ISTA » Topics » Income Taxes

This excerpt taken from the ISTA 10-Q filed May 12, 2009.

Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”, or FIN 48, on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption. As a result of the implementation of FIN 48, the Company did not recognize an increase in the liability for unrecognized tax benefits. As of March 31, 2009 and December 31, 2008, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

The Company’s practice 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 the Company’s balance sheets at March 31, 2009 and December 31, 2008 and has not recognized interest and/or penalties in the condensed consolidated statement of operations for the quarter ended March 31, 2009.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 and forward are subject to examination by the United States and state tax authorities.

At December 31, 2008, the Company had net deferred tax assets of $46.2 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and research and development credit carry forwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to determine the limitation of the net operating loss and research and development credit carry forwards. Until this analysis has been performed the Company has removed the deferred tax assets for net operating losses of $66.6 million and research and development credits of $14.6 million generated through 2008 from its deferred tax asset schedule, and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN 48. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

At December 31, 2008, the Company had Federal and state income tax net operating loss carry forwards of approximately $178.9 million and $102.7 million, respectively. Federal tax loss carryforwards will continue to expire in 2009 unless previously utilized. California tax loss carry forwards begin to expire in 2012, unless previously utilized. In addition, the Company has Federal and California research and development tax credit carry forwards of $9.1 million and $5.5 million, respectively. The Federal research and development credit carry forwards will begin to expire in 2010 unless previously utilized. The California research and development credit carry forwards carry forward indefinitely. The Company has California manufacturing investment credit carry forwards of $34,000. The California manufacturing investment credit carry forward began to expire in 2008.

 

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Table of Contents
These excerpts taken from the ISTA 10-K filed Feb 23, 2009.

Income Taxes

We record a full valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

Income Taxes

We record a full valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

Income Taxes

We record a full valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

6. Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption. As a result of the implementation of FIN 48, the Company did not recognize an increase in the liability for unrecognized tax benefits. As of December 31, 2008, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

The Company’s practice 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 the Company’s balance sheets at December 31, 2008 and at December 31, 2007, and has not recognized interest and/or penalties in the statement of operations for the year ended December 31, 2008.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 and forward are subject to examination by the United States and state tax authorities due to the carry forward of unutilized net operating losses and R&D credits carried forward.

At December 31, 2008, the Company had net deferred tax assets of $46.2 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and research and development credit carry forwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to determine the limitation of the net operating loss and research and development credit carry forwards. Until this analysis has been performed the Company has removed the deferred tax assets for net operating losses of

 

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Table of Contents

ISTA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

$66.6 million and research and development credits of $14.6 million generated through 2008 from its deferred tax asset schedule, and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN 48. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

At December 31, 2008, the Company had Federal and state income tax net operating loss carry forwards of approximately $178.9 million and $102.7 million, respectively. Federal tax loss carryforwards continue to expire in 2008 unless previously utilized. California tax loss carry forwards begin to expire in 2012, unless previously utilized. In addition, the Company has Federal and California research and development tax credit carry forwards of $9.1 million and $5.5 million, respectively. The Federal research and development credit carry forwards will begin to expire in 2010 unless previously utilized. The California research and development credit carry forwards carry forward indefinitely. The Company has California manufacturing investment credit carry forwards of $34,000. The California manufacturing investment credit carry forward has begun to expire in 2008.

Significant components of the Company’s deferred tax assets as of December 31, 2008 and 2007 are listed below. A valuation allowance of $46.2 million and $37.5 million at December 31, 2008 and 2007, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain. Amounts are shown in thousands as of December 31, of the respective years:

 

     December 31,  
     2008     2007  

Deferred tax asset:

    

Net operating loss carryforwards

   $ —       $ —    

Tax credits

     —         —    

Capitalized research and development

     39,082,000       31,407,000  

Stock based compensation

     3,497,000       2,949,000  

Deferred revenue

     1,215,000       1,359,000  

Other, net

     2,379,000       1,821,000  
                

Total deferred tax asset

     46,173,000       37,536,000  

Valuation allowance for deferred tax assets

     (46,173,000 )     (37,536,000 )
                
   $ —       $ —    
                

A portion of the net operating loss carry forwards as of December 31, 2008 include amounts related to stock option deductions. Under FAS 123R, any excess tax benefits from share-based compensation are only realized when income taxes payable is reduced, with the corresponding credit posted to Additional Paid In Capital.

6. Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption. As a result of the implementation of FIN 48, the Company did not recognize an increase in the liability for unrecognized tax benefits. As of December 31, 2008, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

The Company’s practice 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 the Company’s balance sheets at December 31, 2008 and at December 31, 2007, and has not recognized interest and/or penalties in the statement of operations for the year ended December 31, 2008.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 and forward are subject to examination by the United States and state tax authorities due to the carry forward of unutilized net operating losses and R&D credits carried forward.

At December 31, 2008, the Company had net deferred tax assets of $46.2 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and research and development credit carry forwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to determine the limitation of the net operating loss and research and development credit carry forwards. Until this analysis has been performed the Company has removed the deferred tax assets for net operating losses of

 

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Table of Contents

ISTA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

$66.6 million and research and development credits of $14.6 million generated through 2008 from its deferred tax asset schedule, and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN 48. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

At December 31, 2008, the Company had Federal and state income tax net operating loss carry forwards of approximately $178.9 million and $102.7 million, respectively. Federal tax loss carryforwards continue to expire in 2008 unless previously utilized. California tax loss carry forwards begin to expire in 2012, unless previously utilized. In addition, the Company has Federal and California research and development tax credit carry forwards of $9.1 million and $5.5 million, respectively. The Federal research and development credit carry forwards will begin to expire in 2010 unless previously utilized. The California research and development credit carry forwards carry forward indefinitely. The Company has California manufacturing investment credit carry forwards of $34,000. The California manufacturing investment credit carry forward has begun to expire in 2008.

Significant components of the Company’s deferred tax assets as of December 31, 2008 and 2007 are listed below. A valuation allowance of $46.2 million and $37.5 million at December 31, 2008 and 2007, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain. Amounts are shown in thousands as of December 31, of the respective years:

 

     December 31,  
     2008     2007  

Deferred tax asset:

    

Net operating loss carryforwards

   $ —       $ —    

Tax credits

     —         —    

Capitalized research and development

     39,082,000       31,407,000  

Stock based compensation

     3,497,000       2,949,000  

Deferred revenue

     1,215,000       1,359,000  

Other, net

     2,379,000       1,821,000  
                

Total deferred tax asset

     46,173,000       37,536,000  

Valuation allowance for deferred tax assets

     (46,173,000 )     (37,536,000 )
                
   $ —       $ —    
                

A portion of the net operating loss carry forwards as of December 31, 2008 include amounts related to stock option deductions. Under FAS 123R, any excess tax benefits from share-based compensation are only realized when income taxes payable is reduced, with the corresponding credit posted to Additional Paid In Capital.

6. Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption. As a result of the implementation of FIN 48, the Company did not recognize an increase in the liability for unrecognized tax benefits. As of December 31, 2008, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

The Company’s practice 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 the Company’s balance sheets at December 31, 2008 and at December 31, 2007, and has not recognized interest and/or penalties in the statement of operations for the year ended December 31, 2008.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 and forward are subject to examination by the United States and state tax authorities due to the carry forward of unutilized net operating losses and R&D credits carried forward.

At December 31, 2008, the Company had net deferred tax assets of $46.2 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and research and development credit carry forwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to determine the limitation of the net operating loss and research and development credit carry forwards. Until this analysis has been performed the Company has removed the deferred tax assets for net operating losses of

 

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Table of Contents

ISTA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

$66.6 million and research and development credits of $14.6 million generated through 2008 from its deferred tax asset schedule, and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN 48. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

At December 31, 2008, the Company had Federal and state income tax net operating loss carry forwards of approximately $178.9 million and $102.7 million, respectively. Federal tax loss carryforwards continue to expire in 2008 unless previously utilized. California tax loss carry forwards begin to expire in 2012, unless previously utilized. In addition, the Company has Federal and California research and development tax credit carry forwards of $9.1 million and $5.5 million, respectively. The Federal research and development credit carry forwards will begin to expire in 2010 unless previously utilized. The California research and development credit carry forwards carry forward indefinitely. The Company has California manufacturing investment credit carry forwards of $34,000. The California manufacturing investment credit carry forward has begun to expire in 2008.

