Income Taxes

12 Months Ended

Oct. 31, 2022

Income Taxes

Income Taxes

Note 15. Income Taxes

The components of loss before income taxes for the years ended October 31, 2022, 2021, and 2020 were as follows (in thousands):

	2022		2021		2020
U.S.	$	(145,439)	$	(96,959)	$	(85,865)
Foreign		(974)		(4,064)		(3,196)
Loss before income taxes	$	(146,413)	$	(101,023)	$	(89,061)

The Company recorded an income tax provision totaling $0.8 million, $0 million and $0 million for the years ended October 31, 2022, 2021 and 2020, respectively. The income tax expense primarily related to foreign income taxes in South Korea and Canada.

Franchise tax expense, which is included in administrative and selling expenses, was $1.0 million, $0.5 million and $0.3 million for the years ended October 31, 2022, 2021 and 2020, respectively.

The reconciliation of the federal statutory income tax rate to our effective income tax rate for the years ended October 31, 2022, 2021 and 2020 was as follows:

	2022		2021		2020
Statutory federal income tax rate	(21.0)	%	(21.0)	%	(21.0)	%
Increase (decrease) in income taxes resulting from:
State taxes, net of Federal benefits	(3.6)	%	(5.2)	%	(1.1)	%
Foreign withholding tax	0.6	%	0.2	%	—	%
Net operating loss expiration, impairment and true-ups	8.7	%	3.6	%	129.2	%
Nondeductible expenditures	1.4	%	1.9	%	1.4	%
Change in tax rates	0.3	%	(1.3)	%	(0.6)	%
Fair value adjustment on warrants	—	%	3.3	%	8.7	%
Other, net	0.7	%	—	%	1.1	%
Deferred only adjustment	(0.1)	%	0.8	%	4.4	%
Valuation allowance	13.6	%	17.9	%	(122.1)	%
Effective income tax rate	0.6	%	0.2	%	—	%

Our deferred tax assets and liabilities consisted of the following as of October 31, 2022 and 2021 (in thousands):

	2022		2021
Deferred tax assets:
Compensation and benefit accruals	$	8,523	$	7,891
Bad debt and other allowances		2,453		1,081
Capital loss and tax credit carry-forwards		14,310		15,191
Net operating losses (domestic and foreign)		123,825		113,733
Deferred license revenue		1,548		1,885
Accumulated depreciation		20,229		12,379
Grant revenue		475		609
Excess business interest		10,424		9,695
Operating lease liabilities		2,085		2,211
Gross deferred tax assets:		183,872		164,675
Valuation allowance		(180,048)		(160,530)
Deferred tax assets after valuation allowance		3,824		4,145
Deferred tax liability:
In process research and development		(2,475)		(2,510)
Right of use assets		(1,809)		(1,964)
Net deferred tax liability	$	(460)	$	(329)

We continually evaluate our deferred tax assets as to whether it is “more likely than not” that the deferred tax assets will be realized. In assessing the realizability of our deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on the projections for future taxable income over the periods in which the deferred tax assets are realizable, management believes that significant uncertainty exists surrounding the recoverability of the deferred tax assets. As a result, we recorded a valuation allowance against our net deferred tax assets. As of October 31, 2022, we had $393.7 million of federal net operating loss (“NOL”) carryforwards that expire in the years 2023 to 2038 and $556.5 million of state NOL carryforwards that expire in the years 2023 through 2041. Additionally, we had $11.2 million of state tax credits available that will expire from tax years 2023 to 2040.

During the 2020 tax year, the Company experienced an “ownership change” as defined by Internal Revenue Code Section 382. As a result, the utilization of federal and state NOLs generated prior to October of 2020 is subject to limitation and a reduction was made in fiscal year 2020 to the carrying balance of the federal and state NOLs to reflect the future limitation on utilization. The Company has updated its analysis of potential ownership changes through October 31, 2022 and concluded that no additional ownership changes have occurred subsequent to October 2020. In addition, the acquisition of Versa in fiscal year 2013 triggered a Section 382 ownership change at the level of Versa Power System which will limit the future usage of some of the federal and state NOLs that we acquired in that transaction. Accordingly, a valuation allowance has been recorded against the deferred tax asset associated with these attributes to reflect the future limitation on utilization.

The Company’s financial statements reflect expected future tax consequences of uncertain tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction) presuming the taxing authorities’ full knowledge of the position and all relevant facts.

The Company did not have any  unrecognized tax benefits as of October 31, 2022 and 2021. It is our policy to record interest and penalties on unrecognized tax benefits as income taxes; however, because of our significant NOLs, no provision for interest or penalties has been recorded.

We file income tax returns in the U.S. and certain states, primarily Connecticut and California, as well as income tax returns required internationally for South Korea and Germany. We are open to examination by the IRS and various states in which we file for fiscal year 2002 to the present.