Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income Tax Expense

Loss before income taxes consisted of the following (in thousands):

	2022		2021		2020
Domestic	$	(13,798)	$	(10,263)	$	(11,443)
Foreign	(1,186)		(4,564)		(5,731)
Loss before income taxes	$	(14,984)	$	(14,827)	$	(17,174)

Income tax expense (benefit) consisted of the following (in thousands):

	2022		2021		2020
Current:
Federal	$	1,606	$	1,896	$	(2,460)
State	367		551		445
Foreign	3,120		3,391		707
	5,093		5,838		(1,308)
Deferred:
Federal	$	236	$	(2,801)	$	1,721
State	234		(307)		384
Foreign	(1,355)		(2,723)		(1,289)
	(885)		(5,831)		816
Income tax expense (benefit)	$	4,208	$	7	$	(492)

Our income tax expense (benefit) in 2022, 2021, and 2020 included our federal, state, and foreign tax obligations. Our effective income tax rate was a tax expense of 28% for the year ended December 31, 2022. Our effective income tax rate was break-even for the year ended December 31, 2021. Our effective income tax rate was a tax benefit of 3% for the year ended December 31, 2020.

Our income tax rate for the year ended December 31, 2022 was primarily affected by an increase in the valuation allowance on current year items, nondeductible executive compensation expenses, and uncertain tax position expenses, partially offset by the research and development tax credit. Our income tax rate for the year ended December 31, 2021 was primarily affected by an increase in the valuation allowance on current year items, foreign expense items, nondeductible executive compensation expenses, and the recording of a tax reserve on prior year items, partially offset by the reduction of a valuation allowance on prior year items, the research and development tax credit, and releases of uncertain tax position liabilities. Our income tax rate for the year ended December 31, 2020 was primarily affected by changes in our uncertain tax position liabilities, research and development tax credits, and state income taxes, net of federal benefits, partially offset by an increase in the valuation allowance on current year items.

The income tax benefit amounts differ from the amounts computed by applying the US federal statutory income tax rate of 21% for the years ended December 31, 2022, 2021, and 2020 to pretax income as a result of the following (in thousands):

	2022		2021		2020
Tax benefit at statutory rate	$	(3,147)	$	(3,114)	$	(3,606)
Increase (reduction) in income taxes resulting from:
Valuation allowance change	4,779		1,566		3,952
Nondeductible executive compensation	878		1,075		580
Net change in uncertain tax positions	527		762		(1,115)
State income taxes, net of federal benefit	484		73		(455)
Equity compensation	472		(477)		(204)
Foreign income taxes	415		1,138		378
Provision to return adjustments	336		63		531
Foreign interest disallowance	151		307		298
Nondeductible entertainment expenses	117		65		94
Foreign deferred items	(112)		53		(63)
Research and development credit	(961)		(959)		(457)
Other	269		(545)		(425)
Total income tax expense (benefit)	$	4,208	$	7	$	(492)

Deferred Taxes

We generate deferred tax assets primarily as a result of finance and operating leases, net operating losses, excess interest carryforward, accrued compensation, stock compensation, and capital leases. Our deferred tax liabilities are primarily comprised of intangible assets acquired in previous years, finance and operating leases, unrealized gains and losses, and capital leases.

The tax effects of temporary differences which give rise to deferred tax assets and liabilities at December 31 were as follows (in thousands):

	2022		2021
Deferred tax assets:
Finance and operating leases	$	12,581	$	13,762
Loss carryforwards	9,660		6,649
Excess interest carryforward	5,559		3,547
Stock compensation	2,463		2,007
Accrued expenses	1,734		2,088
Deferred compensation	1,317		1,535
Property	1,310		1,356
Inventory and deferred preservation costs write-downs	764		397
Credit carryforwards	503		601
Other	4,283		3,770
Less valuation allowance	(17,942)		(13,282)
Total deferred tax assets, net	22,232		22,430
	2022		2021
Deferred tax liabilities:
Inventory and deferred preservation costs write-downs	—		(105)
Prepaid items	(323)		(395)
Debt costs	(818)		(1,024)
Unrealized gains and losses	(6,624)		(4,088)
Finance and operating leases	(12,217)		(13,404)
Intangible assets	(24,601)		(29,086)
Other	(834)		(770)
Total deferred tax liabilities	(45,417)		(48,872)
Total deferred tax liabilities, net	$	(23,185)	$	(26,442)

As of December 31, 2022 and 2021 we maintained a net deferred tax liability of $23.2 million and $26.4 million, respectively. As of December 31, 2022 and 2021 we maintained valuation allowances against our deferred tax assets of $17.9 million and $13.3 million, respectively, primarily related to net operating loss carryforwards and disallowed excess interest carryforwards.

