INCOME TAXES

9 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Prior to the quarter ended June 30, 2021, the Company recorded a valuation allowance to reduce its deferred tax assets to zero. Based upon the available evidence on June 30, 2021, the Company determined it was more likely than not that a portion of deferred tax assets related to the NOL carryforwards would be utilized in future periods. The Company considered all available evidence, including cumulative income in recent years and its current forecast of future income in its analysis. The Company concluded that sufficient positive evidence exists due to the cumulative positive results achieved since the Company's revised business strategy launched in 2018 and associated long-term related party contract (2019 AMA), which establishes a reasonable expectation of future taxable income. As a result, the Company partially released the valuation allowance against these deferred tax assets and recorded a deferred income tax benefit of $11.3 million in the second quarter of 2021. While the Company believes its forecast of future income is reasonable, it is inherently uncertain. If the Company’s projections of future income are lower than expected, the Company may need to reestablish the valuation allowance.

As of September 30, 2021, we have provided a valuation allowance against consolidated net deferred tax assets of $26.6 million, related primarily to deferred tax assets for Federal and state net operating loss carryforwards not expected to be used within their carryforward periods.

We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. We have not identified any uncertain income tax positions that could have a material impact on the consolidated financial statements. We recognize interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense; we did not have any such amounts accrued as of September 30, 2021 and December 31, 2020. We are subject to taxation in various U.S. jurisdictions and all of our income tax returns remain subject to examination by tax authorities due to the availability of NOL carryforwards.

For interim periods, we recognize an income tax provision/(benefit) based on our estimated annual effective tax rate, calculated for all taxing jurisdictions on a consolidated basis, expected for the entire year. The interim annual estimated effective tax rate is based on the statutory tax rates then in effect, as adjusted for estimated changes in valuation allowance and estimated permanent differences, and excludes certain discrete items whose tax effect, when material, is recognized in the interim period in which they occur. These changes in valuation allowance, permanent differences, and discrete items result in variances to the effective tax rate from period to period. We also have elected to exclude the impacts from significant pre-tax non-recognized subsequent events from our interim estimated annual effective rate until the period in which they occur.

Prior to the adoption of new accounting guidance that we adopted on a prospective basis on January 1, 2021, during periods when we incurred net losses before income taxes, our annual estimated effective tax rate was at times adjusted based on the “loss limitation” requirements applicable to interim tax provisions, resulting in a limited income tax benefit recognized in that period. The “loss limitation” requirements were removed by the new accounting guidance and, therefore, we were not required to assess any such limitation for 2021.

For the nine months ended September 30, 2021, we recognized an income tax benefit of $11.3 million. The income tax benefit resulted from applying an estimated annual effective tax rate of 0.85% to pre-tax consolidated income reported during the period, as well as the net effects of certain discrete items occurring which impact our income tax provision in the period in which they occur primarily related to the release of $11.3 million valuation allowance in the second quarter of 2021. There were no other material discrete items occurring during the nine months ended September 30, 2021.

For the three months ended September 30, 2021, we recognized an income tax expense of $25 thousand. The income tax expense resulted from applying an estimated annual effective tax rate of 0.80% to pre-tax consolidated income reported during the period, as well as the net effects of certain discrete items occurring which impact our income tax provision in the period in which they occur. There were no material discrete items occurring during the three months ended September 30, 2021.

For the three and nine months ended September 30, 2020, the Company recognized deferred income tax expense of $1 thousand and $15 thousand, respectively. The effective tax rate for the three and nine months ended September 30, 2020 was 0% and (0.11)%, respectively.

The Company currently has approximately $146 million in federal and state NOLs. If unused, these NOLs will begin expiring in 2027. Under Internal Revenue Code Section 382, if a change in ownership is triggered, the Company’s NOL assets and possibly certain other deferred tax assets may be impaired.

A reconciliation of the statutory rate and the effective tax rate is as follows:

	Nine Months Ended September 30,
	2021		2020
Federal statutory rate	21.00	%	21.00	%
State income taxes - net of federal benefit	0.85	%	4.74	%
Permanent differences	—	%	0.16	%
Return to provision adjustments	(0.21	%)	(2.45	%)
Change in valuation allowance	(389.13	%)	(18.43	%)
Other, net	(2.44)	%	(5.87)	%
Effective tax rate	(369.93)	%	(0.85)	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company’s deferred tax assets and liabilities at September 30, 2021 and December 31, 2020 are as follows:

	September 30, 2021		December 31, 2020
Deferred tax assets:
Net operating loss and tax credit carryforwards	$	36,841	$	37,899
Stock based compensation	690		648
Investment in affiliates	382		264
Other	24		14
Depreciation and amortization	—		37
	37,937		38,862
Less - valuation allowance	(26,625)		(38,780)
Net deferred tax assets	11,312		82
Deferred tax liabilities:
Depreciation and amortization	14		—
Goodwill amortization	(16)		(103)
Net deferred tax liabilities	(2)		(103)
Net deferred tax assets (liabilities)	$	11,310	$	(21)