INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

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

	Year Ended December 31,
	2021		2020		2019
Domestic	$	2,347	$	(9,441)	$	(1,872)
Foreign	(5,788)		(4,352)		(711)
	$	(3,441)	$	(13,793)	$	(2,583)

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

	December 31,
	2021		2020
Inventory	$	4,616	$	2,993
Accrued compensation	(70)		295
Stock options	3,581		2,322
Research and development tax credit	1,276		1,308
Research and development expense	3,291		2,571
Deferred revenue	1,390		1,441
Property and equipment	524		298
Net operating loss carryforwards	4,401		8,757
Foreign tax credit carryforward	64		64
Sales-type leases	2,494		1,324
Convertible debt equity component	—		(8,691)
Foreign intangible	(11,477)		(11,311)
Other	(540)		(1,124)
	9,550		247
Valuation allowance	(2,788)		(6,409)
Total net deferred tax assets (liabilities)	$	6,762	$	(6,162)

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

	Year Ended December 31,
	2021		2020		2019
Current income tax (benefit) expense:
Federal	$	—	$	(24)	$	—
State	666		339		189
Foreign	225		1,465		170
Total current expense	$	891	$	1,780	$	359
Deferred income tax (benefit) expense:
Federal	$	(4,364)	$	369	$	(1,610)
State	(813)		289		(307)
Foreign	713		(2,199)		112
Total deferred (benefit) expense	(4,464)		(1,541)		(1,805)
Total income tax (benefit) expense	$	(3,573)	$	239	$	(1,446)

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,
	2021		2020		2019
Statutory federal tax rate	21	%	21	%	21	%
State income taxes, net of federal benefit	3	%	(4)	%	9	%
Non-consolidated Investment Income	8	%	1	%	(2)	%
Foreign income inclusion	—	%	(12)	%	—	%
Non-temporary stock option benefit	49	%	6	%	48	%
Meals and entertainment permanent difference	—	%	—	%	(2)	%
GILTI permanent difference	—	%	—	%	2	%
Other permanent differences	—	%	1	%	(1)	%
Foreign tax rate differences	10	%	2	%	6	%
Change in tax rate	8	%	1	%	(6)	%
Change in valuation allowance	88	%	(4)	%	(17)	%
Other deferred differences	(25)	%	(2)	%	(9)	%
Transaction costs	(4)	%	(6)	%	(6)	%
Executive compensation limitation	(65)	%	(6)	%	(7)	%
Research & development credit	(1)	%	2	%	20	%
Equity Investment	(8)	%	(4)	%	—	%
Change in uncertain tax benefits	11	%	3	%	—	%
Contingent Consideration	10	%	—	%	—	%
Other Foreign Income Taxes Due	(2)	%	—	%	—	%
Other	1	%	(1)	%	—	%
Effective income tax rate	104	%	(2)	%	56	%

In 2021, we had total income tax benefit of $3.6 million, including $5.2 million in domestic deferred income tax benefit and $0.7 million in foreign deferred income tax expense, and $0.9 million in current income tax expense. In 2020, we had total income tax expense of $0.2 million, including approximately $0.6 million in domestic deferred income tax expense and $2.2 million of 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. Income tax expense decreased in 2021 from 2020 due to change in valuation allowance, stock option benefits, and executive compensation limitation. Income tax expense increased in 2020 from 2019 due to foreign income inclusion, executive compensation limitations and acquisition related costs.

Cash paid for income taxes for the years ended December 31, 2021, 2020 and 2019 was $2.4 million, $993 thousand and $128 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 2018 - 2020 remain open to examination by the Internal Revenue Service.

As of December 31, 2021, the Company had net operating loss carryforwards ("NOL") of approximately $7.0 million, a foreign tax credit of $64 thousand and a domestic research and development tax credit carryforward of approximately $1.3 million for federal tax purposes. Our federal NOL is expected to expire as follows if unused: $0.4 million in 2022, $5.47 million in 2024 through 2025 and $0.5 million in 2027 through 2037. Our federal NOL of $0.7 million does not have an expiration date. Our foreign NOL of $9.4 million does not have an expiration date.

The Company considered multiple factors in assessing the need for a decrease in the partial valuation allowance against the Company’s deferred tax assets as of December 31, 2021. Due to executive compensation limitation significantly disallowing expense related to stock compensation along with future projections of income, the Company believes they will be able to utilize the remaining Federal NOLs and tax credits before they expire. Due to statute of limitations however, the Company does believe $61 thousand of state NOLs will expire before they can be utilized. For foreign NOL purposes, the Company believes due to projected losses in Germany and historical three year cumulative losses, all statutory deferred tax assets will not be utilized and therefore increased the valuation allowance against all statutory deferred balances in Germany. As a result, the Company recorded an additional $3.6 million tax effected decrease to the current partial valuation allowance against the Company's worldwide net operating losses, statutory assets, and tax credits for the year ended December 31, 2021. As of December 31, 2021, the Company had a deferred tax asset of approximately $5.7 million from net operating losses and tax credits and a net partial valuation allowance of approximately $2.8 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,
	2021		2020
Balance at beginning of period	$	(808)	$	—
Acquired additions based on prior year tax positions	(508)		(1,072)
Reductions from lapse in statutes of limitations	404		358
Currency Translation Adjustment	19		(94)
Balance at the end of period	$	(893)	$	(808)

The total amount of unrecognized tax benefits, which are included in other liabilities within the combined balance sheets as of December 31, 2021 was approximately $0.9 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 in 2020 and BiEssA A-Laboratorio die Analisi Veterinarie S.r.l in 2021. Per the tax indemnification included in the purchase agreements, the sellers have 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, 2021 are $18 thousand.

As of December 31, 2021, the Company had accumulated undistributed earnings generated by foreign subsidiaries of approximately $3.4 million, which would be subject to U.S. taxes and foreign withholding taxes of approximately $167 thousand if repatriated. 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.