Income Taxes

12 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

9. Income Taxes

Income taxes on the consolidated statements of operations consisted of the following:

	Fiscal Year
(In thousands)	2022			2021			2020
Current (benefit) expense:
U.S. Federal	$	(510	)	$	263		$	(1,570	)
U.S. State		(143	)		108			42
International		166			87			90
Total current (benefit) expense		(487	)		458			(1,438	)
Deferred expense (benefit):
U.S. Federal		5,200			1,851			(1,336	)
U.S. State		515			(62	)		197
International		(447	)		(138	)		—
Total deferred expense (benefit)		5,268			1,651			(1,139	)
Total income tax expense (benefit)	$	4,781		$	2,109		$	(2,577	)

The difference between amounts calculated at the statutory U.S. federal income tax rate of 21% and the Company’s effective tax rate was as follows:

	Fiscal Year
(In thousands)	2022			2021			2020
Amount at statutory U.S. federal income tax rate	$	(4,724	)	$	1,333		$	(305	)
Change because of the following items:
State income taxes, net of federal benefit		(897	)		(273	)		(551	)
Foreign and state rate differential		628			596			212
U.S. federal and foreign R&D credits		(1,511	)		(920	)		(1,571	)
Valuation allowance change (1)		10,978			1,059			825
Stock-based compensation (2)		481			(544	)		(81	)
U.S. Federal and state rate change		—			(35	)		17
Tax reserve change		(123	)		(150	)		609
Foreign-derived income deduction		—			—			(88	)
Impact of CARES Act (3)		—			735			(1,700	)
Acquisition-related transaction costs		—			187			—
Other		(51	)		121			56
Income tax expense (benefit)	$	4,781		$	2,109		$	(2,577	)

(1)In fiscal 2022, the valuation allowance change includes a non-cash charge to income tax expense of $10.2 million that resulted from the establishment of a full valuation allowance against U.S. net deferred tax assets as of September 30, 2022. A valuation allowance is required to be recognized against deferred tax assets if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of such assets will not be realized. The relevant guidance weighs available evidence such as historical cumulative taxable losses more heavily than future profitability. The valuation allowance has no impact on the availability of U.S. net deferred tax assets to offset future tax liabilities.

(2)Includes non-deductible stock-based compensation.

(3)In fiscal 2020, the impact of the CARES Act included a discrete tax benefit of $1.7 million that resulted from our ability under the CARES Act to carry back net operating losses (“NOLs”) incurred to periods when the statutory tax rate was 35% versus our current tax rate of 21%. In March 2020, the CARES Act was enacted and included significant business tax provisions. In particular, the CARES Act modified the rules associated with NOLs and made technical corrections to tax depreciation methods for qualified improvement property. Under the temporary provisions of the CARES Act, NOL carryforwards and carrybacks may offset 100% of taxable income for taxable years beginning before 2021. In addition, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund.

Excess tax benefits related to stock-based compensation expense are recorded within income tax (expense) benefit on the consolidated statements of operations and totaled $0.2 million, $0.9 million and $0.4 million for fiscal 2022, 2021 and 2020, respectively.

The components of deferred income taxes, net, consisted of the following and resulted from differences in the recognition of transactions for income tax and financial reporting purposes:

	September 30,
(In thousands)	2022			2021
Depreciable assets	$	(3,995	)	$	(5,106	)
Deferred revenue		2,103			2,130
Accruals and reserves		1,615			1,572
Stock-based compensation		2,443			1,997
Impaired strategic investments		1,787			1,782
NOL carryforwards (1)		6,379			4,319
U.S. Federal and state R&D credits (2)		4,465			3,066
Other		848			618
Valuation allowance		(17,672	)		(7,253	)
Deferred taxes, net	$	(2,027	)	$	3,125

(1)As of September 30, 2022, NOL carryforwards consisted of U.S. federal NOL carryforwards of $2.3 million, U.S. state NOL carryforwards of $0.4 million, and Ireland NOL carryforwards of $3.7 million. U.S. federal and state NOL carryforwards begin to expire in fiscal 2034 and 2028, respectively. Ireland NOL carryforwards have an unlimited carryforward period.

