INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

For the year ended December 31, 2022, our income tax provision resulted in an effective tax rate of 2.3%. For the year ended December 31, 2021, our income tax provision resulted in an effective tax rate of 5.0%. Our income tax provision for the year ended December 31, 2022 was $3.3 million, our income tax provision for December 31, 2021 was $8.8 million and includes federal, state and foreign taxes.

The substantial doubt about the Company’s ability to continue as a going concern basis casts doubt on our ability to estimate and generate future income. The lack of going concern basis applicable for our financial statements for the year ended December 31, 2022, generally requires a valuation allowance for all deferred tax assets that are not realizable through the reversal of existing timing differences or taxable income in carryback years. While several subsidiaries have historically been profitable and for which future income was a material factor in assessing the realizability of their deferred tax assets, the substantial doubt about the Company’s ability to continue on a going concern basis casts doubt on our ability to generate future income. As a result, the Company included a charge of $2.2 million in income tax expense for the valuation allowance required to offset the remaining net deferred tax assets. The $2.2 million charge is primarily attributable to our German and Canadian subsidiaries. Refer to Note 1 - Summary of Significant Accounting Policies and Practices for additional liquidity and going concern discussion.

The components of our tax provision and benefit on continuing operations were as follows (in thousands):

	Current		Deferred		Total
Twelve months ended December 31, 2022:
U.S. Federal	$	(211)	$	—	$	(211)
State & local	513		—		513
Foreign jurisdictions	1,319		1,685		3,004
Tax provision	$	1,621	$	1,685	$	3,306
Twelve months ended December 31, 2021:
U.S. Federal	$	938	$	(1,115)	$	(177)
State & local	590		150		740
Foreign jurisdictions	2,494		5,716		8,210
Tax provision	$	4,022	$	4,751	$	8,773

The components of pre-tax income (loss) from continuing operations for the years ended December 31, 2022 and 2021 were as follows (in thousands):

	Twelve Months Ended December 31,
	2022		2021
Domestic	$	(156,001)	$	(171,299)
Foreign	9,220		(4,773)
Pre-tax income (loss) from continuing operations	$	(146,781)	$	(176,072)

The income tax provision in 2022 and provision in 2021 attributable to the loss from continuing operations, respectively, differed from the amounts computed by applying the U.S. federal income tax rate 21% in 2022, (21% in 2021) to pre-tax loss from continuing operations as a result of the following (in thousands):

	Twelve Months Ended December 31,
	2022		2021
Pre-tax loss from continuing operations	$	(146,781)	$	(176,072)
Computed income taxes at statutory rate	(30,824)		(36,975)
State income taxes, net of federal benefit	395		561
Foreign tax rate differential	701		1,380
Non-cash compensation	228		320
Deferred taxes on investment in foreign subsidiaries	—		(1,939)
Non-deductible expenses	118		229
Foreign withholding	693		1,078
Prior year tax adjustments	7		141
Goodwill impairment	—		9,399
Valuation allowance	31,430		34,284
Rate change	—		(140)
Other	558		435
Total expense (benefit) for income tax on continuing operations	$	3,306	$	8,773

        The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands): 

	December 31,
	2022		2021
Deferred tax assets:
Accrued compensation and benefits	$	7,630	$	7,831
Receivables	552		1,345
Inventory	296		316
Share based compensation	258		271
Other accrued liabilities	2,940		3,467
Tax credit carry forward	2,314		3,613
Interest expense limitation	28,137		22,312
Goodwill and intangible costs	10,143		9,221
Convertible debt	1,780		—
Net operating loss carry forwards	38,860		68,972
Other	1,770		2,428
Deferred tax assets	94,680		119,776
Less: Valuation allowance	(73,483)		(89,191)
Deferred tax assets, net	$	21,197	$	30,585
Deferred tax liabilities:
Property, plant and equipment	(17,642)		(20,267)
Unremitted earnings of foreign subsidiaries	(3,581)		(3,944)
Convertible debt	—		(7,359)
Other	(3,260)		(2,408)
Deferred tax liabilities	(24,483)		(33,978)
Net deferred tax asset (liability) 1	$	(3,286)	$	(3,393)

________________

1 As of December 31, 2021, certain deferred tax balances associated with discontinued operations remain on the balance sheet and in the inventory of deferred taxes but are presented within current assets and current liabilities associated with discontinued operations.

