INCOME TAXES

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The components of income before income taxes were as follows (in thousands):

	Year Ended December 31,
	2020		2019		2018
Domestic	$	(9,441)	$	(1,872)	$	3,602
Foreign	(4,352)		(711)		205
	$	(13,793)	$	(2,583)	$	3,807

Temporary differences that give rise to the components of net deferred tax assets (liabilities) are as follows (in thousands):

	December 31,
	2020		2019
Inventory	$	2,993	$	2,005
Accrued compensation	295		122
Stock options	2,322		1,858
Research and development tax credit	1,308		990
Research and development expense	2,571		1,417
Deferred revenue	1,441		2,052
Property and equipment	298		3,469
Net operating loss carryforwards	8,757		11,676
Foreign tax credit carryforward	64		64
Sales-type leases	1,324		(1,968)
Convertible debt equity component	(8,691)		(9,421)
Foreign intangible	(11,311)		(691)
Other	(1,124)		(179)
	247		11,394
Valuation allowance	(6,409)		(5,656)
Total net deferred tax assets (liabilities)	$	(6,162)	$	5,738

The components of the income tax expense (benefit) are as follows (in thousands):

	Year Ended December 31,
	2020		2019		2018
Current income tax expense:
Federal	$	(24)	$	—	$	(115)
State	339		189		192
Foreign	1,465		170		63
Total current expense	$	1,780	$	359	$	140
Deferred income tax (benefit) expense:
Federal	$	369	$	(1,610)	$	(1,877)
State	289		(307)		(378)
Foreign	(2,199)		112		—
Total deferred (benefit) expense	(1,541)		(1,805)		(2,255)
Total income tax expense (benefit)	$	239	$	(1,446)	$	(2,115)

The Company's income tax (benefit) expense relating to income (loss) for the periods presented differs from the amounts that would result from applying the federal statutory rate to that income (loss) as follows:

	Year Ended December 31,
	2020		2019		2018
Statutory federal tax rate	21	%	21	%	21	%
State income taxes, net of federal benefit	(4)	%	9	%	(8)	%
Non-controlling interest in Optomed	1	%	(2)	%	—	%
Foreign income inclusion	(12)	%	—	%	—	%
Non-temporary stock option benefit	6	%	48	%	(50)	%
Meals and entertainment permanent difference	—	%	(2)	%	1	%
GILTI permanent difference	—	%	2	%	1	%
Other permanent differences	1	%	(1)	%	1	%
Foreign tax rate differences	2	%	6	%	—	%
Change in tax rate	1	%	(6)	%	—	%
Change in valuation allowance	(4)	%	(17)	%	—	%
Other deferred differences	(2)	%	(9)	%	(21)	%
Transaction costs	(6)	%	(6)	%	—	%
Executive compensation limit	(6)	%	(7)	%	—	%
Research & development credit	2	%	20	%	—	%
Equity Investment	(4)	%	—	%	—	%
Change in uncertain tax benefits	3	%	—	%	—	%
Other	(1)	%	—	%	(1)	%
Effective income tax rate	(2)	%	56	%	(56)	%

In 2020, we had total income tax expense of $0.2 million, including $0.6 million in domestic deferred income tax expense and $2.2 million in foreign deferred income tax benefit, and $1.8 million in current income tax expense. In 2019, we had total income tax benefit of $1.4 million, including approximately $1.9 million in domestic deferred income tax benefit and $0.1 million of foreign deferred income tax expense, a non-cash benefit, and approximately $0.4 million in current income tax expense. In 2018, we had total income tax benefit of $2.1 million, including $2.3 million in domestic deferred income tax benefit, a non-cash benefit, and $0.1 million in current income tax expense. Income tax expense increased in 2020 from 2019 due to foreign income inclusion, executive compensation limitations and acquisition related costs. Income tax benefit decreased in 2019 from 2018 due to executive compensation limitations and lower excess tax benefits related to stock-based compensation deductions.

Cash paid for income taxes for the years ended December 31, 2020, 2019 and 2018 was $993 thousand, $128 thousand and $36 thousand, respectively.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various foreign, state and local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Although the U.S. and many states generally have statutes of limitations ranging from 3 to 5 years, those statutes could be extended due to the Company’s net operating loss and tax credit carryforward positions in several of the Company's tax jurisdictions. In the U.S., the tax years 2017 - 2019 remain open to examination by the Internal Revenue Service.

As of December 31, 2020, the Company had net operating loss carryforwards ("NOL") of approximately $35.0 million, a foreign tax credit of $64 thousand and a domestic research and development tax credit carryforward of approximately $1.3 million. Our federal NOL is expected to expire as follows if unused: $22 million in 2021 through 2022, $5.4 million in 2024 through 2025 and $0.5 million in 2027 and later. Our foreign NOL of $7.1 million does not have an expiration date.

The Company considered multiple factors in assessing the need for an increase in the partial valuation allowance against the Company’s deferred tax assets as of December 31, 2020. Significant factors such as employee stock compensation expenses from achievement of Company performance metrics, executive compensation limitations and required capitalization of research and development expenses beginning in 2022 have negatively impacted our future taxable income projections. These future projections indicate a larger portion of the Company’s deferred tax assets will likely expire unrealized. As a result, the Company recorded an additional $0.8 million tax effected increase to the current partial valuation allowance against the Company's worldwide net operating losses and tax credits for the year ended December 31, 2020. As of December 31, 2020, the Company had a deferred tax asset of approximately $10.1 million from net operating losses and tax credits and a net partial valuation allowance of approximately $6.4 million recorded against these deferred tax assets. The Company will continue to closely monitor the need for an additional valuation allowance against its deferred tax assets in each subsequent reporting period which can be impacted by actual operating results compared to the Company's forecast.

ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance with the other provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely or being realized upon ultimate audit settlement. In the normal course of business, the Company's tax returns are subject to examination by various taxing authorities. Such examination may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to certain matters.

The following provides a reconciliation of unrecognized tax benefits which are included in Other liabilities within the Consolidated Balance Sheets (in thousands):

	Year Ended December 31,
	2020		2019
Balance at beginning of period	$	—	$	—
Acquired additions based on prior year tax positions	(1,072)		—
Reductions from lapse in statutes of limitations	358		—
Currency Translation Adjustment	$	(94)	—
Balance at the end of period	$	(808)	$	—

The total amount of unrecognized tax benefits, which are included in other liabilities within the combined balance sheets as of December 31, 2020 was approximately $0.8 million, which may impact the effective tax rate if recognized. These unrecognized tax benefits were recognized as part of the acquisition of scil animal care company GmbH. Per the tax indemnification included in the purchase agreement, the seller has indemnified the Company for these other liabilities, which would reduce the economic impact to the Company if these positions were settled with tax authorities. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, the Company does not expect the change to have a material impact on the combined financial statements. The Company recognizes interest and penalties related to uncertain tax positions in income tax (benefit)/expense. Interest and penalties accrued as of December 31, 2020 are $19.0 thousand.

As of December 31, 2020, the Company had accumulated undistributed earnings generated by foreign subsidiaries of approximately $2.9 million, which would be subject to U.S. taxes and foreign withholding taxes of approximately $145 thousand if repatriated. The Company had previously considered these earnings as a possible cash source through repatriation to the U.S. As of December 31, 2020, the Company has changed its assertion on these earnings and now considers them to be indefinitely reinvested and expects the future U.S. cash generation to be sufficient to meet future U.S. cash needs. If the Company decides to repatriate these foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings would no longer be indefinitely invested outside the United States.