Significant components of the Company’s deferred tax assets as of December 31, 2008 and 2007 are listed below. A valuation allowance of $46.2 million and $37.5 million at December 31, 2008 and 2007, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain. Amounts are shown in thousands as of December 31, of the respective years:

 

     December 31,  
     2008     2007  

Deferred tax asset:

    

Net operating loss carryforwards

   $ —       $ —    

Tax credits

     —         —    

Capitalized research and development

     39,082,000       31,407,000  

Stock based compensation

     3,497,000       2,949,000  

Deferred revenue

     1,215,000       1,359,000  

Other, net

     2,379,000       1,821,000  
                

Total deferred tax asset

     46,173,000       37,536,000  

Valuation allowance for deferred tax assets

     (46,173,000 )     (37,536,000 )
                
   $ —       $ —    
                

A portion of the net operating loss carry forwards as of December 31, 2008 include amounts related to stock option deductions. Under FAS 123R, any excess tax benefits from share-based compensation are only realized when income taxes payable is reduced, with the corresponding credit posted to Additional Paid In Capital.

6. Income Taxes

FACE="Times New Roman" SIZE="2">The Company adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption. As a result of the implementation of FIN 48, the Company did not recognize an
increase in the liability for unrecognized tax benefits. As of December 31, 2008, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The Company’s practice 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 the Company’s balance sheets at December 31, 2008 and at December 31, 2007, and has not recognized interest and/or penalties in the statement of operations for the year ended December 31, 2008.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 and forward
are subject to examination by the United States and state tax authorities due to the carry forward of unutilized net operating losses and R&D credits carried forward.

FACE="Times New Roman" SIZE="2">At December 31, 2008, the Company had net deferred tax assets of $46.2 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full
valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and research and development credit carry forwards to offset future taxable income may be subject to
an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to
determine the limitation of the net operating loss and research and development credit carry forwards. Until this analysis has been performed the Company has removed the deferred tax assets for net operating losses of

 


F-28







Table of Contents



ISTA PHARMACEUTICALS, INC.

ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



$66.6 million and research and development credits of $14.6 million generated through 2008 from its deferred tax asset schedule, and has recorded a
corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN 48. Due to the existence of the valuation allowance, future changes in the Company’s
unrecognized tax benefits will not impact the Company’s effective tax rate.

At December 31, 2008, the Company had Federal
and state income tax net operating loss carry forwards of approximately $178.9 million and $102.7 million, respectively. Federal tax loss carryforwards continue to expire in 2008 unless previously utilized. California tax loss carry forwards
begin to expire in 2012, unless previously utilized. In addition, the Company has Federal and California research and development tax credit carry forwards of $9.1 million and $5.5 million, respectively. The Federal research and
development credit carry forwards will begin to expire in 2010 unless previously utilized. The California research and development credit carry forwards carry forward indefinitely. The Company has California manufacturing investment credit carry
forwards of $34,000. The California manufacturing investment credit carry forward has begun to expire in 2008.

Significant components of
the Company’s deferred tax assets as of December 31, 2008 and 2007 are listed below. A valuation allowance of $46.2 million and $37.5 million at December 31, 2008 and 2007, respectively, has been recognized to offset the net
deferred tax assets as realization of such assets is uncertain. Amounts are shown in thousands as of December 31, of the respective years:

 





























































































































































   December 31, 
   2008  2007 

Deferred tax asset:

   

Net operating loss carryforwards

  $—    $—   

Tax credits

   —     —   

Capitalized research and development

   39,082,000   31,407,000 

Stock based compensation

   3,497,000   2,949,000 

Deferred revenue

   1,215,000   1,359,000 

Other, net

   2,379,000   1,821,000 
         

Total deferred tax asset

   46,173,000   37,536,000 

Valuation allowance for deferred tax assets

   (46,173,000)  (37,536,000)
         
  $—    $—   
         

A portion of the net operating loss carry forwards as of December 31, 2008 include amounts
related to stock option deductions. Under FAS 123R, any excess tax benefits from share-based compensation are only realized when income taxes payable is reduced, with the corresponding credit posted to Additional Paid In Capital.

