MNKD 2017 Annual Report

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax assets as of December 31, 2017 and 2016, are as follows (in thousands): December 31, 2017 2016 Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . . . . . $ 507,235 $ 712,124 Research and development credits . . . . . . . . . . . . . 83,461 77,998 Capitalized research . . . . . . . . . . . . . . . . . . . . . . . . 1,016 5,117 Milestone Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,908 3,242 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 211 440 Loss on purchase commitment . . . . . . . . . . . . . . . . 23,654 36,775 Non-qualified stock option expense . . . . . . . . . . . . 7,004 17,331 Capitalized patent costs . . . . . . . . . . . . . . . . . . . . . 5,194 8,781 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 795 7,380 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,820 45,310 Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . 654,298 914,498 Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . (654,298) (914,498) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — The Company’s effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2017, 2016 and 2015: December 31, 2017 2016 2015 Federal tax benefit rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0% Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 (1.9) — Intercompany transfer of intellectual property . . . . . . . . . . . . . . . . — 0.9 (1.0) 2017 tax law changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (265.0) — — Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.0) — — Tax attribute expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.8) — — Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231.6 (34.0) (34.0) Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — % — % — % As of December 31, 2017 and 2016, management assessed the realizability of deferred tax assets. Management evaluated the need for an amount of any valuation allowance for deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes , wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of the Company’s deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 percent) that the Company may not realize the benefit of its deferred tax assets. In assessing the realization of the Company’s deferred tax assets, the Company considers all available evidence, both positive and negative. In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.” Based upon available evidence, it was concluded on a more-likely-than-not basis that all deferred tax assets were not realizable as of December 31, 2017. Accordingly, a valuation allowance of $654.3 million has 118