16. Income Taxes

The Company has incurred net operating losses since inception. The Company has not reflected any benefit of such net operating loss carryforwards (“NOL”) in the accompanying consolidated financial statements and has established a full valuation allowance of $26.2 million against its deferred tax assets.

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The significant components of the Company’s deferred tax assets consisted of the following:

A reconciliation of the statutory tax rates and the effective tax rates is as follows:

Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. The Company has concluded, based on the weight of available evidence, that its net deferred tax assets are not more likely than not to be realized in the future. Management has considered the Company’s history of cumulative net losses incurred since inception and concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2012 and 2011. Management reevaluates the positive and negative evidence at each reporting period.

In 2012, the Company identified an error related to the taxation of the 2011 Asphelia Asset Purchase. The Company accounted for the transaction as a taxable asset purchase in 2011 but during 2012 determined that the transaction should have been accounted for as a non-taxable reorganization under IRC 368 (a)(1)(c). The net impact of the error was to overstate gross deferred tax assets by $3.6 million and overstate the valuation allowance by $3.6 million with no impact to net deferred tax assets or the provision for income taxes. The error was determined to be immaterial and had no effect on the Company’s consolidated balance sheets statements of operations, changes in stockholders’ deficit or cash flows for any period presented. As a result, the 2011 amounts presented herein have been revised to correct for this misstatement.

As of December 31, 2012, the Company has federal net operating loss carryforwards and research and development tax credit carryforwards of approximately $53.5 million and $1.0 million, including an orphan drug tax credit of $0.3 million, respectively, which expire beginning in 2026 and 2028, respectively. As of December 31, 2012, the Company has state net operating loss carryforwards of approximately $16.8 million, which expires beginning in 2030. Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, or the IRC, and similar state provisions. The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the IRC has occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization.

As of December 31, 2012, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance. The Company would classify interest and penalties related to uncertain tax positions in income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2012. The tax years 2006 through 2012 remain open to examination by one or more major taxing jurisdictions to which the Company is subject.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012. Under prior law, a taxpayer was entitled to a research credit for qualifying amounts paid or incurred on or before December 31, 2011. The Taxpayer Relief Act extends the research credit for two years to December 31, 2013. The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011. As a result of the retroactive extension, a benefit for qualifying amounts incurred in 2012 will be recognized in the period of enactment, which is the first quarter of 2013.