STYLE="margin-top:18px;margin-bottom:0px">7. Employee Benefit Plan

The Company has a 401(k)
Savings Plan covering substantially all employees that have been employed for one month and meet certain age requirements. Employees may contribute up to 92% of their compensation per year (subject to a maximum limit by federal tax law). Beginning
in 2007, the Company provided matching contributions equal to 25% of the first 3% of contributed salary. The Company did not make matching contributions prior to January 1, 2007. Employer contributions were $210,000 and $96,000 for 2008 and
2007, respectively.

6. Income Taxes

FACE="Times New Roman" SIZE="2">The Company adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption. As a result of the implementation of FIN 48, the Company did not recognize an
increase in the liability for unrecognized tax benefits. As of December 31, 2008, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The Company’s practice 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 the Company’s balance sheets at December 31, 2008 and at December 31, 2007, and has not recognized interest and/or penalties in the statement of operations for the year ended December 31, 2008.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 and forward
are subject to examination by the United States and state tax authorities due to the carry forward of unutilized net operating losses and R&D credits carried forward.

FACE="Times New Roman" SIZE="2">At December 31, 2008, the Company had net deferred tax assets of $46.2 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full
valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and research and development credit carry forwards to offset future taxable income may be subject to
an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to
determine the limitation of the net operating loss and research and development credit carry forwards. Until this analysis has been performed the Company has removed the deferred tax assets for net operating losses of

 


F-28







Table of Contents



ISTA PHARMACEUTICALS, INC.

ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



$66.6 million and research and development credits of $14.6 million generated through 2008 from its deferred tax asset schedule, and has recorded a
corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN 48. Due to the existence of the valuation allowance, future changes in the Company’s
unrecognized tax benefits will not impact the Company’s effective tax rate.

At December 31, 2008, the Company had Federal
and state income tax net operating loss carry forwards of approximately $178.9 million and $102.7 million, respectively. Federal tax loss carryforwards continue to expire in 2008 unless previously utilized. California tax loss carry forwards
begin to expire in 2012, unless previously utilized. In addition, the Company has Federal and California research and development tax credit carry forwards of $9.1 million and $5.5 million, respectively. The Federal research and
development credit carry forwards will begin to expire in 2010 unless previously utilized. The California research and development credit carry forwards carry forward indefinitely. The Company has California manufacturing investment credit carry
forwards of $34,000. The California manufacturing investment credit carry forward has begun to expire in 2008.

Significant components of
the Company’s deferred tax assets as of December 31, 2008 and 2007 are listed below. A valuation allowance of $46.2 million and $37.5 million at December 31, 2008 and 2007, respectively, has been recognized to offset the net
deferred tax assets as realization of such assets is uncertain. Amounts are shown in thousands as of December 31, of the respective years:

 





























































































































































   December 31, 
   2008  2007 

Deferred tax asset:

   

Net operating loss carryforwards

  $—    $—   

Tax credits

   —     —   

Capitalized research and development

   39,082,000   31,407,000 

Stock based compensation

   3,497,000   2,949,000 

Deferred revenue

   1,215,000   1,359,000 

Other, net

   2,379,000   1,821,000 
         

Total deferred tax asset

   46,173,000   37,536,000 

Valuation allowance for deferred tax assets

   (46,173,000)  (37,536,000)
         
  $—    $—   
         

A portion of the net operating loss carry forwards as of December 31, 2008 include amounts
related to stock option deductions. Under FAS 123R, any excess tax benefits from share-based compensation are only realized when income taxes payable is reduced, with the corresponding credit posted to Additional Paid In Capital.

