11. Income Taxes
On December 22, 2017, the President of the United States signed Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, (i) permanently reduces the U.S. federal corporate income tax rate from 35% to 21%, (ii) repeals the corporate alternative minimum tax, (iii) imposes new limitations on the utilization of net operating losses, (iv) limits deductibility of interest expense and (v) changes the cost recovery rules. Under U.S. GAAP, the effects of new legislation are recognized upon enactment, which, for federal legislation, is the date the President signs a bill into law. Accordingly, recognition of the tax effects of the Tax Act is required in the interim and annual periods that include December 22, 2017. In December 2017, the SEC issued Staff Accounting Bulletin No. 118 “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”) which allows a company up to one year to finalize and record the tax effects of the Tax Act and clarifies certain aspects of Accounting Standards Codification 740, “Income Taxes” (“ASC 740”) and provides a three-step process for applying ASC 740. First, a company must reflect in its financial statements the income tax effects of the Tax Act on items for which the company can make a complete assessment. Next, a measurement period not to exceed one year is provided for a company to report provisional amounts of the income tax effects of the Tax Act for items for which the company’s assessment is incomplete, but for which it can make a reasonable estimate. A company may adjust provisional amounts as it obtains additional information in subsequent reporting periods. Finally, for items for which a company cannot make a reasonable estimate, a company is not required to report provisional amounts and will continue to apply ASC 740 based on tax law existing immediately before December 22, 2017. A company is required to report provisional amounts for these items in the first reporting period in which the company is able to make a reasonable estimate of the income tax effects of the Tax Act. The Company is currently in the process of finalizing and quantifying the tax effects of the Tax Act, but has recorded provisional amounts based on reasonable estimates for the measurement and accounting of certain effects of the Tax Act in our Consolidated Financial Statements for the year ended December 31, 2017. Under SAB 118, the Company will complete the required analyses and accounting during the year ended December 31, 2018. The Company does not expect that a material adjustment to its deferred tax position will result from the completion of its computations.
The following table summarizes the components of the Company’s (loss) income before income taxes for the periods indicated:
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|
|
For the Years Ended December 31, |
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|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
United States |
|
$ |
(46,755 |
) |
|
$ |
(89,061 |
) |
|
$ |
(459,507 |
) |
|
Total income (loss) before income taxes |
|
$ |
(46,755 |
) |
|
$ |
(89,061 |
) |
|
$ |
(459,507 |
) |
The Company did not report any current provision for income taxes for the years ended December 31, 2017, 2016 and 2015 as the Company has a full valuation allowance against assets created by net operating losses generated. The Company believes that it is more likely than not that the assets will not be utilized.
The Company had no deferred income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015.
Pursuant to the Tax Act, the U.S. federal corporate income tax rate was reduced from 35% to 21% effective for tax years beginning after December 31, 2017. As a result, the Company was required to restate its deferred tax assets and liabilities at the rate expected at the time of reversal. The Company has determined that the rate to apply to its deferred tax assets and liabilities, including expected state taxes net of federal benefit, is 24.6%.
The following table provides a reconciliation of the Company’s effective tax rate from the U.S. 35% statutory rate for 2017, 2016 and 2015. Additionally, the table reflects the impact of the rate change from 38% to 24.6% on the net deferred tax asset for the year ended December 31, 2017 pursuant to the Tax Act as well as the estimated effect of limitations on available net operating loss and tax credit carry forwards by reason of an ownership change (discussed below).
|
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|
For the Years Ended December 31, |
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|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Expected income tax benefit at statutory rate |
|
$ |
(16,364 |
) |
|
$ |
(31,172 |
) |
|
$ |
(160,827 |
) |
|
State tax, tax effected |
|
|
(1,085 |
) |
|
|
(1,408 |
) |
|
|
(7,799 |
) |
|
Non-deductible convertible debt discount |
|
|
3,092 |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation expense |
|
|
523 |
|
|
|
1,995 |
|
|
|
255 |
|
|
Non-deductible compensation |
|
|
63 |
|
|
|
178 |
|
|
|
— |
|
|
Effect of rate change on net deferred tax asset |
|
|
64,515 |
|
|
|
— |
|
|
|
— |
|
|
Effect of ownership change on estimated realization of net operating loss and tax credit carry forwards |
|
|
119,654 |
|
|
|
— |
|
|
|
— |
|
|
State tax rate change and other |
|
|
3,101 |
|
|
|
693 |
|
|
|
17 |
|
|
Other changes in valuation allowance |
|
|
(173,499 |
) |
|
|
29,714 |
|
|
|
168,354 |
|
|
Actual income tax provision |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Year-end deferred taxes are presented in the table below. As a result of the recent Tax Act, deferred taxes as of December 31, 2017 are based on the newly enacted U.S. statutory federal income tax rate of 21%. Deferred taxes as of December 31, 2016 are based on the previous U.S. statutory federal income tax rate of 35%. The components of the Company’s U.S. deferred taxes are as follows for the periods presented:
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|
As of December 31, |
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|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
|
Capital assets |
|
$ |
27,137 |
|
|
$ |
33,131 |
|
|
Stock-based compensation |
|
|
2,390 |
|
|
|
2,499 |
|
|
Net operating loss carry forwards |
|
|
80,060 |
|
|
|
196,775 |
|
|
Foreign tax credit carry forwards |
|
|
— |
|
|
|
50,681 |
|
|
Valuation allowance |
|
|
(109,587 |
) |
|
|
(283,086 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
In connection with the Company’s recent equity and convertible debt transactions during 2017, the Company determined that the utilization of net operating losses in future years may be subject to limitations by reason of an “ownership change” as defined under Section 382 of the Internal Revenue Code (“Section 382 Limitation”). As a result of the Section 382 Limitation, the Company may not be able to fully utilize its net operating loss carry forwards and other tax credit carry forwards. For U.S. federal income tax purposes, as of December 31, 2017, the Company has net operating loss carry forwards of approximately $550.0 million, which, if not utilized, will expire between 2030 and 2037. As of December 31, 2017, the Company also has foreign tax credit carry forwards of $50.7 million, which, if not utilized, will expire in 2019. Based on the Company’s estimate of the impact of the ownership change and Section 382 Limitation, the net operating loss reflected in the table above has been reduced to $353.0 million and the foreign tax credits have been reduced to zero. The estimate of the available net operating loss after the ownership change will be adjusted in future periods as actual drilling and production results are evaluated under the provisions of Section 382 of the Internal Revenue Code. The utilization of the remaining net operating loss carry forwards are dependent on the Company generating future taxable income and U.S. tax liability, as well as other factors.
Current authoritative guidance requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For a tax position meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At December 31, 2017, the Company did not have any material unrecognized tax benefits that, if recognized, would affect the effective tax rate.
The Company is subject to examination of income tax filings in the U.S. and various state jurisdictions for the periods 2010 and forward and the foreign jurisdiction of Canada for the tax periods 2000 through 2013 due to the Company’s continued loss position in such jurisdiction. The Company is currently under audit by the U.S. Internal Revenue Service for the taxable period ended December 31, 2014.
Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of general and administrative expense in the consolidated statement of operations. The Company has not recorded any interest or penalties associated with unrecognized tax benefits.