Note 15.    Income Taxes

No provision for income taxes was recorded for the years ended December 31, 2017, 2016 and 2015. The Company has incurred net operating losses for all the periods presented. The Company has not reflected any benefit of such net operating loss carryforwards in the consolidated financial statements. The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets.

The following table presents domestic and foreign components of net loss for the periods presented (in thousands):

 

The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows:

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“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 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

The corporate tax rate reduction to 21% under the Tax Act is effective January 1, 2018. Consequently, the Company has recorded a decrease in net deferred tax assets of $11.5 million, with a corresponding adjustment to the valuation allowance of $11.5 million, for the year ended December 31, 2017. The state deferred tax effect on federal deferred tax assets has been calculated using 79% rather than the previous 66% federal benefit. The increase in deferred tax assets has been offset against an increase to the valuation allowance.

The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Since Protagonist Pty Limited, the Company’s only foreign subsidiary, has a cumulative deficit in E&P, there is no Transition Tax to be included in the December 31, 2017 tax provision.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the tax effect of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act’s enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, the Company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that the Company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, the Company must record a provisional estimate in its consolidated financial statements. If the Company cannot determine a provisional estimate to be included in its consolidated financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The amounts of the tax effects related to the Tax Act described in the paragraphs above represent the Company’s reasonable estimates and are provisional amounts within the meaning of SAB 118. The provisional transition tax at zero has been determined based on the cumulative deficit foreign E&P as of the relevant measurement date. Any change to such estimate during the measurement period should have no material impact on the Company’s financial statements. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the Tax Act. In subsequent periods, but within the measurement period, the Company will analyze that guidance and other necessary information to refine its estimates and complete its accounting for the tax effects of the Tax Act as necessary.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as a period cost are both acceptable methods subject to an accounting policy election. Effective for the quarter ending March 31, 2018, the Company will elect to treat any potential GILTI inclusions as a period cost as the Company is not projecting any material impact from GILTI inclusions and any deferred taxes related to any inclusion would be immaterial.

The components of the deferred tax assets are as follows (in thousands):

 

Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has established a valuation allowance to offset deferred tax assets as of December 31, 2017 and 2016 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The valuation allowance increased by approximately $1.9 million, $13.4 million and $3.0 million during the years ended December 31, 2017, 2016 and 2015, respectively. The current year change in the valuation allowance is mainly related to the increase in net operating loss carryforwards generated during the year and offset by a decrease in the deferred tax assets related to the reduction of the U.S. corporate income tax rate as provided in the Tax Act. The increase in valuation allowance in the prior years in mainly related to the increase in net operating loss carryforwards incurred during the respective taxable years.

At December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes of approximately $79.2 million which are available to offset future taxable income, if any, through 2033 and net operating loss carryforwards for state income tax purposes of approximately $68.0 million which are available to offset future taxable income, if any, through 2033.

At December 31, 2017 the Company also had accumulated Australian tax losses of $10.4 million available for carry forward against future earnings which, under relevant tax laws, do not expire but may be limited under certain circumstances.

As of December 31, 2017, the Company also had $2.4 million of federal and $1.3 million of state research and development tax credit carryforwards available to reduce future income taxes. The federal research and development tax credits will begin to expire in 2035, if not utilized. The state research and development tax credits have no expiration date.

Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. As a result of such ownership changes, the Company’s ability to realize the potential future benefit of tax losses and tax credits that existed at the time of the ownership change may be significantly reduced. Based on a review of the Company’s equity transactions since inception, the Company believes a portion of its net operating loss carryforwards and credit carryforwards may be limited due to an equity financing which occurred in 2015.

It is the Company’s policy to include penalties and interest expense related to income taxes as a component of other expense, as necessary.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

The Company does not expect that its uncertain tax positions will materially change in the next twelve months. The reversal of the uncertain tax benefits would not impact the Company’s effective tax rate as the Company continues to maintain a full valuation allowance against its deferred tax assets.

The Company files income tax returns in the United States federal jurisdiction, the State of California and Australia. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. The Company’s tax returns for 2013 through 2017 remain open for examination due to the carryover of unused net operating losses and tax credits.