Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.4
Income Taxes
12 Months Ended
Dec. 31, 2022
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 years ended December 31, 2022, 2021 and 2020 or to its deferred tax assets as of December 31, 2022 and 2021.
(Loss) income before income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 is as follows (in thousands):
  2022 2021 2020
(Loss) income before income tax expense (benefit):
Domestic $ (90,058) $ 24,761  $ (6,954)
Foreign (69,284) (39,836) (7,102)
Total $ (159,342) $ (15,075) $ (14,056)
Income tax expense (benefit)
Current:      
Federal $ (41) $ 41  $ (434)
State 176  41  273 
Foreign 17  —  — 
Total current tax expense (benefit) $ 152  $ 82  $ (161)
Deferred:
Federal $ 614  $ (575) $ (12,856)
State (647) 1,241  (5,211)
Foreign (15,211) (7,476) — 
Total deferred benefit provision $ (15,244) $ (6,810) $ (18,067)
Total tax benefit provision $ (15,092) $ (6,728) $ (18,228)
A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended December 31, 2022, 2021 and 2020 is as follows:
  2022 2021 2020
Federal statutory tax rate 21.00  % 21.00  % 21.00  %
State income taxes, net of federal income tax benefit 2.06  % 17.77  % 14.29  %
Transaction Costs (0.01) % (10.11) % —  %
Penalties (0.03) % (15.61) % (0.01) %
Compensation expense (2.17) % (0.96) % 65.78  %
Inivata acquisition fair value adjustment —  % 159.14  % —  %
Capped call interest 4.50  % —  % —  %
Tax credits 1.32  % 11.63  % 32.11  %
Return to provision and other deferred tax adjustments (0.22) % —  % 7.38  %
Foreign tax rate differential 1.20  % 2.74  % (1.64) %
Other, net (0.12) % (2.91) % (0.26) %
Valuation allowance (18.07) % (138.07) % (8.97) %
Effective tax rate 9.46  % 44.62  % 129.68  %
At December 31, 2022 and 2021, deferred income tax assets and liabilities consisted of the following (in thousands):
  2022 2021
Deferred tax assets:
Accrued compensation 5,282  6,171 
Net operating loss carry-forwards 106,742  81,903 
Tax credits 8,983  6,596 
Stock-based compensation 2,797  2,355 
Operating lease liabilities 19,248  19,978 
Interest expense 2,751  886 
Convertible debt discount 5,287  — 
Research expenditures 4,348  — 
Other 4,529  2,963 
     Gross deferred tax assets 159,967  120,852 
     Less: valuation allowance (65,166) (33,014)
Total deferred tax assets $ 94,801  $ 87,838 
Deferred tax liabilities:
Operating lease right-of-use assets $ (18,215) $ (19,094)
Convertible debt discount —  (1)
Intangible assets (101,886) (108,592)
Property and equipment (9,450) (15,389)
Total deferred tax liabilities $ (129,551) $ (143,076)
Net deferred income tax liabilities $ (34,750) $ (55,238)
At December 31, 2022, the Company has federal net operating loss carry forwards of approximately $262.5 million, foreign net operating loss carryforwards of approximately $188.9 million, including $158.2 million in the United Kingdom, and state net operating loss carry forwards of approximately $131.6 million. Federal net operating loss carry forwards will begin to expire in 2036. Under the Tax Act, as modified by the CARES Act, the Company’s 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 began 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, 2022, the Company has federal R&D credit carryforwards of approximately $8.1 million that begin to expire in 2036 and state research and investment credit carryforwards of approximately $4.6 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.
The Company has not conducted a formal study to determine whether there was an ownership change in prior periods that would limit the use of the Company’s net operating loss carryforwards and credit carryforwards under IRC Section 382.
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, 2022 and 2021, 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 deferred tax assets. Accordingly, management established a valuation allowance of $59.5 million related to the Company’s domestic operations and a full valuation allowance of $5.7 million as of December 31, 2022 related to the Company’s China, Switzerland and Singapore operations.
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, 2022. For Switzerland, the Company has open tax years ended December 31, 2018 to December 31, 2022, for Singapore the Company has open tax years ended December 31, 2020 to December 31, 2022 and for United Kingdom the Company has open tax years ended December 31, 2021 and December 31, 2022. 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, 2022 and 2021 (in thousands):
2022 2021
Unrecognized tax benefits - January 1 $ 2,351  $ 1,670 
Increases in prior year positions 82  83 
Increases in tax positions taken in current year 726  632 
Statute expirations —  (34)
Unrecognized tax benefits - December 31 $ 3,159  $ 2,351 
Due to the valuation allowance, the majority of unrecognized tax benefits at December 31, 2022, if recognized, would not impact 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.