INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

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

	Year Ended December 31,
	2022		2021		2020
Domestic	$	(13,465)	$	2,347	$	(9,441)
Foreign	(8,369)		(5,788)		(4,352)
	$	(21,834)	$	(3,441)	$	(13,793)

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

	December 31,
	2022		2021
Inventory	$	6,995	$	4,616
Accrued compensation	182		(70)
Stock options	3,882		3,581
Research and development tax credit	1,803		1,276
Research and development expense	6,387		3,291
Deferred revenue	1,411		1,390
Property and equipment	1,533		524
Net operating loss carryforwards	3,764		4,401
Foreign tax credit carryforward	—		64
Sales-type leases	1,800		2,494
Foreign intangible	(14,098)		(11,477)
Foreign net investment in leases	(2,474)		—
Allowance for bad debt	1,319		219
Interest expense limitation	807		—
Other	(598)		(759)
	12,713		9,550
Valuation allowance	(4,997)		(2,788)
Total net deferred tax assets	$	7,716	$	6,762

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

	Year Ended December 31,
	2022		2021		2020
Current income tax expense (benefit) :
Federal	$	273	$	—	$	(24)
State	1,041		666		339
Foreign	(26)		225		1,465
Total current expense	$	1,288	$	891	$	1,780
Deferred income tax (benefit) expense:
Federal	$	(2,930)	$	(4,364)	$	369
State	(1,223)		(813)		289
Foreign	(545)		713		(2,199)
Total deferred benefit	(4,698)		(4,464)		(1,541)
Total income tax (benefit) expense	$	(3,410)	$	(3,573)	$	239

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,
	2022		2021		2020
Statutory federal tax rate	21	%	21	%	21	%
State income taxes, net of federal benefit	1	%	3	%	(4)	%
Non-consolidated investment income	1	%	8	%	1	%
Foreign income inclusion	—	%	—	%	(12)	%
Non-temporary stock option benefit	4	%	49	%	6	%
Other permanent differences	(1)	%	—	%	1	%
Foreign tax rate differences	3	%	10	%	2	%
Change in tax rate	—	%	8	%	1	%
Change in valuation allowance	(11)	%	88	%	(4)	%
Other deferred differences	(1)	%	(25)	%	(2)	%
Transaction costs	—	%	(4)	%	(6)	%
Executive compensation limitation	(9)	%	(65)	%	(6)	%
Research & development credit	6	%	(1)	%	2	%
Equity investment	(1)	%	(8)	%	(4)	%
Change in uncertain tax benefits	—	%	11	%	3	%
Contingent consideration	2	%	10	%	—	%
Other foreign income taxes due	—	%	(2)	%	—	%
Other	1	%	1	%	(1)	%
Effective income tax rate	16	%	104	%	(2)	%

In 2022, we had total income tax benefit of $3.4 million, including $4.2 million in domestic deferred income tax benefit and $0.5 million in foreign deferred income tax benefit, and $1.3 million in current income tax expense. In 2021, we had total income tax benefit of $3.6 million, including approximately $5.2 million in domestic deferred income tax benefit and $0.7 million of 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 approximately $1.8 million in current income tax expense. Income tax benefit decreased in 2022 from 2021 due to income tax expense related to change in valuation allowance offset by the additional tax benefit from financial reporting loss and research and development credits. Income tax expense decreased in 2021 from 2020 due to change in valuation allowance, stock option benefits, and executive compensation limitation.

Cash paid for income taxes for the years ended December 31, 2022, 2021 and 2020 was $2.7 million, $2.4 million and $993 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 2019 - 2021 remain open to examination by the Internal Revenue Service.

As of December 31, 2022, the Company had a domestic research and development tax credit carryforward of approximately $1.8 million for federal tax purposes, which is offset by the uncertain tax position of $0.5 million, discussed below. All federal net operating loss carryforwards (“NOL”) are expected to be utilized in 2022. Our foreign NOL of $13.1 million and foreign interest expense limitation carryforward of $0.8 million do 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, 2022. Due to future projected income and IRC §174 research and development capitalization requirements, the Company believes it will be able to utilize the remaining research and development tax credits before they expire. For foreign purposes, the Company believes due to projected losses and historical three year cumulative losses in Germany, France, Italy and Spain, all statutory deferred tax assets will not be utilized and therefore increased the valuation allowance against all statutory deferred balances. As a result, the Company recorded an additional $2.2 million tax effected increase to the current partial valuation allowance against the Company's statutory foreign assets for the year ended December 31, 2022. As of December 31, 2022, the Company had a deferred tax asset of approximately $6.4 million from net operating losses, interest expense limitation carryforward, and tax credits and a net partial valuation allowance of approximately $5.0 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 (in thousands):

	Year Ended December 31,
	2022		2021
Balance at beginning of period	$	(893)	$	(808)
Additions based on prior year tax positions	(378)		(508)
Additions based on current year tax position	(104)		—
Reductions from lapse in statues of limitation	436		404
Currency translation adjustment	47		19
Other adjustment	28		—
Balance at the end of period	$	(864)	$	(893)

The total amount of unrecognized tax benefits as of December 31, 2022 was approximately $0.9 million, which may impact the effective tax rate if recognized. Historically, these unrecognized tax benefits were recognized as part of the acquisition of scil animal care company GmbH ("scil") in 2020 and BiEssA A-Laboratorio die Analisi Veterinarie S.r.l ("BSA") in 2021. Per the tax indemnification included in the purchase agreements of scil and BSA, 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. In 2022, the Company increased unrecognized tax benefits of $0.5 million related to the 2019 - 2022 domestic research and development tax credits. These credits often receive challenge and include controversy in the Internal Revenue Service's interpretation of both facts and law that may differ from that of the Company. 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, 2022 are $28 thousand.

As of December 31, 2022, the Company had accumulated undistributed earnings generated by foreign subsidiaries of approximately $4.1 million, which would be subject to U.S. taxes and foreign withholding taxes of approximately $0.2 million 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.