A preliminary analysis of past and subsequent equity offerings by the Company, and other transactions that have an impact on the Company’s ownership structure, concluded that the Company may have experienced one or more ownership changes under Sections 382 and 383 of the Internal Revenue Code or IRC. Provisions of the IRC place special limitations on the usage of net operating losses and credits following an ownership change. Such limitations may limit or eliminate the potential future tax benefit to be realized by the Company from its accumulated NOLs and research and development credits.

The Company files income tax returns in the United States, Arizona, California, Texas and various other state jurisdictions, with varying statutes of limitations. As of December 31, 2016, the earliest year subject to examination is 2013 for US federal tax purposes. The earliest year subject to examination is 2012 for Arizona, California and Texas, and 2009 for the remaining state jurisdictions. However, the Company’s net operating loss carryforwards for periods ending December 31, 2001 and thereafter remain subject to examination by the United States and certain states.