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, 2016, 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:



	2016		2015		2014
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	7	%	8	%	2	%
Change in valuation allowance for deferred tax assets	35	%	32	%	38	%
Other	(2	)%	—	%	—	%
Total	—	%	—	%	—	%

Deferred taxes consisted of the following:



	December 31, 2016			December 31, 2015			December 31, 2014
Net operating loss carryforwards	$	27,267,545		$	20,091,036		$	16,302,000
Stock-based compensation	3,090,903			2,599,308			2,191,000
Less valuation allowance	(30,358,448		)	(22,690,344		)	(18,493,000		)
Net deferred tax asset	$	—		$	—		$	—

The valuation allowance increased by $7,668,104, $4,197,344 and $712,739 during the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, the Company had federal and California income tax net operating loss carryforwards of approximately $68.2 million. These net operating losses will begin to expire in taxable years 2027 through 2036 and 2017 through 2036, 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. As of December 31, 2016, the Company has not experienced a change in ownership as defined by Section 382 of the Internal Revenue Code, based on a revised analysis completed by management. 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 as a result of its February 2015 and August 2016 financings.

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.