Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.0.1
Income Taxes
12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The CARES Act impacted a number of provisions of the tax code, including the eligibility of certain deductions and the treatment of net operating losses (“NOLs”) and tax credits. The CARES Act did not result in any material adjustments to the Company’s income tax provision for the year ended December 31, 2021, or to its deferred tax assets as of December 31, 2021.
(Loss) income before income tax benefit for the years ended December 31, 2021, 2020, and 2019 is as follows (in thousands):
  2021 2020 2019
(Loss) income before income tax expense (benefit):
Domestic $ 24,761  $ (6,954) $ 7,053 
Foreign (39,836) (7,102) (3,408)
Total $ (15,075) $ (14,056) $ 3,645 
Income tax expense (benefit)
Current:      
Federal $ 41  $ (434) $ (303)
State 41  273  290 
Total current tax (benefit) expense $ 82  $ (161) $ (13)
Deferred:
Federal $ (575) $ (12,856) $ (3,409)
State 1,241  (5,211) (939)
Foreign (7,476) —  — 
Total deferred benefit provision $ (6,810) $ (18,067) $ (4,348)
Total tax benefit provision $ (6,728) $ (18,228) $ (4,361)
A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended December 31, 2021, 2020 and 2019 is as follows:
  2021 2020 2019
Federal statutory tax rate 21.00  % 21.00  % 21.00  %
State income taxes, net of federal income tax benefit 17.77  % 14.29  % (19.47) %
Transaction Costs (10.11) % —  % —  %
Penalties (15.61) % (0.01) % 0.08  %
Non-deductible expenses (3.29) % (1.41) % 7.41  %
Compensation expense (0.96) % 65.78  % (135.12) %
Inivata acquisition fair value adjustment 159.14  % —  % —  %
Tax credits 11.63  % 32.11  % —  %
Uncertain tax position 0.22  % 1.21  % (3.32) %
Return to provision and other deferred tax adjustments —  % 7.38  % (13.20) %
Foreign tax rate differential 2.74  % (1.64) % —  %
Other, net 0.16  % (0.06) % (2.78) %
Valuation allowance (138.07) % (8.97) % 25.74  %
Effective tax rate 44.62  % 129.68  % (119.66) %
At December 31, 2021 and 2020, deferred income tax assets and liabilities consisted of the following (in thousands):
  2021 2020
Deferred tax assets:
Accounts receivable, net $ 295  $ 1,286 
Accrued compensation 6,171  5,403 
Net operating loss carry-forwards 81,903  33,888 
Tax credits 6,596  4,575 
Stock-based compensation 2,355  1,999 
Operating lease liabilities 19,978  11,589 
Interest expense 886  — 
Other 2,668  1,470 
     Gross deferred tax assets 120,852  60,210 
     Less: valuation allowance (33,014) (2,631)
Total deferred tax assets 87,838  57,579 
Deferred tax liabilities:
Operating lease right-of-use assets (19,094) (11,120)
Investment in non-consolidated affiliate —  (1,000)
Convertible debt discount (1) (6,636)
Intangible assets (108,592) (29,268)
Property and equipment (15,389) (14,678)
Other —  (292)
Total deferred tax liabilities (143,076) (62,994)
Net deferred income tax liabilities $ (55,238) $ (5,415)
At December 31, 2021, the Company has federal net operating loss carry forwards of approximately $231.5 million, foreign net operating loss carryforwards of approximately $118.9 million, including $96.4 million in the United Kingdom, and state net operating loss carry forwards of approximately $112.8 million. Federal net operating loss carry forwards will begin to expire in 2036. Under the Tax Act, as modified by the CARES Act, our federal NOLs generated in tax years ending after December 31, 2017 may be carried forward indefinitely, however, the deductibility of such federal net NOLs in tax years beginning after December 31, 2020, is limited to 80% of taxable income. State tax NOLs will begin to expire in 2022. NOLs in Switzerland and China begin to expire in 2024 and 2025, if not utilized in future periods. The NOLs in Singapore and the United Kingdom do not expire. As of December 31, 2021, the Company has federal R&D credit carryforwards of
approximately $5.5 million that begin to expire in 2036 and state research and investment credit carryforwards of approximately $3.8 million that do not expire. An ownership change of more than 50 percent could result in a limitation of the use of net operating loss carryforwards and credit carryforwards under IRC Section 382 and the regulations thereunder. We have not conducted a formal study to determine whether there was an ownership change in prior periods that would limit the use of our net operating loss carryforwards and credit carryforwards under IRC Section 382. Management believes it is more likely than not that a limitation under Section 382 would not materially impact the realizability of the deferred tax assets related to federal and state net operating losses or credits.
Management assesses the recoverability of its deferred tax assets as of the end of each quarter, weighing all positive and negative evidence, and is required to establish and maintain a valuation allowance for these assets if it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed. As of December 31, 2021 and 2020, management determined that sufficient positive evidence did not exist and concluded that it is more likely than not that a valuation allowance is required against foreign deferred tax assets. Accordingly, management established a full valuation allowance of $4.1 million and $2.6 million as of December 31, 2021 and 2020, respectively, related to the Company’s China, Switzerland and Singapore operations. As of December 31, 2021, management determined that sufficient positive evidence did not exist and conclude that it is more likely than not that a valuation allowance is required against certain domestic deferred tax assets. Accordingly, management established a valuation allowance of $28.9 million related to the Company’s domestic operations as of December 31, 2021.
The Company files income tax returns in the United States, as well as Singapore, Switzerland, China, United Kingdom and in various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment. For U.S. federal and most state purposes, the Company has open tax years ended December 31, 2017 to December 31, 2020. For Switzerland, the Company has open tax years ended December 31, 2017 to December 31, 2020, for Singapore the Company has open tax years ended December 31, 2018 to December 31, 2020 and for United Kingdom the Company has open tax years ended April 5, 2018 to April 5, 2020. The 2017 U.S. Federal income tax filing is currently under examination by the IRS.
The Company applied the accounting standard for uncertain tax positions and recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from management’s belief that a position can or cannot be sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.
The following are the unrecognized tax benefits as of December 31, 2021 and 2020 (in thousands):
2021 2020
Unrecognized tax benefits - January 1 $ 1,670  $ 444 
Increases in prior year positions 83  1,020 
Reversals of prior year positions —  — 
Increases in tax positions taken in current year 632  378 
Statute expirations (34) (172)
Unrecognized tax benefits - December 31 $ 2,351  $ 1,670 
The amount of unrecognized tax benefits at December 31, 2021, if recognized would favorably affect the Company’s effective tax rate. These unrecognized tax benefits are classified as other long-term liabilities on the Consolidated Balance Sheets. The interest and penalties related to the unrecognized tax benefit are immaterial. Interest and tax penalties related to unrecognized tax benefits are included in income tax expense.