Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

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INCOME TAXES
6 Months Ended
Jun. 30, 2018
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES

The Company utilizes the asset and liability approach to measuring deferred tax assets and liabilities based on temporary differences existing at each balance sheet date using currently enacted tax rates. A valuation allowance for the Company’s deferred tax assets is established if, in management’s opinion, it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors.  Due to uncertainty surrounding the realization of its deferred tax assets, the Company has continued to record a valuation allowance against its net deferred tax assets.

The income tax provision (benefit) for the three and six months ended June 30, 2018 and 2017 consists of the following:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Current Income Tax Provision (Benefit)
$

 
$

 
$

 
$

Deferred Income Tax Provision (Benefit)
 

 
 

 
 

 
 

Federal
(19,180,000
)
 
4,699,000

 
(18,560,000
)
 
10,649,000

State
(4,228,000
)
 
424,000

 
(4,091,000
)
 
960,000

Valuation Allowance
23,408,000

 
(5,123,000
)
 
22,651,000

 
(11,609,000
)
Total Income Tax Provision (Benefit)
$

 
$

 
$

 
$



Income tax provision (benefit) during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income (loss), plus any unusual or infrequently occurring items that are recorded in the interim period.  The provision for the three and six-month periods ended June 30, 2018, differ from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to income before income taxes.  The lower effective tax rate in 2018 and 2017 relates to the valuation allowance placed on the net deferred tax assets, in addition to state income taxes and estimated permanent differences.

The Company’s May 15, 2018 closing under the Exchange Agreement and related transactions triggered an ownership change within the meaning of Section 382 of the Internal Revenue Code (“IRC”) due to the share issuances that resulted from the Exchange Agreement and related transactions.  In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. Since the Company has experienced an ownership change, utilization of net operating losses and other tax carryforward attributes are subject to an annual limitation, which is determined by first multiplying the value of the Company’s common stock at the time of the ownership change by the applicable long-term, tax-exempt rate, plus any built-in gains recognized within five years following the ownership change.  Any such limitation is still being evaluated and may result in the expiration of a significant portion of the Company’s tax attributes.  Any carryforward attributes that expire prior to utilization will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance upon finalization of the limitation analysis, which will be completed prior to the end of the fiscal year. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations of the Company.  

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“the Act”) which made significant changes that affect the Company, resulting in significant modifications to existing law.  The Company’s financial statements for the year ended December 31, 2017 and for the quarter ended June 30, 2018 reflect certain effects of the Act which includes a reduction in the corporate tax rate from 35% to 21% effective January 1, 2018, as well as other changes.

The Act also repeals the corporate alternative minimum tax for tax years beginning after December 31, 2017 and provides that prior alternative minimum tax credits will be refundable. The Company has credits that are expected to be refunded between 2018 and 2021 as a result of the Act and monetization opportunities under current tax laws.

The Act is a comprehensive tax reform bill containing a number of other provisions that either currently or in the future could impact the Company.  The Company has completed the analysis of the Act and does not expect a material change due to the transition impacts. Any changes that do arise due to changes in interpretations of the Act, legislative action to address questions that arise because of the Act, changes in accounting standards for income taxes or related interpretations in response to the Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts will be disclosed in future periods as they arise. The effect of certain limitations effective for the tax year 2018 and forward, specifically related to the deductibility of executive compensation and interest expense, have been evaluated.

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities.  The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.  Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.  The Company has no liabilities for unrecognized tax benefits.

The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense.  For the three and six months ended June 30, 2018 and 2017, the Company did not recognize any interest or penalties in its condensed statements of operations, nor did it have any interest or penalties accrued in its condensed balance sheet at June 30, 2018 and December 31, 2017 relating to unrecognized benefits.

The tax years 2017, 2016 and 2015 remain open to examination for federal and state income tax purposes.