Income Taxes
The income tax provision is comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | Four Months Ended December 31, 2015 | | Year Ended August 31, 2015 |
| 2017 | | 2016 | | |
Current: | | | | | | | |
Federal | $ | (99 | ) | | $ | 106 |
| | $ | — |
| | $ | (4 | ) |
State | — |
| | — |
| | — |
| | (111 | ) |
Total current income tax expense (benefit) | (99 | ) | | 106 |
| | — |
| | (115 | ) |
| | | | | | | |
Deferred: | | | | | | | |
Federal | 48,631 |
| | (74,099 | ) | | (45,332 | ) | | 10,820 |
|
State | 4,371 |
| | (6,651 | ) | | (4,074 | ) | | 972 |
|
Total deferred income tax (benefit) expense | 53,002 |
| | (80,750 | ) | | (49,406 | ) | | 11,792 |
|
| | | | | | | |
Valuation allowance | (53,002 | ) | | 80,750 |
| | 39,399 |
| | — |
|
Income tax expense (benefit) | $ | (99 | ) | | $ | 106 |
| | $ | (10,007 | ) | | $ | 11,677 |
|
A reconciliation of expected federal income taxes on income from continuing operations at statutory rates with the expense (benefit) for income taxes is presented in the following table (in thousands):
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | Four Months Ended December 31, 2015 | | Year Ended August 31, 2015 |
| 2017 | | 2016 | | |
| | | | | | | |
Federal income tax at statutory rate | $ | 48,410 |
| | $ | (74,489 | ) | | $ | (45,200 | ) | | $ | 10,105 |
|
State income taxes, net of federal tax | 4,371 |
| | (6,685 | ) | | (4,062 | ) | | 908 |
|
Statutory depletion | (159 | ) | | (287 | ) | | (150 | ) | | (451 | ) |
Stock-based compensation | 50 |
| | 383 |
| | — |
| | 92 |
|
Non-deductible compensation | — |
| | — |
| | — |
| | 850 |
|
Impact of tax reform, net of valuation allowance | (99 | ) | | | | | | |
Valuation allowance | (53,002 | ) | | 80,750 |
| | 39,399 |
| | — |
|
Other | 330 |
| | 434 |
| | 6 |
| | 173 |
|
Income tax expense (benefit) | $ | (99 | ) | | $ | 106 |
| | $ | (10,007 | ) | | $ | 11,677 |
|
Effective rate expressed as a percentage | — | % | | — | % | | 8 | % | | 39 | % |
On December 22, 2017, Congress signed Public Law No. 115-97, commonly referred to as the Tax Cut and Jobs Act of 2017 (“TCJA”). The passage of this legislation resulted in the change in the U.S. statutory rate from 35% to 21% beginning in January of 2018, the elimination of the corporate alternative minimum tax (“AMT”), the acceleration of depreciation for US tax purposes, limitations on deductibility of interest expense, the elimination of net operating loss carrybacks, and limitations on the use of future losses. In accordance with ASC 740, Income Taxes, the impact of a change in tax law is recorded in the period of enactment. Consequently, the Company has recorded a decrease to its net deferred tax assets of $24.0 million with a corresponding net adjustment to the valuation allowance for the year ended December 31, 2017. The Company also eliminated the $0.1 million deferred tax asset for its AMT credits and recorded a non-current tax receivable with a corresponding benefit to current income taxes. Based on the Company's current interpretation and subject to the release of the related regulations and any future interpretive guidance, the Company believes the effects of the change in tax law incorporated herein are substantially complete. As a result of other changes introduced by the TCJA, starting with compensation paid in 2018, Section 162(m) may limit us from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers for any fiscal year. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million fiscal year deduction limit if paid to a covered executive. Additional information that may affect our income tax accounts and disclosures would include further clarification and guidance on how the Internal Revenue Service will implement tax reform, including guidance with respect to 100% bonus depreciation on self-constructed assets and Section 162(m), further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state income tax returns, completion of our 2017 tax return filings, and the potential for additional guidance from the SEC or the FASB related to tax reform.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, projected future taxable income, and tax planning strategies in making this assessment. Judgment is required in considering the relative weight of negative and positive evidence. The Company continues to monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits, and other deferred tax assets will be utilized prior to their expiration. As a result, it may be determined that a deferred tax asset valuation allowance should be established or released. Any increases or decreases in a deferred tax asset valuation allowance would impact net income through offsetting changes in income tax expense.
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at each of the period ends is presented in the following table (in thousands):
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets (liabilities): | | | |
Net operating loss carryforward | $ | 43,283 |
| | $ | 47,462 |
|
Stock-based compensation | 5,237 |
| | 5,576 |
|
Basis of oil and gas properties | (5,011 | ) | | 62,707 |
|
Statutory depletion | 2,795 |
| | 4,028 |
|
Unrealized loss on commodity derivative | 1,939 |
| | 1,334 |
|
Other | (615 | ) | | (958 | ) |
| 47,628 |
| | 120,149 |
|
Valuation allowance on tax assets | (47,628 | ) | | (120,149 | ) |
Deferred tax asset (liability), net | $ | — |
| | $ | — |
|
In connection with ASU 2016-09, deferred tax assets were increased by $4.5 million related to excess benefit net operating loss carryforwards along with a $4.5 million offsetting increase in the Company's valuation allowance. The impact of the adjustments netted to zero within retained earnings.
At December 31, 2017, the Company has U.S. Federal and state net operating loss carryforward of approximately $175.5 million that could be utilized to offset taxable income of future years. These net operating loss carryforwards will expire in various years beginning in 2025 with substantially all of the carryforwards expiring beginning in 2031.
At each reporting period, management considers the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, projected future taxable income, and tax planning strategies in making an assessment as to the future utilization of deferred tax assets. During the year ended December 31, 2017, the Company recognized a full valuation allowance on its net deferred tax assets. This decision was based on the fact that for the preceding three-year period, the Company has reported cumulative net losses.
The ability of the Company to utilize its NOL carryforwards to reduce future taxable income is subject to various limitations under the Internal Revenue Code of 1986, as amended (the “Code”). The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the purchase or sale of stock by 5% shareholders and the offering of stock by the Company during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of the Company. In the event of an ownership change, Section 382 of the Code imposes an annual limitation on the amount of a Company’s taxable income that can be offset by these carryforwards.
The Company underwent an ownership change as defined in Section 382 of the Internal Revenue Code on December 31, 2016, as a result of our issuance of common stock. The amount of our taxable income for tax years ending after our ownership change, which may be offset by NOL carryovers from pre-change years, will be subject to an annual limitation, known as a Section 382 limitation. The Section 382 limitation is based on the value of our stock immediately before the ownership change multiplied by the long-term tax exempt rate in effect at the time of the ownership change, increased by built in gains recognized during the 5-year period beginning on the ownership change date. The identified change of ownership is not anticipated to restrict the Company's ability to utilize its NOLs.
As of December 31, 2017, the Company had no unrecognized tax benefits. The Company believes that there are no new items, nor changes in facts or judgments that should impact the Company’s tax position. Given the substantial NOL carryforwards at both the federal and state levels, it is anticipated that any changes resulting from a tax examination would simply adjust the carryforwards, and would not result in significant interest expense or penalties. The Company's federal and state tax returns filed since August 31, 2014 and August 31, 2013, respectively, remain subject to examination by tax authorities.