TAXES

12 Months Ended

Dec. 31, 2021

Income tax expense (benefit) from continuing operations is summarized as follows:


	Years Ended December 31,				Period from Inception to December 31, 2019		Period from January 1, 2019 to September 3, 2019
	2021		2020		(Successor)		(Predecessor)
(in thousands)
Pre-tax (loss) income
Domestic	$	(10,856)	$	(8,524)	$	(17,968)	$	(19,033)
Foreign	259		122		211		90
Total pre-tax loss	(10,597)		(8,402)		(17,757)		(18,943)
Current tax benefit (expense):
Federal	(36)		—		—		—
State	222		(689)		(78)		(3)
Foreign	(136)		(303)		(9)		(17)
Total Current tax benefit (expense)	50		(992)		(87)		(20)
Deferred tax benefit:
Federal	631		2,342		765		16,119
State	(62)		554		180		7,189
Foreign	—		—		—		—
Total deferred tax benefit	569		2,896		945		23,308
Total tax benefit (expense):
Federal	595		2,342		765		16,119
State	160		(135)		102		7,186
Foreign	(136)		(303)		(9)		(17)
Total benefit for taxes on income	$	619	$	1,904	$	858	$	23,288

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal income tax examinations for the years prior to 2018. With few exceptions, we are no longer subject to state income tax examinations for the years prior to 2018. At December 31, 2021, there are no income tax examinations currently in process in the U.S. jurisdictions.

Our subsidiary, Convey Health Solutions Philippines, Inc. (“CHSP”), is subject to income taxes in the Philippines at a favorable rate due to certain tax incentives afforded to our subsidiary by the Philippine Economic Zone Authority. At December 31, 2021, our subsidiary is under examination by the Bureau of Internal Revenue for the year 2014.

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. Significant components of our deferred taxes were as follows:


	December 31, 2021	December 31, 2020
(in thousands)
Deferred Tax Assets:
Net operating loss carry forward	$12,247	$13,997
General business credits	4,173	4,078
Accrued compensation	1,545	5,921
Stock-based compensation	2,132	1,870
Foreign tax credit	—	268
Deferred revenue	66	260
Allowance for refunds, claim denials and returns	20	171
Accrued liabilities	2,153	1,707
Intangible assets	603	648
Deferred rent	239	367
Accrued Taxes	2,654	3,264
Interest expense	4,186	—
Tenant Improvement Allowance	1,225	1,431
Uniform Capitalization	110	532
Director and officer prior act liability insurance policy	1,790	—
Other	266	121
Total deferred tax assets, net	$33,409	$34,635
Deferred tax liabilities:
Identifiable Intangible assets	$(47,660)	$(50,827)

Property and equipment	(5,382)	(5,687)
Software development costs	(2,984)	(1,669)
Change in Fair Value on Contingent liability	(3,018)	(3,013)
Prepaids	(357)	—

Total deferred tax liabilities	$(59,401)	$(61,196)
Net deferred tax liability	$(25,992)	$(26,561)

The total of all deferred tax assets is $33.4 million and $34.6 million as of December 31, 2021 and 2020, respectively. The total of all deferred tax liabilities is $59.4 million and $61.2 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, we had no unrecognized tax benefits.

As a result of the Merger, an analysis was completed in accordance with Internal Revenue Code Section 382 (“Section 382”) to determine the limitations associated with our use of preexisting Net Operating Loss (“NOL”) carryforwards in future periods. The annual limitation is based on a number of factors including the value of our stock (as defined for tax purposes) on the date of the ownership change, our net unrealized built in gain position on that date and the effect of any subsequent ownership changes, if any. We retained a third party to complete the required Section 382 analysis who determined that at September 4, 2019 approximately $66.9 million of the NOL carryforwards will be available to future tax periods in varying increments annually. As of December 31, 2021, we had $43.3 million of federal NOL carryforwards of which $0.7 million

begin to expire between 2023 and 2026 and the remaining $42.6 million has an indefinite carryforward period. The remaining NOLs will be limited to 80% of taxable income in accordance with the Tax Cut and Jobs Act. As of December 31, 2021, we had $41.4 million of combined NOL carryforwards in various states which will begin to expire in 2023.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Consequently, we have filed NOL carryback claims for the years 2016 and 2017. Furthermore, the CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Internal Revenue Code Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification significantly increases the allowable interest expense deduction and results in significantly less taxable income for the year-ended 2020, resulting in less utilization of net operating losses in that year. As a result of the CARES Act, it is anticipated that we will fully utilize all interest expense that was deferred with no additional disallowed interest expense in 2020. Finally, the CARES Act included a retroactive technical correction as if it were included in the Tax Cuts and Jobs Act originally. The CARES Act permits Qualified Improvement Property to qualify for 15-year depreciation and therefore also be eligible for 100 percent first-year bonus depreciation.

A reconciliation of the provision for income taxes at the federal statutory rate compared to the effective tax rate is as follows:


	Years Ended December 31,				Period from Inception to December 31, 2019		Period from January 1, 2019 to September 3, 2019
	2021		2020		(Successor)		(Predecessor)
(in thousands)
Income tax expense at the statutory rate	$	2,225	$	1,764	$	3,729	$	3,978
Increase in income taxes resulting from:
Foreign Jurisdiction rate different than the statutory	(82)		(277)		35		2
State taxes, net of federal	30		(159)		242		5,837
Loss on Extinguishment of Debt	—		—		—		654
Transaction bonuses deduction for tax not for book	—		—		—		2,713
Tax credits	187		272		(71)		72
Option Holder Compensation	486		—		—		9,300
Non-Deductible Compensation for Covered Employees	(880)		—		—		—
Write off of Excess DTA related to Stock Option Exercise	(120)		—		—		—
Buyer Transaction Costs not Deductible for Tax	—		—		(2,953)		—
70% Success based deductible transaction Costs	—		—		—		1,185
Prior Year Adjustments	—		—		—		(170)
Carryback Due To CARES Act	—		154		—		—
Fair value contingency	608		375		—		—
Disallowed Fringe Benefits	(149)		(140)		(43)		(59)
FTC - Expiration	(268)		—		—		—

NOL Carryforward Adjustment - Amended 2019 Tax Return	(1,369)		—		—		—
Other	(49)		(85)		(81)		(224)
Income tax benefit	$	619	$	1,904	$	858	$	23,288

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
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-Name Accounting Standards Codification
-Topic 740
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-Section S99
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Reference 3: http://www.xbrl.org/2003/role/disclosureRef
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Reference 4: http://www.xbrl.org/2003/role/disclosureRef
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Reference 5: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-SubTopic 10
-Section 50
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-URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319

Reference 6: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
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-URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338

Reference 7: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
-URI http://asc.fasb.org/topic&trid=2144680

Reference 8: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 740
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-Section 50
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-URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331

Reference 9: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
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-URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690

+ Details

Convey Health Solutions Holdings, Inc. 10-K