Income Taxes
The components of the income tax benefit are as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | — |
| | (1 | ) | | (518 | ) |
| $ | — |
| | $ | (1 | ) | | $ | (518 | ) |
Deferred: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 287 |
| | 203 |
| | 193 |
|
| $ | 287 |
| | $ | 203 |
| | $ | 193 |
|
Income tax expense (benefit) | $ | 287 |
| | $ | 202 |
| | $ | (325 | ) |
The following is a reconciliation of the income tax benefit that was recorded compared to taxes provided at the United States statutory rate: |
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Income tax benefit at the statutory federal rate (35%) | $ | (8,404 | ) | | $ | (7,691 | ) | | $ | (2,871 | ) |
Effect of federal rate change to ending deferred tax assets and liabilities | 7,994 |
| | — |
| | — |
|
Nondeductible expenses | 34 |
| | 23 |
| | 148 |
|
Valuation allowance | (1,377 | ) | | 7,063 |
| | 2,261 |
|
State taxes, net of federal benefit | 9 |
| | 204 |
| | (211 | ) |
Stock-based compensation and other | 2,031 |
| | 603 |
| | 348 |
|
Income tax expense (benefit) | $ | 287 |
| | $ | 202 |
| | $ | (325 | ) |
Effective tax rate | 1.2 | % | | 0.9 | % | | 4.0 | % |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows: |
| | | | | | | |
| December 31, |
(in thousands) | 2017 | | 2016 |
Deferred income tax assets | | | |
Bad debts | $ | 2 |
| | $ | 3 |
|
Stock-based compensation | 1,344 |
| | 3,050 |
|
Accrued liabilities and other | 29 |
| | 49 |
|
Deferred revenue | 180 |
| | 413 |
|
Net operating losses | 29,274 |
| | 31,130 |
|
Total net deferred tax assets | $ | 30,829 |
| | $ | 34,645 |
|
Deferred income tax liabilities | | | |
Prepaids | $ | (210 | ) | | $ | (378 | ) |
Property, plant and equipment | (18,906 | ) | | (20,890 | ) |
Total net deferred tax liabilities | $ | (19,116 | ) | | $ | (21,268 | ) |
Valuation allowance | $ | (12,396 | ) | | $ | (13,773 | ) |
Net deferred tax liability | $ | (683 | ) | | $ | (396 | ) |
As of December 31, 2017, the Company had a total of $131.5 million of net operating loss carryforwards, which begin to expire in 2031.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”), resulting in significant modifications to existing law. The Company has completed the accounting for the effects of the Act during 2017. Our financial statements for the year ended December 31, 2017, reflect the effects of the Act which includes a reduction in the corporate tax rate from 35% to 21%. Accordingly, our deferred tax assets and liabilities were revalued at the newly enacted rates expected to be effective in 2018 and forward. Since our federal deferred tax asset was fully offset by a valuation allowance, the overall net adjustment to our tax provision in the three months ended December 31, 2017 due to the reduction in the U.S. corporate income tax rate to 21% did not materially affect our financial statements.
Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize its NOLs if it experiences an ownership change. In general terms, an ownership change may result from transactions increasing the ownership percentage of certain shareholders in the stock of the corporation by more than 50 percentage points over a three year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382. The Company believes it incurred an ownership change in April 2016. The Company is subject to an annual limitation on the usage of its NOL, however, the Company also believes that the entire NOL that existed in April 2016 will be fully available to the Company over the life of the NOL carryforward period. Management will continue to monitor the potential impact of Section 382 with respect to its NOL carryforward.
Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2017, we had no unrecognized tax benefits. We file income tax returns in the United States and in various state jurisdictions. With few exceptions, we are subject to United States federal, state and local income tax examinations by tax authorities for tax periods 2012 and forward. Our federal and state tax returns for 2012 and subsequent years remain subject to examination by tax authorities. Although we cannot predict the outcome of future tax examinations, we do not anticipate that the ultimate resolution of these examinations will have a material impact on our financial position, results of operations, or cash flows.
In assessing the realizability of the deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future income in periods in which the deferred tax assets can be utilized. In all years presented, we determined that the deferred tax assets did not meet the more likely than not threshold of being utilized and thus recorded a valuation allowance. All of our deferred tax liability as of December 31, 2017 relates to state taxes.
Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operations. We have not recorded any interest or penalties associated with unrecognized tax benefits.