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.

A valuation allowance is required if the weight of available evidence suggests it is more likely than not that some portion or all of the deferred tax asset will not be recognized. Accordingly, a valuation allowance has been established for the full amount of the deferred tax assets.

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:



	March 31, 2016		March 31, 2015
Income tax benefit at the federal statutory rate	(34	)%	(34	)%
State income tax benefit, net of federal tax benefit	(6	)%	(6	)%
Change in fair value of warrant liability	3	%	(2	)%
Change in valuation allowance for deferred tax assets	37	%	42	%
Total	—	%	—	%

Deferred taxes consisted of the following:



	March 31, 2016			December 31, 2015
Net operating loss carryforwards	$	22,439,204		$	16,302,000
Stock-based compensation	2,690,282			2,191,000
Less valuation allowance	(25,129,486		)	(18,493,000		)
Net deferred tax asset	$	—		$	—

The valuation allowance increased by $2,439,142 and $883,062 during the three months ended March 31, 2016 and 2015 respectively.

As of December 31, 2015, the Company had federal and California income tax net operating loss carry forwards of approximately $50.1 million, and as of March 31, 2016, management has estimated federal and California income tax net operating loss carry forwards of approximately $56.1 million. These federal and California 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 had not incurred any limitations on its ability to utilize its net operating losses under Section 382 of the Internal Revenue Code during 2012. The Company may incur limitations in the future if there is a change in ownership as computed under the prescribed method of the Internal Revenue Code.

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 $11.0 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 are 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 potential future limitations of IRS Section 382, as well as expiration of federal and state net operating loss carryforwards.