10. INCOME TAXES

As of December 31, 2013, the Company had federal and state net operating loss carryforwards of $260.9 million and $237.7 million, respectively, available to reduce future taxable income, which expire 2014 through 2033. Utilization of these net operating losses could be limited under Section 382 of the Internal Revenue Code and similar state laws based on ownership changes and the value of the Company’s stock. Approximately $11.6 million of the Company’s carryforwards were generated as a result of deductions related to exercises of stock options. When utilized, this portion of the Company’s carryforwards, as tax affected, will be accounted for as a direct increase to contributed capital rather than as a reduction of the year’s provision for income taxes. The principal differences between net operating loss carryforwards for tax purposes and the deficit accumulated during the development stage result from timing differences related to depreciation, amortization, treatment of research and development costs, limitations on the length of time that net operating losses may be carried forward, losses on changes in warrant valuation and differences in the recognition of stock-based compensation.

The Company had gross deferred tax assets of $133.6 million and $114.1 million at December 31, 2013 and 2012, respectively, primarily from U.S. federal and state net operating loss carryforwards, U.S. federal and state research and development credit carryforwards, share based compensation expense and intangibles. A valuation allowance was recorded to reduce the net deferred tax asset to zero because it is more likely than not that the deferred tax asset will not be realized.

An analysis of the deferred tax assets (liabilities) is as follows:


	December 31,
	2013			2012
	(in thousands)
Net operating loss carryforwards	$	94,170		$	85,600
Difference in depreciation and amortization		2,492			2,524
Research and development tax credits		23,599			20,012
Stock compensation		9,036			4,424
Deferred rent		2,849			265
Deferred revenue		1,219			1,133
Other		208			169

Gross deferred tax assets		133,573			114,127

Valuation allowance		(133,573	)		(114,127	)

Net deferred tax asset	$	—		$	—

The increase in the valuation allowance for deferred tax assets of $19.4 million for the year ended December 31, 2013, was mainly due to the increase in the net operating loss carryforwards and research and development tax credits, as well as the impact of stock option activity. The decrease in the valuation allowance for deferred tax assets of $ 2.7 million for the year ended December 31, 2012 was mainly due to the decrease in net operating loss carryforwards.

The reconciliation between the Company’s effective tax rate and the income tax rate is as follows:


	Year Ended December 31,
	2013			2012			2011
	(in thousands)
Federal income tax rate		34.0	%		34.0	%		34.0	%
Research and development tax credits		1.4			(0.6	)		54.6
Valuation allowance		(12.4	)		(7.5	)		(507.4	)
Permanent Differences		(8.8	)		(25.9	)		450.0
Other		—			—			(31.2	)
Foreign rate differential		(14.2	)		—			—

Effective tax rate		—	%		—	%		—	%

Permanent differences affecting the Company’s effective tax rate include gain (loss) on changes in warrant valuation and losses in a foreign jurisdiction. On December 31, 2012, the Company licensed certain intellectual property of Sarepta Therapeutics, Inc. to its wholly owned subsidiary, Sarepta International C.V. The parties also entered into a contract research agreement under which Sarepta Therapeutics, Inc. performs research services for Sarepta International C.V. During the year ended December 31, 2013, Sarepta International C.V. incurred $46.7 million of costs in connection with the research and development activities.

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 on its balance sheet at December 31, 2013 or December 31, 2012, and has not recognized interest and/or penalties in the statement of operations for 2013, 2012 or 2011. The Company has not recognized any liability for unrecognized tax benefits.