Income Taxes

The components of the income tax expense are as follows:



	December 31,
(in thousands)	2017			2016
Current:
Federal	$	—		$	—
State and local	20			16
	20			16
Deferred:
Federal	(566		)	8
State and local	(99		)	1
	(665		)	9
Total income tax (benefit) expense	$	(645	)	$	25

Tax reform legislation commonly known as the Tax Cuts and Jobs Act (“Tax Act”) was signed into law on December 22, 2017, requiring the re-measurement of deferred income tax assets and liabilities. Modifications to existing tax law included a shift to a flat federal corporate income tax rate of 21%, limitations to the deductibility of interest on debt, limitations to the deductibility of certain executive compensation, and expanded allowance of bonus depreciation on qualifying property (effective after September 30, 2017). The Tax Act allows net operating losses to be carried forward indefinitely for years beginning after December 2017, and generally limited annually to 80% of taxpayer’s income. Net operating loss carrybacks will generally no longer be available.

The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 - Income Taxes ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for the income tax effects of the Tax Act is incomplete, but it can determine a reasonable estimate, it must record a provisional estimate in the financial statements. The Company does not anticipate further adjustments to the deferred income tax assets and liabilities as a result of the Tax Act.

The following reconciles the “statutory” federal income tax rate to the effective income tax rate:



	December 31,
	2017		2016
"Expected" provision at federal statutory rate	35	%	35	%
Reduction in income tax benefit and increase in income tax expense resulting from:
Change in federal valuation allowance	29	%	35	%
Other	2	%	—	%
Effective income tax rate	(4	)%	—	%

The tax effects of temporary differences that give rise to the deferred income tax assets and liabilities are as follows:



	December 31,
(in thousands)	2017			2016
Deferred income tax assets:
Receivable allowance	$	68		$	17
Accumulated depreciation	226			371
Restructuring accrual	242			454
Intangible assets	—			813
Compensation expense	664			634
Federal net operating loss carryforward	3,674			61,688
State net operating loss carryforward	1,124			5,736
Accrued expenses	773			160
Deferred rent	22			57
Deferred revenue	503			83
Interest	230			180
Other	32			10
Gross deferred income tax assets	$	7,558		$	70,203
Valuation allowance	(6,520		)	(70,203		)
Net deferred income tax assets	$	1,038		$	—
Deferred income tax liabilities:
Intangible Assets	$	(1,038	)	$	—
Goodwill	(18		)	(16		)
Gross deferred income tax liabilities	$	(1,056	)	$	(16	)
Net deferred income tax liabilities	$	(18	)	$	(16	)

There was no current federal tax expense recorded in the years ended December 31, 2017 and 2016. The current state tax expense recorded for the years ended December 31, 2017 and 2016 reflects a state tax liability to one state. Deferred income tax expense (benefit) is recorded as of December 31, 2017 and 2016.

The tax years 2014 through 2017 may be subject to federal examination and assessment. Tax years from 2009 through 2013 remain open solely for purposes of federal and certain state examination of net operating loss and credit carryforwards. State income tax returns may be subject to examination for tax years 2013 through 2017, depending on state tax statute of limitations.

As of December 31, 2017, the Company had U.S. federal and state net operating loss carryforwards of approximately $19.9 million and $19.3 million, respectively after applying the limitations under IRC Section 382.

The Company has significant deferred income tax assets attributable to tax deductible intangibles and federal and state net operating loss carryforwards, which may reduce taxable income in future periods. Based on the cumulative tax and operating losses, the lack of taxes in the carryback period, and the uncertainty surrounding the extent or timing of future taxable income, the Company believes it is not more likely than not that it will realize the tax benefits of its deferred income tax assets. Accordingly, the Company continues to record a full valuation allowance on its net deferred income tax assets as of December 31, 2017 and 2016, with the exception of deferred income tax on the liabilities of certain indefinite-lived intangibles. As a result of the Tax Act, the Company’s net deferred income tax assets and valuation allowance were re-measured. The deferred income tax asset and valuation allowance were reduced as a result of the decrease in the enacted tax rate and net operating loss limitations calculated under IRC Section 382.

A schedule of the change in valuation allowance is as follows:



(in thousands)	Valuation Allowance
Balance, December 31, 2016	$	(70,203	)
Reductions - Section 382	66,226
Increases - current year	(5,822		)
Reductions - tax rate change	3,279
Balance, December 31, 2017	$	(6,520	)

Since the Company had changes in ownership during 2015, continuing into 2016 and 2017, the Company has determined that additional limitations under IRC Section 382 of the Internal Revenue Code of 1986 apply to the future utilization of certain tax attributes including NOL carryforwards, other tax carryforwards, and certain built-in losses. Limitations on future net operating losses apply when a greater than 50% ownership change over a three-year period occurs under the rules of IRC Section 382. The Company has not had a formal study completed with respect to IRC Section 382; however, the Company did complete its own analysis and determined that there has been a greater than 50% change in ownership following the Merger on May 11, 2017. The allowance of future net operating losses is limited to the market capitalization value multiplied by the “long-term tax-exempt rate” as of May 2017, the month in which the ownership change took place. It is estimated that the Company will be limited to approximately $0.2 million of NOL per year, and due to expiring net operating loss provisions, the Company has estimated it will be unable to utilize approximately $173.1 million and $140.4 million of remaining federal and state net operating losses, respectively, in the future. The net operating loss carryforwards that are expiring prior to utilization as a result of the Section 382 limitations reduce the deferred income tax assets, with a corresponding reduction of the valuation allowance. No tax benefit has been reported since a full valuation allowance offsets these tax attributes.

In addition to the Company’s existing net operating losses, the Company acquired net operating losses of PHS as part of the Merger, satisfying the continuity of business requirements under IRC Sections 368. Prior to the acquisition, PHS reported a full valuation allowance against its net deferred income tax assets. Preliminary calculations indicate the PHS losses will be limited to $0.09 million of NOL per year, provided the business continuity requirements under Section 382 are satisfied for a two-year period beginning on date of ownership change.

After reducing the valuation allowance under the rules of IRC Section 382, the merged Company was required to release some of its valuation allowance and record an income tax benefit of $0.7 million due to changes in the acquirer’s valuation allowance at the time of the business combination. The net operating loss carryforwards, if not utilized, will expire in the years 2018 through 2037. Further limitations to the acquired PHS net operating losses as a result of expiring net operating loss carryforwards or additional ownership changes may reduce the deferred tax assets with a corresponding reduction of the valuation allowance. No tax benefit has been reported since a full valuation allowance offsets these tax attributes.