As of December 31, 2022 we had approximately $1.6 million of federal net operating loss carryforwards related to the acquisitions of Cardiogenesis and Hemosphere that we anticipate partially utilizing before expiration, approximately $2.5 million of state net operating loss carryforwards that will begin to expire in 2023, approximately $5.6 million of foreign net operating loss carryforwards that will begin to expire in 2025, and approximately $483,000 in research and development tax credit carryforwards that will begin to expire in 2030, and approximately $93,000 in credits from other jurisdictions that mostly expire in 2027.

As of December 31, 2022 we had a deferred tax asset of $5.6 million of disallowed interest expense deduction carryforwards as a result of the interest deductibility rule imposed by the “Tax Cuts and Jobs Act” of 2017 (“Tax Act”), and later modified by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). This deferred tax asset can be carried forward indefinitely. This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income, modified to be 50% in 2021 by the CARES Act. For the years ended December 31, 2022 and 2021 our interest deduction was limited to $8.1 million and $11.7 million, respectively.

During the twelve months ended December 31, 2021 we corrected certain immaterial prior year errors primarily related to the release of a valuation allowance, reduction of income taxes payable, and an increase in the tax reserve. On correcting the errors, we recorded an income tax benefit of $2.1 million.

We believe that the realizability of our acquired net operating loss carryforwards will be limited in future periods due to a change in control of our former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis Corporation (“Cardiogenesis”), as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. We believe that our acquisitions of these companies each constituted a change in control as defined in Section 382 and that, prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered such a change in control. The deferred tax assets recorded on our Consolidated Balance Sheets exclude amounts that we expect will not be realizable due to changes in control. A portion of the acquired net operating loss carryforwards is related to state income taxes for which we believe it is more likely than not that some will not be realized. Therefore, we recorded a valuation allowance against these state net operating loss carryforwards. In addition, during the year, the realizability of a portion of our net operating loss carryforwards and other deferred tax assets was limited. We recorded a valuation allowance against these deferred tax assets.

Reinvestment of Unremitted Earnings

We intend to reinvest substantially all of the unremitted earnings of our non-US subsidiaries to fund working capital, strategic investments, and debt repayment and postpone their remittance indefinitely. Accordingly, no provision for state and local taxes or foreign withholding taxes was recorded on these unremitted earnings in the accompanying Consolidated Statements of Operations and Comprehensive Loss. The Company is permanently reinvested with respect to the outside basis differences in its significant non-US subsidiaries. As of December 31, 2022 we had a deferred tax liability of zero for the tax effects of this outside basis difference in its Consolidated Statements of Operations and Comprehensive Loss.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of our uncertain tax position liability, excluding interest and penalties, was as follows (in thousands):

	2022		2021		2020
Beginning balance	$	4,089	$	2,574	$	3,523
Increases related to current year tax positions	847		1,661		473
Increases related to prior year tax positions	20		386		420
Decreases related to prior year tax positions	(103)		(170)		(238)
(Decreases) increases for foreign exchange differences	(145)		(121)		99
Decreases due to the lapsing of statutes of limitations	(200)		(241)		(1,703)
Ending balance	$	4,508	$	4,089	$	2,574

We recorded non-current liabilities of $358,000 and $220,000 related to interest and penalties on uncertain tax positions on our Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively. We included expense of $145,000 for December 31, 2022, and income of $35,000 and $180,000 for December 31, 2021 and 2020, respectively, for interest and penalties related to unrecognized tax benefits in our Consolidated Statements of Operations and Comprehensive Loss.

As of December 31, 2022 our uncertain tax liability of $4.9 million, including interest and penalties, was recorded as a reduction to deferred tax assets of $100,000, and a non-current liability of $4.8 million on our Consolidated Balance Sheets. The amount of uncertain tax liabilities that are expected to affect our tax rate if recognized were $3.6 million, $3.2 million, and $2.6 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2021 our total uncertain tax liability, including interest and penalties of $4.3 million, was recorded as a reduction to deferred tax assets of $300,000 and as a non-current liability of $4.0 million on our Consolidated Balance Sheets.

We believe it is reasonably possible that approximately $112,000 of our uncertain tax liability will be recognized in 2023 due to the lapsing of various federal and state and foreign statutes of limitations, of which substantially all would affect the tax rate.

Other

Our tax years 2019 and forward generally remain open to examination by the major taxing jurisdictions to which we are subject. However, certain returns from years prior to 2019, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.