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Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

14. INCOME TAXES

The Company incurred net losses for each of the years ended December 31, 2019 and 2018, and the Company has recorded valuation allowances for its net deferred tax assets for each of those years. Accordingly, the Company has not recognized a benefit for income taxes in the accompanying financial statements. Income tax benefit using the Company’s effective income tax rate differs from the U.S. federal statutory income tax rate due to the following:

		2019				2018
		(in thousands)
Income tax benefit at federal statutory rate		$	(115	)		$	218
State income tax benefit, net of federal impact			(32	)			37
Change in state tax rate, net of federal benefit			331				(435	)
Change in value of warrant			(74	)			163
Effect of Section 382 limitation			-				(1,303	)
Percentage depletion carryover			9				4
Prior year true up			52				451
Other			23				50
Decrease in valuation allowance			(194	)			815

Income tax benefit (expense)		$	-			$	-

The components of deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:

		2019				2018
		(in thousands)
Deferred tax assets:
Net operating loss carryover ⁽¹⁾		$	4,098			$	3,594
Property and equipment			3,468				4,306
Percentage depletion and contribution carryovers ⁽¹⁾			1,833				1,721
Alternative minimum tax credit carryover ⁽¹⁾			42				42
Equity method investment and other			615				592
Deferred compensation liability			41				9
Asset retirement obligations			181				221
Stock-based compensation			68				61
Lease obligations			44				-

Total deferred tax assets			10,390				10,546

Deferred tax liabilities:
Property and equipment			-				-
Lease assets			(40	)			-
Other			-				-

Total deferred tax liabilities			(40	)			-

Net deferred tax assets			10,350				10,546
Less valuation allowance			(10,350	)			(10,546	)

Net deferred tax asset		$	-			$	-

⁽¹⁾

In December 2017, the Company paid down debt through the issuance of common stock. This issuance represented a 49.3% ownership change in the Company. This change in ownership, combined with other equity events, triggered loss limitations under Internal Revenue Code (“I.R.C.”) Section 382. As a result, the Company wrote-off $29.8 million of gross deferred tax assets in 2017, and an additional $2.4 million in gross deferred tax assets in 2018. Since the Company has maintained a valuation allowance against these tax assets there is no impact to the consolidated statement of operations in either year.

As of December 31, 2019, the Company has approximately $6.4 million of net operating loss carryovers (after limitations) for federal income tax purposes. The net operating losses are not subject to limitation under I.R.C. Section 382 and carry forward indefinitely.

I.R.C. Section 382 of the Internal Revenue Code limits the Company’s ability to utilize the tax deductions associated with its oil and gas properties to offset taxable income in future years, due to the existence of a Net Unrealizable Built-In Loss (“NUBIL”) at the time of the change in control. Such a limitation will be effective for a five-year period subsequent to the change in control. In the event the Company has Recognized Built-In Losses (“RBIL”) during the five-year period, those losses will be limited; losses exceeding the annual limitation are carried forward as RBIL carryovers. As of December 31, 2019, the Company has approximately $7.1 million of RBIL carryovers, which carry forward indefinitely subject to the annual limitation.

The Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. During the years ended December 31, 2019 and 2018, no adjustments were recognized for uncertain tax positions.

The Company files income tax returns in U.S. federal and multiple state jurisdictions. The Company is subject to tax audits in these jurisdictions until the applicable statute of limitations expires. The Company is no longer subject to U.S. federal tax examinations for tax years prior to 2016. The Company is open for various state tax examinations for tax years 2015 and later. The Company’s policy is to recognize potential interest and penalties accrued related to uncertain tax positions within income tax expense. For the years ended December 31, 2019 and 2018, the Company did not recognize any interest or penalties in its statement of operations, nor did it have any interest or penalties accrued in its balance sheet at December 31, 2019 and 2018 related to uncertain tax positions.