| 8. | INCOME TAXES |
No provision for federal and state income taxes has been recorded as the Company has incurred losses since inception for tax purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
In assessing the realizability of net deferred taxes in accordance with ASC 740, Income Taxes, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the weight of available evidence, primarily the incurrence of net losses since inception, anticipated net losses in the near future, reversals of existing temporary differences and expiration of various federal and state attributes, the Company does not consider it more likely than not that some or all of the net deferred taxes will be realized. Accordingly, a 100% valuation allowance has been applied against net deferred taxes.
As of December 31, 2017, the Company had Federal and State income tax net operating loss (“NOL”) carryforwards of approximately $62.8 million and $59.4 million, respectively, which will expire at various dates through 2037. As of December 31, 2017, the Company had Federal and State research and development tax credit carryforwards of approximately $1.8 million and $299,000, respectively, which will expire at various dates through 2037.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (Tax Act) was enacted into law making significant changes to the Internal Revenue Code. The main provision impacting the Company is the reduction in the U.S. statutory corporate tax rate to 21% for years beginning after December 31, 2017. On the same day, the SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, which provides guidance for companies that have not completed their accounting for the income tax effects of the Tax Act in the period of enactment, allowing for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. Based on the reduction in the corporate tax rate, we revalued our deferred tax assets and liabilities which resulted in an $8.9 million reduction in the deferred tax asset and the corresponding valuation allowance as of December 31, 2017. The net impact of the change in tax rate was zero due to the Company’s full valuation allowance.
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows:
| 12/31/2017 | 12/31/2016 | |||||||
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Deferred Tax Assets |
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Federal & State NOL carryforward |
$ | 16,935,101 | $ | 16,669,295 | ||||
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Federal & State R&D credit carryforward |
2,058,771 | 1,271,891 | ||||||
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Intangibles – net |
325,744 | 700,215 | ||||||
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Accounts payable and accrued expenses |
615,490 | 772,841 | ||||||
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Stock options |
2,197,983 | 2,399,666 | ||||||
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Fixed assets – net |
6,409 | 3,861 | ||||||
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Gross deferred tax assets |
22,139,498 | 21,817,769 | ||||||
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Valuation Allowance |
(22,123,292 | ) | (21,786,477 | ) | ||||
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Net Deferred Tax Assets |
16,206 | 31,292 | ||||||
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Deferred Tax Liabilities |
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Note Discounts |
(16,206 | ) | (31,292 | ) | ||||
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Gross deferred tax liabilities |
(16,206 | ) | (31,292 | ) | ||||
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TOTAL |
$ | — | $ | — | ||||
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The change in valuation allowance of $0.3 million from December 31, 2016 to December 31, 2017 is primarily driven by no tax benefit being recorded on the current year loss from operations offset by the impact of revaluing the Company’s deferred tax assets due to the Tax Act.
Under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) and certain other tax assets (tax attributes) to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). Transactions involving the Company’s common stock, even those outside the Company’s control, such as purchases or sales by investors, within the testing period could result in an ownership change. A limitation on the Company’s ability to utilize some or all of its NOLs or credits could have a material adverse effect on the Company’s results of operations and cash flows. Prior to 2016, Aldeyra had undergone two ownership changes and it is possible that additional ownership changes have occurred since. However, the Company’s management believes that it had sufficient “Built-In-Gain” to offset any Section 382 limitation generated by such ownership changes. Any future ownership changes, including those resulting from the Company’s recent or future financing activities, may cause the Company’s existing tax attributes to have additional limitations.
All tax years are open for examination by the taxing authorities for both federal and state purposes.
A reconciliation of the federal statutory tax rate of 34% to the Company’s effective income tax rates are as follows:
| Years ended December 31, |
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| 2017 | 2016 | |||||||
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Statutory tax rate |
34.00 | % | 34.00 | % | ||||
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State taxes, net of federal benefits |
5.37 | % | 5.24 | % | ||||
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Federal research and development credits |
3.00 | % | 2.84 | % | ||||
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Change in valuation allowance |
(1.51 | )% | (39.42 | )% | ||||
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Stock-based compensation |
(1.11 | )% | (2.63 | )% | ||||
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Federal rate change |
(39.75 | )% | 0.00 | % | ||||
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Other |
0.00 | % | (0.03 | )% | ||||
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Effective tax rate |
0.00 | % | 0.00 | % | ||||
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The Company accounts for uncertain tax positions pursuant to ASC 740 which prescribes a recognition threshold and measurement process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return. If the tax position meets this threshold, the benefit to be recognized is measured as the tax benefit having the highest likelihood of being realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes. Management is not aware of any uncertain tax positions.