Menlo Therapeutics Inc.

Income Taxes

The Company did not record a provision or benefit for income taxes during the years ended December 31, 2017, 2016 and 2015.

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:



	Year Ended December 31,
	2017		2016		2015
Statutory Rate	34	%	34	%	34	%
State Tax	1	%	—	%	6	%
Permanent Differences	(3	)%	—	%	—	%
Other	(1	)%	—	%	—	%
General Business Credits	4	%	2	%	1	%
Change in Valuation Allowance	(11	)%	(36	)%	(41	)%
Tax Reform - Tax Rate Change	(24	)%	—		—
Total	—	%	—	%	—	%

The tax effect of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows (in thousands):




	Year Ended December 31,
	2017			2016			2015
Deferred Tax Assets
NOLs	$	10,404		$	10,458		$	5,992
Depreciation and Amortization	226			328			362
Stock‑Based Compensation	274			161			34
Research & Development Credits	2,063			586			233
Deferred Revenue	1,791			—			—
Other Accruals	235			98			—
Total Deferred Tax Assets	$	14,993		$	11,631		$	6,621
Valuation Allowance	(14,993		)	(11,631		)	(6,621		)
Net Deferred Tax Assets	$	—		$	—		$	—

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net change in the total valuation allowance for the years ended December 31, 2017, 2016 and 2015 was an increase of approximately $3.4 million, $5.0 million, and $1.9 million, respectively.

As of December 31, 2017 and 2016, the Company had net operating loss carryforwards for federal income tax purposes of $44.3 million and $28.2 million, respectively which expire beginning in the year 2031 and federal research and development tax credits of $2.1 million and $0.5 million, respectively which expire beginning in the year 2031.

As of December 31, 2017 and 2016, the Company had net operating loss carryforwards for state income tax purposes of $15.0 million and $15.0 million, respectively which expire beginning in the year 2031 and state research and development tax credits of $0.9 million and $0.4 million, respectively which do not expire.

Federal and state tax laws impose substantial restrictions on the utilization of the net operating loss and credit carryforwards in the event of an ownership change as defined in Section 382 of the Internal Revenue Code. Accordingly, the Company’s ability to utilize these carryforwards may be limited as a result of such ownership change. Such a limitation could result in the expiration of carryforwards before they are utilized.

The Company has adopted ASC 740-10, Accounting for Uncertainty in Income Taxes, that prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in the Company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the provision for income taxes in the period that such determination is made. As of December 31, 2017 the Company had no accrued interest and penalties related to uncertain tax positions.

The Company filed US and California tax returns with varying statues of limitations. The federal and California tax years from 2011 to 2017 remain open to examination due to the carryover of unused net operating losses and tax credits. The Company does not expect any material changes to the estimated amount of liability associated with its uncertain tax positions within the next 12 months.

Uncertain Tax Positions

The following table summarizes the activity related to unrecognized tax benefits (in thousands):




	For the year ended December 31,
	2017		2016		2015
Tax Benefits:
Unrecognized Benefit ‑ beginning of period	$	229	$	93	$	73
Gross Increases(Decreases) ‑ prior period tax positions	59		—		—
Gross Increases(Decreases) ‑ current period tax positions	515		136		20
Total Unrecognized Benefit ‑ end of period	$	803	$	229	$	93

Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% (the “Rate Reduction”) effective for tax years beginning after December 31, 2017. The Company reduced deferred tax assets at December 31, 2017 for the effect of the Rate Reduction. The Rate Reduction did not impact the Company's provision for income taxes for 2017 due to the full valuation allowance on deferred tax assets.

Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company determined that $7.0 million of the reduction in deferred tax assets resulting from Rate Reduction was both provisional and a reasonable estimate at December 31, 2017. Additionally, the Company is still in the process of analyzing certain provisions of the Act including the application of new executive compensation limitation provisions under Internal Revenue Section 162(m). These items are subject to revisions from further analysis of the Tax Act and interpretation of any additional guidance issued by the U.S. Treasury Department, IRS, FASB, and other standard-setting and regulatory bodies.