The income tax provision (benefit) for the years ended December 31, 2017 and 2016 consisted of the following:

 

		December 31,
		2017			2016
		(in thousands)
U.S. Federal:
Current		$	-		$	-
Deferred			32,579			(2,971)
State and local:
Current			-			-
Deferred			1,059			(124)
			33,638			(3,095)
Change in valuation allowance			(33,638)			3,095
Income tax provision		$	-		$	-

 

The tax effects of temporary differences that give rise to the Company’s deferred tax asset as of December 31, 2017 and 2016 consisted of the following:

 

		December 31,
		2017			2016
		(In thousands)
Deferred tax assets:
Oil and natural gas properties and equipment		$	-		$	5,156
Net operating loss carry-forward			15,653			42,017
Share based compensation			784			2,135
Abandonment obligation			212			445
Derivative instruments			191			-
Accrued liabilities			43			-
Debt conversion costs			-			482
Other			9			28
Total deferred tax asset			16,892			50,263
Valuation allowance			(16,624)			(50,263)
Deferred tax asset, net of valuation allowance		$	268		$	-
Deferred tax liabilities:
Oil and natural gas properties and equipment		$	268		$	-
Total deferred tax liability			268			-
Net deferred tax asset (liability)		$	-		$	-

 

Reconciliation of the Company’s effective tax rate to the expected U.S. federal tax rate is:

 

		Year Ended December 31,
		2017			2016
Effective federal tax rate			34.00	%		34.00	%
State tax rate, net of federal benefit			1.11	%		1.42	%
Effect of the Tax Cuts and Jobs Act			-11.22	%		-	%
Change in fair value derivative liability			-2.59	%		-1.32	%
Debt discount amortization			-3.51	%		-4.11	%
Share based compensation differences and forfeitures			0.91	%		-2.28	%
Change in rate			-0.05	%		-5.90	%
Other permanent differences			-4.61	%		-12.29	%
NOL true-up - §382 limitation			-47.22	%		-0.00	%
Other			-6.47	%		-0.10	%
Valuation allowance			39.65	%		-9.42	%
Net			-	%		-	%

 

As of December 31, 2017 and 2016, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $70.1 million and $118.6 million, respectively, available to offset future taxable income. To the extent not utilized, the net operating loss carry-forwards as of December 31, 2017 will expire beginning in 2027 through 2036. A full Section 382 analysis was prepared in 2017 resulting in a true-up of the Company’s net operating losses subject to limitation under Section 382 from $118.6 million to $9.1 million as of December 31, 2016. The net operating loss of $70.1 million as of December 31, 2017 could be subject to Section 382 limitation due to potential ownership changes of more than 50% which may have occurred during the current tax year.

 

In assessing the need for a valuation allowance on the Company’s deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon whether future book income is sufficient to reverse existing temporary differences that give rise to deferred tax assets, as well as whether future taxable income is sufficient to utilize net operating loss and credit carryforwards. Assessing the need for, or the sufficiency of, a valuation allowance requires the evaluation of all available evidence, both positive and negative. Negative evidence considered by management includes cumulative book and tax losses in recent years, no taxable income in available carryback years, and no tax planning strategies contemplated to realize the valued deferred tax assets.

 

As of December 31, 2017, and 2016, management assessed the available positive and negative evidence to estimate if sufficient future taxable income would be generated to use the Company’s deferred tax assets and determined that it is not more-likely-than-not that the deferred tax assets would be realized in the near future. Therefore, the Company recorded a full valuation allowance of approximately $16.6 million and $50.0 million on its deferred tax assets as of December 31, 2017 and 2016, respectively.

 

The New Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code applicable to certain items in 2017 as well as those applicable to 2018 and subsequent years.

 

ASC 740 requires the recognition of the tax effects of the Act for annual periods that include December 22, 2017. At December 31, 2017, the Company has made reasonable estimates of the effects on its existing deferred tax balances. The Company has remeasured certain federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally twenty one percent. The provisional amount recognized related to the remeasurement of its federal deferred tax balance was $9.5 million, which was subject to a valuation allowance at December 31, 2017.

 

The Company will continue to analyze the Act and future IRS regulations, refine its calculations, gain a more thorough understanding of how individual states are implementing this new law and evaluate other provisions of the tax reform. This further analysis could potentially affect the measurement of deferred tax balances or potentially give rise to new deferred tax amounts.