Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1, Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.

As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.

The sources of loss before income tax benefit are as follows:

(In thousands)	For the year ended December 31,
Current:	2023		2022
Domestic	$	(57,634)	$	(346,468)
Foreign	—		114,149
Total	$	(57,634)	$	(232,319)

Income tax benefit consisted of the following: 

(In thousands)	For the year ended December 31,
Current:	2023		2022
Federal	$	—	$	—
State	(18)		159
Foreign	—		—
Total current expense	(18)		159
Deferred:
Federal	(1,301)		(7,192)
State	101		(1,435)
Foreign	—		(916)
Total deferred benefit	(1,200)		(9,543)
Income tax benefit	$	(1,218)	$	(9,384)

Income tax benefit differed from the amount that would be provided by applying the U.S. federal statutory rate due to the following: 

(In thousands)	For the year ended December 31, 2023				For the year ended December 31, 2022
	Amount		Tax Rate		Amount		Tax Rate
Loss before income taxes	$	(57,634)			$	(232,319)
Federal statutory income tax	(12,103)		21.00	%	(48,787)		21.00	%
State income tax, net of federal benefit	110		(0.19)	%	(9,324)		4.01	%
Foreign differential rate	—		—	%	(357)		0.15	%
Goodwill impairment	7,273		(12.62)	%	18,380		(7.91)	%
Transactions costs	3,147		(5.46)	%	187		(0.08)	%
Permanently disallowed interest expense	1,646		(2.86)	%	2,544		(1.10)	%
Valuation allowance	(2,750)		4.77	%	51,670		(22.24)	%
Deconsolidation of subsidiary	(2,412)		4.19	%	(24,766)		10.66	%
Tax gain on sale of Innovations Group	1,760		(3.05)	%	—		—	%
Other	2,111		(3.66)	%	1,069		(0.46)	%
Effective income tax rate	$	(1,218)	2.11	%	$	(9,384)	4.04	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes are as follows:

(In thousands)	December 31, 2023		December 31, 2022
Deferred Tax Assets
Accrued expenses	$	1,553	$	5,863
Transactions costs	7,453		88
Net operating loss carryforwards	9,112		10,208
Stock compensation	2,048		2,109
Provision for expected credit losses	102		4,097
Disallowed interest expense	4,041		789
Unrealized loss from fair market value adjustment on derivatives	—		14
Investment in Glocal	40,193		40,432
Other	440		865
Total deferred tax assets	64,942		64,465
Deferred Tax Liabilities
Property, plant and equipment	(882)		(1,169)
Intangibles	(5,251)		(5,156)
Convertible debt accretion	(5,420)		(7,670)
Investment in deconsolidated entities	(4,611)		—
Total deferred tax liabilities	(16,164)		(13,995)
Less: valuation allowance	(48,778)		(51,670)
Net deferred tax asset (liability)	$	—	$	(1,200)

We evaluate our deferred tax assets periodically to determine if valuation allowances are required. Ultimately, the realization of deferred tax assets is dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or tax attributes can be utilized. To this end, we consider the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax-planning strategies, and projected future taxable income. Based on these above considerations, and consistent with our conclusion as of December 31, 2022, we continue to believe it is more likely than not that a portion of the benefit from the deferred tax assets will not be realized, and as such has recorded a valuation allowance of $48.8 million against our deferred tax assets as of December 31, 2023. The net change in the valuation allowance for the years ended December 31, 2023 and 2022 are $(2.9) million and $51.7 million, respectively.

As a result of the voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, deferred tax assets and liabilities related primarily to certain intangibles, fixed assets and accrued liabilities were written off, and we recorded a deferred tax liability related to the book to tax basis difference in the Thrasys and TTC investments.

As of December 31, 2023, the Company had approximately $7.5 million of federal net operating loss (“NOL”) carryforward and $1.6 million of state NOL carryforward. The federal NOL carryforward will carry forward indefinitely. The state NOL carryforward will begin expiring in 2032. A valuation allowance has been recorded against these deferred tax assets.

As of December 31, 2023 and 2022, respectively, we had no accumulated unremitted earnings from foreign subsidiaries.

The following table summarizes the activity related to our unrecognized tax benefits:

	For the year ended December 31,
	2023		2022
Beginning balance	$	—	$	1,703
Changes for prior year tax positions	4,519		(1,703)
Ending balance	$	4,519	$	—

As of December 31, 2023 and 2022 we had uncertain tax positions of $4.5 million and zero, respectively.

The Internal Revenue Service (“IRS”) audited the 2008 and 2009 tax returns for a business in our Integrated Care Management segment for the proper year of inclusion in income of an approximately $15 million payment on the license of certain intellectual property rights. The business originally included the $15 million payment in income on its 2010 S Corporation tax return, matching the year of inclusion for financial accounting purposes. The corporate level tax was paid to California and the business passed the gain through to its shareholders. The

IRS has asserted that the business owes C Corporation tax of approximately $5 million for 2008, or in the alternative, the business owes C Corporation tax of approximately $5 million for 2009 as a built-in gain. In addition, the business could be assessed additional California franchise tax of approximately $1.3 million; and if additional income taxes are imposed, interest will be charged at approximately 4% to 10% per year, compounded annually, resulting in potential interest of approximate $4 million. The IRS has not asked that penalties be imposed.

The matter is currently pending before the U.S. Tax Court, Docket 11565-15. There are related tax cases for some of the former shareholders of the business for additional income taxes due if the gain is shifted to 2009. On December 4, 2018, the IRS filed a motion for summary judgment; however, the business prevailed, and the motion was denied. In January 2020, the business filed a motion for summary judgment arguing that either the gain was properly reported in 2010 and all taxes have been paid or in the alternative it should have been taxable in 2009 with no built-in gains tax. In both cases, there would be no additional income tax due for 2008 or 2009 to be paid by the business. The IRS filed an objection to the business’ motion. On March 3, 2021, the U.S. Tax Court, without consideration of the merits of the case, issued a very brief court order dismissing the business’ motion. Had the motion been granted, the need for a trial would have been obviated.

When we acquired the business in November 2020, all of the former shareholders of the business agreed to indemnify us for any losses as a result of this dispute with the IRS.

The business filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) commencing a chapter 11 case (the “Bankruptcy Case”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on October 20, 2023. As a result, the automatic stay imposed by section 362(a) of the Bankruptcy Code became immediately effective, and, on October 30, 2023, the U.S. Tax Court entered an order staying all proceedings in the case. On November 17, 2023, the IRS filed before the Bankruptcy Court an amended proof of claim asserting a priority claim under section 507(a)(8) of the Bankruptcy Code in the amount of $17,282,914.83 (the “IRS Proof of Claim”) based on both of the IRS’s alternative positions. On March 14, 2024, the business filed a motion in the Bankruptcy Court to estimate the IRS Proof of Claim pursuant to sections 502(c) and 105 (a) of the Bankruptcy Code, or, alternatively pursuant to section 505 of the Bankruptcy Code, and believe that it should be substantially reduced to an amount between $0 to approximately $166,835. The ultimate outcome of this matter is unknown at this time. This business is a subsidiary of UpHealth Holdings, which we deconsolidated as of September 30, 2023 (as discussed in Note 1, Organization and Business).