STYLE="margin-top:18px;margin-bottom:0px">7. Employee Benefit Plan

The Company has a 401(k)
Savings Plan covering substantially all employees that have been employed for one month and meet certain age requirements. Employees may contribute up to 92% of their compensation per year (subject to a maximum limit by federal tax law). Beginning
in 2007, the Company provided matching contributions equal to 25% of the first 3% of contributed salary. The Company did not make matching contributions prior to January 1, 2007. Employer contributions were $210,000 and $96,000 for 2008 and
2007, respectively.

6. Income Taxes

FACE="Times New Roman" SIZE="2">The Company adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption. As a result of the implementation of FIN 48, the Company did not recognize an
increase in the liability for unrecognized tax benefits. As of December 31, 2008, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The Company’s practice 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 the Company’s balance sheets at December 31, 2008 and at December 31, 2007, and has not recognized interest and/or penalties in the statement of operations for the year ended December 31, 2008.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years for 1994 and forward
are subject to examination by the United States and state tax authorities due to the carry forward of unutilized net operating losses and R&D credits carried forward.

FACE="Times New Roman" SIZE="2">At December 31, 2008, the Company had net deferred tax assets of $46.2 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full
valuation has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss and research and development credit carry forwards to offset future taxable income may be subject to
an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to
determine the limitation of the net operating loss and research and development credit carry forwards. Until this analysis has been performed the Company has removed the deferred tax assets for net operating losses of

 


F-28







Table of Contents



ISTA PHARMACEUTICALS, INC.

ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



$66.6 million and research and development credits of $14.6 million generated through 2008 from its deferred tax asset schedule, and has recorded a
corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits under FIN 48. Due to the existence of the valuation allowance, future changes in the Company’s
unrecognized tax benefits will not impact the Company’s effective tax rate.

At December 31, 2008, the Company had Federal
and state income tax net operating loss carry forwards of approximately $178.9 million and $102.7 million, respectively. Federal tax loss carryforwards continue to expire in 2008 unless previously utilized. California tax loss carry forwards
begin to expire in 2012, unless previously utilized. In addition, the Company has Federal and California research and development tax credit carry forwards of $9.1 million and $5.5 million, respectively. The Federal research and
development credit carry forwards will begin to expire in 2010 unless previously utilized. The California research and development credit carry forwards carry forward indefinitely. The Company has California manufacturing investment credit carry
forwards of $34,000. The California manufacturing investment credit carry forward has begun to expire in 2008.

Significant components of
the Company’s deferred tax assets as of December 31, 2008 and 2007 are listed below. A valuation allowance of $46.2 million and $37.5 million at December 31, 2008 and 2007, respectively, has been recognized to offset the net
deferred tax assets as realization of such assets is uncertain. Amounts are shown in thousands as of December 31, of the respective years:

 





























































































































































   December 31, 
   2008  2007 

Deferred tax asset:

   

Net operating loss carryforwards

  $—    $—   

Tax credits

   —     —   

Capitalized research and development

   39,082,000   31,407,000 

Stock based compensation

   3,497,000   2,949,000 

Deferred revenue

   1,215,000   1,359,000 

Other, net

   2,379,000   1,821,000 
         

Total deferred tax asset

   46,173,000   37,536,000 

Valuation allowance for deferred tax assets

   (46,173,000)  (37,536,000)
         
  $—    $—   
         

A portion of the net operating loss carry forwards as of December 31, 2008 include amounts
related to stock option deductions. Under FAS 123R, any excess tax benefits from share-based compensation are only realized when income taxes payable is reduced, with the corresponding credit posted to Additional Paid In Capital.

STYLE="margin-top:18px;margin-bottom:0px">7. Employee Benefit Plan

The Company has a 401(k)
Savings Plan covering substantially all employees that have been employed for one month and meet certain age requirements. Employees may contribute up to 92% of their compensation per year (subject to a maximum limit by federal tax law). Beginning
in 2007, the Company provided matching contributions equal to 25% of the first 3% of contributed salary. The Company did not make matching contributions prior to January 1, 2007. Employer contributions were $210,000 and $96,000 for 2008 and
2007, respectively.

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