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INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES

11. INCOME TAXES

 

The components of the income tax provision for the years ended December 31, 2022 and 2021 include the following:

 

   2022   2021 
   (in thousands) 
Current:          
Federal  $-   $- 
State   28    - 
Total current income tax  $28   $- 
           
Deferred:          
Federal  $(1,765)  $- 
State   (156)   - 
Total deferred income taxes  $(1,921)   - 
           
Total income tax provision  $(1,893)  $- 

 

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:

 

   2022   2021 
   (in thousands) 
Income tax benefit at federal statutory rate (21%)  $(600)  $(372)
State income tax benefit, net of federal benefit   (95)   (26)
Change in value of warrant   -    (16)
Percentage depletion carryover   -    (50)
Prior year true up   (509)   (14)
Compensation and other   187    

2

 
Acquisition   1,056    - 
Change in valuation allowance   (1,932)   476 
           
Income tax benefit  $(1,893)  $- 

 

The components of deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows:

 

   2022   2021 
   (in thousands) 
Deferred tax assets:          
Net operating loss carryover  $8,443   $6,295 
Property and equipment   -    3,115 
Percentage depletion and contribution carryovers   2,004    1,947 
Equity method investment and other   249    225 
Deferred compensation liability   256    9 
Asset retirement obligations   3,581    327 
Stock-based compensation   439    190 
Lease obligations   224    30 
Derivatives   390    - 
           
Total deferred tax assets   15,586    12,138 
           
Deferred tax liabilities:          
Property and equipment   (6,107)   - 
Lease assets   (198)   (27)
           
Total deferred tax liabilities   (6,305)   (27)
           
Net deferred tax assets   9,281    12,111 
Less valuation allowance   (10,179)   (12,111)
           
Net deferred tax liability  $(898)  $- 

 

 

As of December 31, 2022, the Company has approximately $22.2 million in net operating loss carryovers (after limitations) for federal income tax purposes. The net operating losses incurred prior to January 5, 2022 are subject to an Internal Revenue Code (“I.R.C.”) Section 382 limitation as a result of a change of control incurred in conjunction with the transaction that closed on that date. Losses incurred prior to 2018 have a carryforward period of 20 years and begin to expire in 2037. Losses incurred after 2017 have an indefinite carryforward period but are limited to offsetting 80% of taxable income in any given year.

 

I.R.C. Section 382 limits the Company’s ability to utilize certain tax attributes to offset taxable income in future years. Due to the existence of a net unrealizable built in loss (“NUBIL”), assets at the time of the 2017 change in control, the Company also has realized built in losses (“RBIL”) that exceed the annual limitation. As of December 31, 2022, the Company has approximately $10.5 million of RBIL carryovers, which carry forward indefinitely subject to the annual limitation.

 

On January 5, 2022, the Company received assets in exchange for common stock of the Company. The transaction was an IRC Section 351 contribution for which the Company received carryover basis in the assets. At the date of the transaction, the Company recorded a deferred tax liability for the difference in the book and tax basis in the underlying assets and recorded the related adjustment of $2.8 million to proved oil and gas properties. As a result of recording the deferred tax liability, the Company released a portion of the existing valuation allowance and recorded a tax benefit.

 

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, 2022 and 2021, 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. With certain exceptions, the Company is no longer subject to U.S. federal tax examinations for tax years prior to 2019. Similarly, the Company is open for various state tax examinations for tax years 2018 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, 2022 and 2021, 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, 2022 and 2021 related to uncertain tax positions.