Management evaluates all available evidence, both positive and negative, to determine whether sufficient future taxable income will be generated to allow for the realization of the existing deferred tax assets. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. A significant factor of negative evidence evaluated was the cumulative pre-tax loss incurred over the two-year period ended December 31, 2022. This objective evidence limits the ability to consider other subjective positive evidence, such as our projections for future pre-tax income.

On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $73.5 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. This valuation allowance relates primarily to the deferred tax assets for federal, foreign and state tax net operating loss carryforwards. The amount of deferred tax asset considered realizable could be adjusted if there are changes to net operating loss carryforward periods or there is a change to the weight assessed on various sources of positive and negative evidence.

The current year increase in the valuation allowance is primarily attributable to our foreign operations. In the current quarter, we were able to release $11.5 million of valuation allowance resulting from the realization of deferred tax assets for our U.S. operations.

As of December 31, 2022, we had net operating loss carryforwards for U.S. federal income tax purposes of $104.2 million. Of this amount, $3.7 million expires in various dates through 2037, which is subject to limitations under Section 382 of the U.S. Internal Revenue Code of 1986 as a result of stock ownership changes from Quest Integrity business sale, and $100.5 million has an indefinite carryforward period. These carryforwards are available, subject to certain limitations such as mentioned above, to offset future taxable income. Further, we have state net operating loss carryforwards of $178.6 million with $156.5 million expiring on various dates through 2041 and $22.1 million with an indefinite carryforward period.

As of December 31, 2022, we had interest expense carryforward for U.S. income tax purposes of $120.6 million. The entire $120.6 million has an indefinite carryforward period. These carryforwards are available, subject to certain limitations, to offset future taxable income.

As of December 31, 2022, the Company had $2.2 million of tax credits that will expire on various dates through 2037 if not utilized.

As of December 31, 2022, we had foreign net operating loss carryforwards totaling $25.1 million. Of this amount, $1.8 million will expire in various dates through 2031 and $23.3 million has an unlimited carryforward period.

As of December 31, 2022, none of our undistributed earnings of foreign operations were considered to be permanently reinvested overseas. As of December 31, 2022, the deferred tax liability related to undistributed earnings of foreign subsidiaries was $2.6 million.

As of December 31, 2022, $1.7 million of unrecognized tax benefits would affect our effective tax rate. We estimate the uncertain tax benefits that may be recognized within the next twelve months will not be material. Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.

We file income tax returns in the U.S. federal and state jurisdictions as well as various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years prior to 2016. We are currently under audit in one of the states in which we do substantial business. As of December 31, 2022, we recorded a $0.5 million tax liability in our uncertain positions related to this audit due to retroactive changes included in final regulations issued by the state. Certain Dutch entities were also under audit. We did not anticipate any material adjustments related to these examinations.

Periodic examinations of our tax filings occur by the taxing authorities for the jurisdictions in which we conduct business. These examinations review the significant positions taken on our returns, including the timing and amount of income and deductions reported, as well as the allocation of income among multiple taxing jurisdictions. We do not expect any material adjustments to result from positions taken on our income tax returns.

The following table summarizes the Company’s reconciliation of gross unrecognized tax benefits, excluding penalties and interest, for the year ended December 31, 2022 and 2021 (in thousands):

	Twelve Months Ended December 31,
	2022		2021
Unrecognized tax benefits - January 1	$	1,285	$	1,610
Additions based on current year tax positions	—		—
Additions based on tax positions related to prior years	350		543
Reductions based on tax positions related to prior years	—		—
Disposition of uncertain tax positions of discontinued operations	(426)		—
Settlements	—		—
Reductions resulting from a lapse of the applicable statute of limitations	(112)		(868)
Unrecognized tax benefits - December 31	$	1,097	$	1,285

We have recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of December 31, 2022 and 2021, the total amount of accrued interest and penalties related to unrecognized tax benefits was $0.6 million and $0.6 million, respectively. There was approximately $0.0 million and $0.2 million, respectively, of interest and penalties related to unrecognized tax benefits that was recorded in income tax expense for the period ended December 31, 2022 and 2021