Income Taxes
The Company provides for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
For the year ended December 31, 2017 the Company recorded a U.S. net expense for income taxes of $6.5 million. The expense for the revaluation of the deferred tax asset related to the change in the U.S. federal corporate tax rate from 35% to 21% was $7.7 million. With the purchase of Lovoo, GmbH in October 2017, the Company recorded a provision for German income taxes of $0.2 million.
The provision for income taxes for 2017, 2016 and 2015, consists of the following:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal: | | | | | |
Current | $ | 20,870 |
| | $ | 150,233 |
| | $ | 224,980 |
|
Deferred | 6,637,417 |
| | (26,783,983 | ) | | — |
|
Total federal | 6,658,287 |
| | (26,633,750 | ) | | 224,980 |
|
State: | | | | | |
Current | (32,456 | ) | | 71,120 |
| | 51,321 |
|
Deferred | (74,368 | ) | | (1,312,732 | ) | | — |
|
Total state | (106,824 | ) | | (1,241,612 | ) | | 51,321 |
|
Foreign: | | | | | |
Current | 293,331 |
| | — |
| | — |
|
Deferred | (141,194 | ) | | — |
| | — |
|
Total foreign | 152,137 |
| | — |
| | — |
|
Provision (benefit) for income taxes | $ | 6,703,600 |
| | $ | (27,875,362 | ) | | $ | 276,301 |
|
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company's deferred tax assets are comprised of the following:
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | |
Net operating loss carryforward | $ | 18,092,988 |
| | $ | 27,342,311 |
|
Property and equipment | 326,229 |
| | — |
|
Stock options and warrants | 2,796,366 |
| | 4,999,444 |
|
Federal and state tax credits | 6,208,362 |
| | 823,914 |
|
Accrued liabilities and other reserves | 1,514,995 |
| | 1,231,073 |
|
Other comprehensive income | 309,436 |
| | — |
|
Other | 476,910 |
| | — |
|
Total deferred tax assets | 29,725,286 |
| | 34,396,742 |
|
Valuation allowance | (2,512,045 | ) | | — |
|
Net deferred tax assets | 27,213,241 |
| | 34,396,742 |
|
Deferred tax liabilities | | | |
Property and equipment | — |
| | (212,327 | ) |
Amortization of intangible assets | (11,692,027 | ) | | (5,930,588 | ) |
Total deferred tax liabilities | (11,692,027 | ) | | (6,142,915 | ) |
Net deferred tax assets | $ | 15,521,214 |
| | $ | 28,253,827 |
|
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets (primarily federal and state net operating losses (NOLs). As of December 31, 2017, in part because in the current year the Company achieved three years of cumulative adjusted pretax income in the U.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that net deferred tax assets, before valuation allowance, of $18.1 million are realizable, except for certain Pennsylvania NOLs that, starting in 2017, are limited to 30% of taxable income. Upon acquisition, the Company determined that a valuation allowance was required for certain if(we) California net operating loss and credits. The Company believes it is more likely than not that the foreign deferred tax assets are realizable.
A reconciliation of income tax expense computed at the statutory federal income tax rate of 35% to income taxes as reflected in the financial statements is as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
U.S. federal income tax at statutory rate | $ | (20,260,844 | ) | | $ | 6,437,639 |
| | $ | 2,123,616 |
|
State tax benefit, net of federal provision (benefit) | (21,096 | ) | | (1,266,504 | ) | | 20,672 |
|
Effect of rates different than statutory | (311,304 | ) | | — |
| | — |
|
Goodwill impairment | 19,750,101 |
| | — |
| | — |
|
Windfall tax benefit | (2,155,157 | ) | | (2,957,837 | ) | | — |
|
Fair market value adjustment for warrants | — |
| | 302,609 |
| | — |
|
Transaction costs | 819,251 |
| | 607,528 |
| | 209,646 |
|
Sec. 162(m) Excess Officer's Compensation | 283,351 |
| | 476,339 |
| | — |
|
Nondeductible expenses | 825,169 |
| | 56,018 |
| | — |
|
Stock compensation forfeitures and other | 562,155 |
| | 1,195,454 |
| | 34,334 |
|
Loss on foreign investments | — |
| | (649,998 | ) | |
|
|
Rate change | 7,670,606 |
| | (909,045 | ) | | — |
|
Other | (146,909 | ) | | 72,184 |
| | 20,347 |
|
Dissolution of foreign entity | (1,124,781 | ) | | — |
| | — |
|
Repatriation tax | 81,808 |
| | — |
| | — |
|
Change in valuation allowance | 731,250 |
| | (31,247,234 | ) | | (2,168,528 | ) |
Foreign subsidiary loss with no tax benefit | — |
| | 7,485 |
| | 36,214 |
|
(Benefit) provision for income taxes | $ | 6,703,600 |
| | $ | (27,875,362 | ) | | $ | 276,301 |
|
