Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.24.1.u1
Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
For financial reporting purposes, Loss Before Income Tax Benefit (Expense) includes the following components (in thousands):
Year Ended December 31,
2023 2022
United States $ (45,517) $ (42,254)
Foreign (32,658) (2,170)
Loss Before Income Tax Benefit (Expense) $ (78,175) $ (44,424)
The significant components of Income Tax Benefit (Expense) are as follows (in thousands):
Year Ended December 31,
2023 2022
Current:
Federal $ –  $ – 
State –  – 
Foreign –  (150)
–  (150)
Deferred:
Federal 152  – 
State 116  – 
Foreign 705  45 
973  45 
Income Tax Benefit (Expense) $ 973  $ (105)
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred Tax Liability, net consists of the following components (in thousands):
As of December 31,
2023 2022
Deferred Tax Assets:
Net Operating Loss Carryover $ 48,857  $ 40,870 
Lease Liability 2,632  3,140 
Stock Compensation 1,884  2,355 
Warrants 18  153 
Marketable Securities 249  1,851 
Other 2,519  1,924 
Total Gross Deferred Tax Assets 56,159  50,293 
Less: Valuation Allowance (49,963) (42,938)
Deferred Tax Assets, net $ 6,196  $ 7,355 
Deferred Tax Liabilities:
Right-of-Use Assets (2,427) (2,949)
Intangible Assets (1) (5,168) (6,778)
Total Gross Deferred Tax Liabilities $ (7,595) $ (9,727)
Deferred Tax Liability, net $ (1,399) $ (2,372)
(1) The December 31, 2022 balance is adjusted to include the correction of error as noted in Note 2 within the Restatement of Previously Issued 2022 Financial Statements and Unaudited Interim 2023 Financial Statements section.
The income tax provision differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax income from continuing operations due to the following (in thousands):
Year Ended December 31,
2023 2022
Income Tax Benefit Computed at the Statutory Federal Rate $ 16,396  $ 9,553 
State Income Taxes, Net of Federal Tax Effect 1,630  1,883 
Stock Compensation (828) (1,894)
Contingent Earn Out –  282 
Goodwill Impairment (7,042) (1,020)
Warrants (583) 53 
Other (729) (960)
Non-U.S. operations 858  94 
Valuation Allowance (8,729) (8,096)
Income Tax Benefit (Expense) $ 973  $ (105)

At December 31, 2023, the Company had Federal, state, and foreign net operating loss carry forwards of approximately $125.8 million, $126.2 million, and $50.5 million, respectively, that may be offset against future taxable income and will begin to expire in 2027, if not utilized. No tax benefit has been reported in the December 31, 2023 financial statements since the potential tax benefit from net operating loss carryforward is offset by a valuation allowance of the same amount. At December 31, 2023, the Company had gross realized capital loss carryforwards of $5.1 million, which expire beginning in 2027 if not utilized. A full valuation allowance has been recorded against this amount.

For the years ending December 31, 2023 and 2022, the Company reflects a deferred tax liability in the amount of $1.4 million and $2.4 million (after the correction of the error identified as described in Note 2), respectively, due to the future tax liability from assets with indefinite lives known as a “naked credit.” The future tax liability created by this indefinite lived asset can be offset by up to 80% of net operating loss carryforwards created after 2017. The remaining portion of the future tax liability from indefinite lived assets cannot be used to offset definite lived deferred tax assets.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.
ASC 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the consolidated financial statements.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of December 31, 2023, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and in the states of California, Florida, Massachusetts, New Jersey, New York, as well as Canada. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses were generated and carried forward to make adjustments up to the amount of the net operating losses. The Company is currently subject to U.S. federal, state and local and foreign tax examinations by tax authorities. The Company is no longer subject to audits by U.S. federal, state, local or foreign authorities for years prior to 2019.
Kartoon Studios, Inc. and its wholly-owned U.S. subsidiaries are subject to U.S. income taxes and file a consolidated tax return in the U.S. The Beacon Communications Group, Ltd., Ameba Inc. and WOW Unlimited Media Inc. are subject to Canadian income taxes on a stand-alone basis and file separate tax returns in Canada.