Income Taxes

Deferred taxes represent the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Temporary differences result primarily from the recording of tax benefits of net operating loss carry forwards and stock-based compensation.

As of December 31, 2015, the Company has an insufficient history to support the likelihood of ultimate realization of the benefit associated with the deferred tax asset. Accordingly, a valuation allowance has been established for the full amount of the net deferred tax asset.

The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:



	2015		2014		2013
Income tax benefit at the federal statutory rate	(34	)%	(34	)%	(34	)%
State income tax benefit, net of federal tax benefit	(6	)%	(6	)%	(6	)%
Change in fair value of warrant liability	8	%	2	%	7	%
Change in valuation allowance for deferred tax assets	32	%	38	%	33	%
Total	—	%	—	%	—	%

Deferred taxes consisted of the following:



	December 31, 2015			December 31, 2014			December 31, 2013
Net operating loss carryforwards	$	20,091,036		$	16,302,000		$	15,759,274
Stock-based compensation	2,599,308			2,191,000			2,020,987
Less valuation allowance	(22,690,344		)	(18,493,000		)	(17,780,261		)
Net deferred tax asset	$	—		$	—		$	—

The valuation allowance increased by $4,197,344, $712,739 and $3,161,558 during the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, the Company had federal and California income tax net operating loss carryforwards of approximately $50.1 million. These net operating losses will begin to expire in 2022 and 2016, respectively, unless previously utilized.

Section 382 of the Internal Revenue Code can limit the amount of net operating losses which may be utilized if certain changes to a company’s ownership occur. While the Company underwent an ownership change in 2012 as defined by Section 382 of the Internal Revenue Code, management estimated that the Company has not incurred any limitations on its ability to utilize its net operating losses under Section 382 of the Internal Revenue Code during 2013. The Company has not determined whether an ownership change has occurred as a result of the Company’s issuance of common stock in February 2015 and consequently, has not determined if it will incur any limitations on its ability to utilize its net operation losses under Section 382.

During the fourth quarter of 2014, the Company licensed the non-U.S. rights to a significant portion of its intellectual property to its Bermuda-based subsidiary for approximately $11 million. The fair value of the intellectual property rights was determined by an independent third party. The proceeds from this sale represent a gain for U.S. tax purposes and were offset by current year losses and net operating loss carryforwards. However, the Internal Revenue Service, or the IRS, or the California Franchise Tax Board, or the CFTB, could challenge the valuation of the intellectual property rights and assess a greater valuation, which would require the Company to utilize a portion, or all, of its available net operating losses. If an IRS or a CFTB valuation exceeds the available net operating losses, the Company would incur additional income taxes. The Company’s ability to use its net operating losses is subject to the limitations of IRS Section 382, as well as expiration of federal and state net operating loss carryforwards.