Income Taxes

12 Months Ended

Jul. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

(Loss) income before (benefit from) provision for income taxes consists of the following:

	Fiscal Years Ended July 31,
	2021		2020	2019
U.S.	$	(73,153,000)	7,226,000	28,813,000
Foreign	(1,827,000)		2,084,000	97,000
	$	(74,980,000)	9,310,000	28,910,000

The (benefit from) provision for income taxes included in the accompanying Consolidated Statements of Operations consists of the following:

	Fiscal Years Ended July 31,
	2021		2020	2019
Federal – current	$	608,000	1,053,000	(2,190,000)
Federal – deferred	(877,000)		721,000	4,782,000
State and local – current	466,000		1,137,000	1,715,000
State and local – deferred	(598,000)		(1,312,000)	(321,000)
Foreign – current	688,000		298,000	62,000
Foreign – deferred	(1,787,000)		393,000	(179,000)
(Benefit from) provision for income taxes	$	(1,500,000)	2,290,000	3,869,000

The (benefit from) provision for income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a result of the following:

	Fiscal Years Ended July 31,
	2021				2020			2019
	Amount		Rate		Amount	Rate		Amount	Rate
Computed "expected" tax expense (benefit)	$	(15,746,000)	21.0	%	1,955,000	21.0	%	6,071,000	21.0	%
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit	(1,371,000)		1.8		(278,000)	(3.0)		967,000	3.3
Stock-based compensation	(20,000)		—		308,000	3.3		(44,000)	(0.1)
Research and experimentation credits	(1,018,000)		1.4		(1,210,000)	(13.0)		(1,129,000)	(3.9)
Foreign-derived intangible income deduction	164,000		(0.2)		(162,000)	(1.7)		(632,000)	(2.2)
Nondeductible transaction costs	402,000		(0.5)		301,000	3.2		394,000	1.4
Nondeductible executive compensation	628,000		(0.8)		595,000	6.4		330,000	1.1
Fines and penalties	—		—		189,000	2.0		2,000	—
Audit settlements	6,000		—		1,000	—		(2,081,000)	(7.2)
Change in the beginning of the year valuation allowance for deferred tax assets	(805,000)		1.1		—	—		—	—
Change in valuation allowance	15,582,000		(20.8)		—	—		—	—
Remeasurement of deferred taxes	(224,000)		0.3		(135,000)	(1.5)		—	—
Foreign income taxes	676,000		(0.9)		453,000	4.9		5,000	—
Other, net	226,000		(0.4)		273,000	3.0		(14,000)	—
(Benefit from) provision for income taxes	$	(1,500,000)	2.0	%	2,290,000	24.6	%	3,869,000	13.4	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 2021 and 2020 are presented below:

	2021		2020
Deferred tax assets:
Inventory and warranty reserves	$	6,774,000	5,786,000
Compensation and commissions	4,338,000		3,210,000
Federal, state and foreign research and experimentation credits	19,324,000		19,656,000
Stock-based compensation	4,979,000		4,955,000
Foreign scientific research and experimental development expenditures	1,496,000		1,765,000
Federal, state and foreign net operating losses	5,413,000		3,942,000
Federal and state capital losses	15,582,000		28,000
Lease liabilities	10,980,000		7,335,000
Other	4,550,000		6,572,000
Less: valuation allowance	(28,384,000)		(11,471,000)
Total deferred tax assets	45,052,000		41,778,000
Deferred tax liabilities:
Plant and equipment	(1,146,000)		(801,000)
Lease right-of-use assets	(10,085,000)		(7,080,000)
Intangibles	(54,635,000)		(50,368,000)
Total deferred tax liabilities	(65,866,000)		(58,249,000)
Net deferred tax liabilities	$	(20,814,000)	(16,471,000)

At July 31, 2021, our net deferred tax liability of $20,814,000 includes $416,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets. At July 31, 2020, our net deferred tax liability of $16,471,000 includes $1,166,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets.

We provide for income taxes under the provisions of ASC 740 which requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of them will not be realized. If management determines that it is more likely than not that some or all of its deferred tax assets will not be realized, a valuation allowance will be recorded against such deferred tax assets.

At July 31, 2021, we have federal research and experimentation credits of $9,471,000 that will begin to expire in 2028. The timing and manner in which we may utilize tax credits in future tax years will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 383 of the Internal Revenue Code.

We have state net operating loss carryforwards available of $3,267,000, which expire through 2040, utilization of which will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 382 of the Internal Revenue Code. We believe that it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $3,178,000 on the deferred tax assets relating to these state net operating loss carryforwards. We have state research and experimentation credit carryforwards of $8,038,000, which expire through 2040. We believe that it is more likely than not that the benefit from certain state research and experimentation credits will not be realized. In recognition of this risk, we have provided a valuation allowance of $7,451,000 on the deferred tax assets relating to these state credits. We have federal and state capital loss carryforwards of $15,582,000, which begin to expire in 2026. We believe that it is more likely than not that the benefit from these capital losses will not be realized. In recognition of this risk, we have provided a valuation allowance of $15,582,000 on the deferred tax assets relating to these capital losses.

At July 31, 2021, we had foreign deferred tax assets relating to net operating loss carryforwards of $2,116,000, which will begin to expire in 2032. We believe that it is more likely than not that certain net operating loss carryforwards may not be realized. In recognition of this risk, we have provided a valuation allowance of $656,000 on the deferred tax assets relating to these net operating loss carryforwards. We have foreign deferred tax assets relating to research and experimentation credits of $1,814,000, which will begin to expire in 2024. Our foreign earnings and profits are insignificant and, as such, we have not recorded any deferred tax liability on unremitted foreign earnings.

We must generate $193,800,000 of taxable income in the future to fully utilize our net deferred tax assets as of July 31, 2021. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

At July 31, 2021 and 2020, total unrecognized tax benefits were $9,172,000 and $8,345,000, respectively, including interest of $163,000 and $75,000, respectively. At July 31, 2021 and 2020, $2,717,000 and 1,963,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Consolidated Balance Sheets. The remaining unrecognized tax benefits of $6,455,000 and $6,382,000 at July 31, 2021 and 2020, respectively, were presented as an offset to the associated non-current deferred tax assets on our Consolidated Balance Sheets. Of the total unrecognized tax benefits, $8,408,000 and $7,700,000 at July 31, 2021 and 2020, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our consolidated financial statements. We do not expect that there will be any significant changes to our total unrecognized tax benefits within the next twelve months.

Our policy is to recognize potential interest and penalties relating to uncertain tax positions in income tax expense. The following table summarizes the activity related to our unrecognized tax benefits for fiscal years 2021, 2020 and 2019 (excluding interest):

	2021		2020	2019
Balance at beginning of period	$	8,270,000	7,203,000	9,137,000
Increase related to current period	528,000		684,000	893,000
Increase related to prior periods	338,000		464,000	17,000
Expiration of statute of limitations	(48,000)		(73,000)	(394,000)
Decrease related to prior periods	(79,000)		(8,000)	(2,450,000)
Balance at end of period	$	9,009,000	8,270,000	7,203,000

Our U.S. federal income tax returns for fiscal 2018 through 2020 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2017 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.