(2)As of September 30, 2022, U.S. federal and state R&D credits begin to expire in fiscal 2028.

As of September 30, 2022 and 2021, valuation allowances against deferred tax assets, net, totaled $17.7 million and $7.3 million, respectively. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise from net operating loss and tax credits and are primarily a result of temporary differences between the financial reporting and tax bases of assets and liabilities. We evaluate the recoverability of deferred tax assets by assessing all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. A valuation allowance is established if it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of deferred tax assets will not be realized. The determination of whether a valuation allowance should be established, as well as the amount of such allowance, requires significant judgment and estimates, including estimates of future earnings.

In evaluating the realizability of our net deferred tax assets, we perform an assessment each reporting period of both positive and negative evidence. As of September 30, 2022, we identified negative evidence that included the existence of three-year cumulative U.S. pre-tax losses adjusted for permanent adjustments and short-term future losses. As of September 30, 2022, we identified positive evidence that included (i) our forecast of long-term future earnings; and (ii) future reversal of taxable temporary differences and carryforwards.

We apply judgment to consider the relative impact of negative and positive evidence and the weight given to negative and positive evidence is commensurate with the extent to which such evidence can be objectively verified. Objective historical evidence, such as cumulative three-year pre-tax losses adjusted for permanent adjustments, is given greater weight than subjective positive evidence such as forecasts of future earnings. The more objective negative evidence that exists limits our ability to consider other, potentially positive, subjective evidence, such as our future earnings projections. Based on our evaluation of all available positive and negative evidence, and by placing greater weight on the objective negative evidence associated with our three-year cumulative U.S. pre-tax loss adjusted for permanent adjustments, we determined, as of September 30, 2022, that it is more likely than not that our net U.S. deferred tax assets will not be realized. Accordingly, in fiscal 2022, we recorded a full valuation allowance against our net U.S. deferred tax assets as of September 30, 2022, resulting in a non-cash charge to income tax expense of $10.2 million in fiscal 2022. Due to significant estimates used to establish the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record additional adjustments to the valuation allowance in future reporting periods that could have a material effect on our results of operations.

Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes pursuant to accounting guidance. The following is a reconciliation of the changes in unrecognized tax benefits, excluding interest and penalties:

	Fiscal Year
(In thousands)	2022			2021			2020
Unrecognized tax benefits, beginning balance	$	2,887		$	2,871		$	2,323
Increases in tax positions for prior years		53			15			58
Decreases in tax positions for prior years		(35	)		(8	)		(1	)
Increases in tax positions for current year		519			458			664
Settlements with taxing authorities		—			—			—
Lapse of the statute of limitations		(631	)		(449	)		(173	)
Unrecognized tax benefits, ending balance	$	2,793		$	2,887		$	2,871

The total amount of unrecognized tax benefits excluding interest and penalties that, if recognized, would affect the effective tax rate was $2.5 million and $2.7 million as of September 30, 2022 and 2021, respectively. As of September 30, 2022, the Company does not expect the liability for unrecognized tax benefits to change significantly in the next 12 months and has classified the above balances on the consolidated balance sheets in other noncurrent liabilities. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense on the consolidated statements of operations. As of September 30, 2022 and 2021, the gross amount accrued for interest and penalties on unrecognized tax benefits was $0.3 million and $0.4 million, respectively.

The Company files income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdiction and in various state jurisdictions, as well as several non-U.S. jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. The Internal Revenue Service commenced an examination of the Company’s fiscal 2019 U.S. federal tax return during fiscal 2022; the examination has not been completed. U.S. federal income tax returns for years prior to fiscal 2019 are no longer subject to examination by federal tax authorities. For tax returns for U.S. state and local jurisdictions, the Company is no longer subject to examination for tax years generally before fiscal 2012. For tax returns for non-U.S. jurisdictions, the Company is no longer subject to income tax examination for years prior to 2018. Additionally, the Company has been indemnified of liability for any taxes relating to Creagh Medical, NorMedix and Vetex for periods prior to the respective acquisition dates, pursuant to the terms of the related share purchase agreements. As of September 30, 2022 and 2021, there were no undistributed earnings in foreign subsidiaries.