Annual report pursuant to Section 13 and 15(d)

19. Income Taxes

v3.6.0.2
19. Income Taxes
12 Months Ended
Dec. 31, 2016
Pro forma financial information  
19. Income Taxes

The provision (benefit) for income taxes for the years ending December 31, 2016 and 2015 consists of the following:

 

    2016   2015  
Current        
  Federal     (7,710,000)  
  State 60,000      
    60,000   (7,710,000)  
           
Deferred        
  Federal (2,632,394)      
  State     50,000  
    (2,632,394)   50,000  
           
    (7,660,000)    
           
                 

 

For the years ended December 31, 2016 and 2015, the Company recorded deferred tax liabilities of $2.6 million and $7.7 million, respectively, as a result of intangible assets subject to amortization acquired in business acquisitions that are not amortizable for income tax purposes. As a result of these business combinations, the recording of the deferred tax liabilities resulted in a release of the valuation allowance against the Company’s deferred tax assets of $2.6 million and $7.7 million for the years ended December 31, 2016 and 2015, respectively, with a corresponding income tax benefit. The tax benefit will be realized as the Company amortizes the intangible assets over their estimated useful lives (See Note 5).

 

The following reconciles the Federal statutory tax rate to the effective income tax rate for the years ended December 31, 2016 and 2015:

 

      2016   2015  
      %   %  
Federal statutory rate (34.0)   (34.0)  
State net of federal tax (3.4)   (3.6)  
Permanent and other items 1.2   1.1  
Change in valuation allowance 17.9   (11.8)  
      (18.3)   (48.3)  

 

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. In assessing the realizability of deferred tax assets, Management evaluates whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on Management’s evaluation, it is more likely than not that the deferred tax asset will not be realized and as such a valuation allowance has been recorded as of December 31, 2016 and 2015.

 

The components of the Company's deferred tax assets and liabilities consist of the following at December 31, 2016 and 2015:

 

      2016   2015
Deferred income tax assets:      
  Net operating losses 41,975,000   32,569,000
  Allowance for doubtful accounts 99,000   77,000
  Derivative liability 294,000   620,000
  Accrued liabilities 910,000   1,037,000
  Other   83,000    
      43,361,000   34,303,000
           
Deferred income tax liabilities:      
  Intangible assets 9,943,000   3,305,000
  Property and equipment 1,098,000   1,103,000
  Debt discount     388,000
      11,041,000   4,796,000
Deferred tax asset, net 32,320,000   29,507,000
           
Less: valuation allowance (32,320,000)   (29,507,000)
           
Net deferred tax assets      
           

 

At December 31, 2016 and 2015, the Company had federal net operating loss carryforwards of approximately $118.0 million and $93.0 million, respectively, which expire in varying amounts through December 31, 2036. Pursuant to Code Sec. 382 of the Internal Revenue Code (“the Code”), the utilization of net operating loss carryforwards may be limited as a result of a cumulative change in stock ownership of more than 50% over a three year period. The Company underwent such a change and consequently, the utilization of a portion of the net operating loss carryforwards is subject to certain limitations.