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, most provisions of which will take effect starting in 2018. The Tax Act makes substantial changes to U.S. taxation of corporations, including, lowering the U.S. federal corporate income tax rate from 35% to 21%, and instituting a territorial tax system, along with a one-time tax on accumulated foreign earnings. Upon enactment, the Company remeasured its deferred tax balances to reflect the new 21% U.S. federal tax rate, which resulted in a tax expense of $7.7 million in 2017. The Company also recorded a provisional liability for the one-time U.S. tax of $0.1 million, triggered by the Tax Act, on accumulated foreign earnings, net of no foreign tax credit. Another provision of the Tax Act subjects performance based compensation paid to certain covered employees to the limitation on the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code. As a result of this provision the future payment of stock based compensation for which deferred tax assets exist as December 31, 2017 may be nondeductible in the future year in which it is paid. The Company’s accounting policy is to treat stock based compensation as deductible first and to apply the limitation to cash based compensation in the year of payment. Based on information available at this time it is assumed that these future payments will be deductible and that any limitation on the deductibility will be applied to other compensation paid in the year of payment.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company has determined that the $0.1 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. As further guidance is issued by the Department of the Treasury, additional work may be necessary to ensure earnings as required by the calculations are properly determined. Additionally, as a result of the Tax Act, the Company has not completed its evaluation of its indefinite reinvestment assertion with regard to foreign earnings under ASC 740-30. As a result, deferred tax liabilities may be increased or decreased during the period allowed under SAB 118. Further, no estimate can currently be made and no provisional amounts were recorded in the financial statements for the impact of the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act. The GILTI provision imposes taxes on foreign earnings in excess of a deemed return on tangible assets. This tax is effective for the Company after the end of the current fiscal year. However, the Company is evaluating whether deferred taxes should be recorded in relation to the GILTI provisions or if the tax should be recorded in the period in which it occurs. Based on the current interpretation, the Company may choose either method as an accounting policy election. The Company has not yet decided on the accounting policy related to GILTI and will only do so after completion of an analysis. Any subsequent adjustment to any of these amounts will be recorded to current tax expense during the measurement period provided under SAB 118.
The deferred tax assets at both December 31, 2017 and 2016 are principally the result of federal and state net operating loss carryforwards of $68.6 million and $73.0 million, respectively, which substantially begin to expire in 2023 and through 2035. The net operating loss carryforward at December 31, 2017 includes $16.9 million of Skout NOLs on which the Company performed an Internal Revenue Code Section 382 study which concluded that $1.3 million of a total of $18.2 million would be unusable due to annual limitation. Previously, the Company had completed an Internal Revenue Code Section 382 study to determine annual limitations on the usability of MeetMe’s net operating loss carryforwards due to historical changes in ownership. The amount of federal NOL carryforwards as of December 31, 2017 disclosed above do not include $63.3 million of The Meet Group, Inc. NOL carryforwards that are expected to expire unutilized pursuant to the Section 382 study.
In accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, the Company has analyzed its tax position in all jurisdictions where it is required to file an income tax return and the Company has not recognized a benefit for uncertain tax positions. With respect to purchase accounting associated with the if(we) acquisition, a liability for uncertain tax positions was established in the amount of $2.0 million. If the unrecognized tax benefit is recognized it will impact the effective tax rate of the Company. All of the uncertain tax position has been recorded as a reduction to the related deferred tax asset for the credit carryforward in accordance with Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists for all periods. The total amount of unrecognized tax benefits is not expected to increase or decrease within 12 months of the reporting date.
The following is a tabular reconciliation of total amounts of unrecognized tax benefits:
|
| | | |
| 2017 |
Unrecognized tax liabilities— January 1 | $ | — |
|
Gross increases— tax positions in prior year | 2,029,653 |
|
Unrecognized tax liabilities— December 31 | $ | 2,029,653 |
|
The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company's statements of operations and comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015.
The Company files income tax returns in the U.S. and various state and foreign jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2013 through December 31, 2017. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period.
The Company does not expect to repatriate any earnings in foreign subsidiaries, and therefore no accrual for withholding or other taxes has been made. The Company will continue to monitor any excess financial reporting over tax basis in our investments in foreign subsidiaries that may arise in future periods, and withholding taxes or other taxes would be recorded for any amounts not considered permanently reinvested, if applicable.