Note 13. Income Taxes

Income tax expense (benefit) was comprised of the following:

	Years Ended July 31,
	2015		2014
Current
Federal	$	-	$	-
State		-		-
Total current		-		-
Deferred
Federal		(1,181,162)		(148,161)
State		(205,397)		(20,260)
Total deferred		(1,386,559)		(168,421)
Change in valuation allowance		1,386,559		168,421

	$	-	$	-

The following is a reconciliation of the differences between the actual provision for income taxes and the provision computed by applying the federal statutory rate on income before income taxes for the years ended July 31:

	2015		2014
Tax (benefit) at federal statutory rate	$	(1,413,664)	$	(159,070)
State tax (benefit), net of federal benefit		(197,769)		(23,445)
Change in FV of derivative liability		132,880		-
Incentive Stock Options		145,935		15,686
Other		(53,941)		(1,592)
Change in valuation allowance		1,386,559		168,421
Total provision for income taxes	$	-	$	-

The significant components of the deferred income tax assets and liabilities as of July 31, 2015 and July 31, 2014 are as follows:

	Years Ended July 31,
	2015		2014
Current Deferred Tax Assets:
Accruals	$	117,214	$	17,938
Non-Current Deferred Tax Assets:

Net Operating Loss Carryforwards		1,860,375		754,782
Research and development credits		188,949		145,162
Other Credits		3,635		3,635
Intangible Assets		200,725		28,181
Fixed Assets		(32,166)		2475

Total Non-Current Deferred Tax Assets		2,221,518		934,235

Total Deferred Tax Assets		2,338,732		952,173

Valuation Allowance		(2,338,732)		(952,173)

Net Deferred Tax Assets	$	—	$	—

Future tax benefits, which may arise as a result of these losses, have not been recognized in these financial statements, and have been offset by a valuation allowance since there is no assurance that we will be able to utilize these NOLs.

The valuation allowance increased by $1,386,559 from July 31, 2014 to July 31, 2015 primarily due to the generation of current year net operating losses and research and development credits claimed.

As of July 31, 2015, the Company had $4,833,000 of federal and $2,992,000 of state net operating loss, respectively, available to offset future taxable income. The federal net operating loss carryforwards begins to expire in 2018 and the state net operating loss carryforwards will begin to expire in 2029, if not utilized. As of July 31, 2015, the Company also had $115,889 of federal and $72,892 of state research and development credit carryforwards, respectively. The federal research and development credit carryforward begins to expire in 2027 and the state research and development credit begins to expire in 2027, if not utilized.

In addition, the use of net operating loss and tax credit carryforwards may be limited under Section 382 of the Internal Revenue Code in certain situations where changes occur in the stock ownership of a company. In the event that the Company has had a change in ownership, utilization of the carryforwards could be restricted.

The Company files income tax returns in the U.S. federal jurisdiction and certain state jurisdictions. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The federal and California statute of limitations remains open for the years ended July 31, 2009 through 2015.