Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

24. Income Taxes

The components of the benefit for income taxes consist of the following:

	Years Ended December 31,
	2019		2018
Current tax benefit:
Federal	$	-	$	-
State and local		-		-
Total current tax benefit		-		-
Deferred tax benefit:
Federal		9,802,070		3,359,203
State and local		3,053,709		1,498,009
Change in valuation allowance		6,685,348		(4,765,579	)
Total deferred tax benefit		19,541,127		91,633
Total income tax benefit	$	19,541,127	$	91,633

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, imposes a one-time repatriation tax, and numerous other provisions transitioning to a territorial system.

Proposed amendments to the Income Tax Regulations under Section 163(j) of the U.S. Internal Revenue Code were issued on November 26, 2018 and were effective for the taxable year 2019 after publication in the Federal Register, at which time they will be adopted by the Company. Additional discussion of the impact of the TCJA on the consolidated financial statements is included below.

The components of deferred tax assets and liabilities were as follows:

	As of December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	20,998,172		$	10,474,525
Tax credit carryforwards		263,873			263,873
Allowance for doubtful accounts		450,116			16,017
Accrued expenses and other		64,494			64,849
Deferred rent		-			21,233
Contract liabilities		-			84,622
Liquidated damages payable		1,078,235			646,146
Stock-based compensation		1,055,083			242,545
Operating lease liability		223,596			-
Depreciation and amortization		3,921,952			981,850
Current deferred tax assets		28,055,521			12,795,660
Valuation allowance		(3,484,746	)		(8,541,191	)
Total deferred tax assets		24,570,775			4,254,469
Deferred tax liabilities:
Prepaid expenses		(148,051	)		-
Contract liabilities		(67,295	)		-
Acquisition-related intangibles		(24,355,429	)		(4,254,469	)
Total deferred tax liabilities		(24,570,775	)		(4,254,469	)
Net deferred tax	$	-		$	-

The Company must make judgements as to the realization of deferred tax assets that are dependent upon a variety of factors, including the generation of future taxable income, the reversal of deferred tax liabilities, and tax planning strategies. To the extent that the Company believes that recovery is not likely, it must establish a valuation allowance. A valuation allowance has been established for deferred tax assets which the Company does not believe meet the “more likely than not” criteria. The Company’s judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If the Company’s assumptions and consequently its estimates change in the future, the valuation allowances it has established may be increased or decreased, resulting in a respective increase or decrease in income tax expense. Based upon the Company’s historical operating losses and the uncertainty of future taxable income, the Company has provided a valuation allowance primarily against its deferred tax assets up to the deferred tax liabilities as of December 31, 2019 and 2018.

As of December 31, 2019, the Company had federal, state, and local net operating loss carryforwards available of approximately $75.00 million, $59.66 million, and $22.66 million, respectively, to offset future taxable income. Net operating losses for U.S. federal tax purposes of $34.44 million do not expire (limited to 80% of taxable income in a given year) and $40.56 million will expire, if not utilized, through 2037 in various amounts. As of December 31, 2018, the Company had federal, state, and local net operating loss carryforwards available of approximately $36.65 million, $33.93 million, and $8.15 million, respectively, to offset future taxable income.

Sections 382 and 383 of the Internal Revenue Code imposes restrictions on the use of a corporation’s net operating losses, as well as certain recognized built-in losses and other carryforwards, after an ownership change occurs. A section 382 ownership change occurs if one or more stockholders or groups of stockholders who own at least 5% of the Company’s common stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Future issuances or sales of the Company’s common stock (including certain transactions involving the Company’s common stock that are outside of the Company’s control) could also result in an ownership change under section 382. If an ownership change occurs, Section 382 would impose an annual limit on the amount of pre-change net operating losses and other losses we can use to reduce our taxable income generally equal to the product of the total value of the Company’s outstanding equity immediately prior to the ownership change (subject to certain adjustments) and the long-term tax exempt interest rate for the month of the ownership change.

The Company believes that it did have a change in control under these sections in connection with its recapitalization on November 4, 2016 and utilization of the carryforwards would be limited such that the majority of the carryforwards will never be available. Accordingly, the Company has not recorded those net operating loss carryforwards and credit carryforwards in its deferred tax assets. The Company completed a preliminary section 382 analysis as of December 31, 2019 and concluded it may have experienced an ownership change as a result of certain equity offerings during 2018. The Company concluded that its federal net operating loss carryforwards, including any net operating loss carryforwards as a result of the mergers during 2018 and 2019, resulted in annual limitations on the overall net operating loss carryforward and that the ownership change during 2018 would impose an annual limit on the net operating loss carryforwards and could cause federal income taxes (similar provisions apply for state and local income taxes) to be paid earlier than otherwise would be paid if such limitations were not in effect. The federal, state, and local net operating loss carryforwards are stated net of any such anticipated limitations as of December 31, 2019.

The benefit for income taxes on the statement of operations differs from the amount computed by applying the statutory federal income tax rate to loss before the benefit for income taxes, as follows:

	Years Ended December 31,
	2019						2018
	Amount			Percent			Amount			Percent
Federal benefit expected at statutory rate	$	(12,188,924	)		21.0	%	$	(5,493,498	)		21.0	%
State and local taxes, net of federal benefit		(3,053,709	)		5.3	%		(1,498,009	)		5.7	%
Stock-based compensation		276,382			(0.5	)%		434,556			(1.7	)%
Other differences, net		199,642			(0.3	)%		246,614			(0.8	)%
Valuation allowance		(6,685,348	)		11.5	%		4,765,579			(18.2	)%
Permanent differences		1,910,830			(3.3	)%		1,453,125			(5.6	)%
Tax benefit and effective income tax rate	$	(19,541,127	)		33.7	%	$	(91,633	)		0.4	%

The Company recognizes the tax benefit from uncertain tax positions only if it is “more likely than not” that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to income tax matters in income tax expense. The Company is also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to its unrecognized tax benefits will occur during the next 12 months.

The Company did not recognize any uncertain tax positions or any accrued interest and penalties associated with uncertain tax positions for the years ended December 31, 2019 and 2018. The Company files tax returns in the U.S. federal jurisdiction and New York, California, and other states. The Company is generally subject to examination by income tax authorities for three years from the filing of a tax return, therefore, the federal and certain state returns from 2016 forward and the California returns from 2015 forward are subject to examination. The Company currently is not under examination by any tax authority.