Note 15. Income Taxes

The components of loss from continuing operations before income taxes for the fiscal years ended October 31, 2012, 2011, and 2010 were as follows:



	2012			2011			2010
U.S.	$	(35,535	)	$	(46,365	)	$	(53,915	)
Foreign	(302		)	408			(2,367		)
Loss before income taxes	$	(35,837	)	$	(45,957	)	$	(56,282	)

There was current income tax expense of $0.07 million, $0.02 million and $0.04 million related to foreign withholding taxes and income taxes in South Korea and no deferred federal income tax expense (benefit) for each of the years ended October 31, 2012, 2011 and 2010. Franchise tax expense, which is included in administrative and selling expenses, was $0.2 million, $0.1 million and $0.2 million for the years ended October 31, 2012, 2011 and 2010, respectively.

The reconciliation of the federal statutory income tax rate to our effective income tax rate for the years ended October 31, 2012, 2011 and 2010 was as follows:



	2012		2011		2010
Statutory federal income tax rate	(34.0	)%	(34.0	)%	(34.0	)%
Increase (decrease) in income taxes resulting from:
State taxes net of Federal benefits	(2.6	)%	(2.3	)%	(2.0	)%
Foreign Withholding Tax	0.2	%	0.3	%	—	%
Net operating loss adjustment and true-ups	(34.9	)%	1.7	%	1.6	%
Nondeductible expenditures	1.2	%	1.9	%	1.7	%
Change in State tax rate	(6.8	)%	(2.4	)%	7.6	%
Other, net	(0.1	)%	0.3	%	—	%
Valuation allowance	77.2	%	34.8	%	25.1	%
Effective income tax rate	0.2	%	0.3	%	—	%

Our deferred tax assets and liabilities consisted of the following at October 31, 2012 and 2011:



	2012			2011
Deferred tax assets:
Compensation and benefit accruals	$	5,745		$	4,490
Bad debt and other reserves	2,938			3,888
Capital loss and tax credit carry-forwards	14,396			6,222
Investment in Versa	4,068			2,490
Net operating loss (domestic and foreign)	219,496			202,635
Deferred license revenue	2,533			2,847
Lower of cost or market inventory reserves	857			1,158
Accumulated depreciation	257			—
Gross deferred tax assets:	250,290			223,730
Valuation allowance	(249,294		)	(222,536		)
Deferred tax assets after valuation allowance	996			1,194
Deferred tax liability:
Investment in partnerships	(996		)	(884		)
Accumulated depreciation	—			(310		)
Gross deferred tax liability	(996		)	(1,194		)
Net deferred tax assets	$	—		$	—

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 full valuation allowance against our net deferred tax assets. Approximately $4.3 million of the valuation allowance will reduce additional paid in capital upon subsequent recognition of any related tax benefits.

At October 31, 2012, we had federal and state NOL carryforwards of $659 million and $372 million, respectively, for which a portion of the NOL has not been recognized in connection with share-based compensation. The Federal NOLs expire in varying amounts from 2020 through 2032 while state NOLs expire in varying amounts from 2012 through 2032. Additionally, we had $9.5 million of state tax credits available, of which $1 million expires in 2018. The remaining credits do not expire.

Certain transactions involving the Company’s beneficial ownership occurred in fiscal 2012 and prior years, which could have resulted in a stock ownership change for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. We have completed a detailed Section 382 study in fiscal 2012 to determine if any of our NOL and credit carryovers will be subject to limitation. Based on that study we have determined that there was no ownership change as of the end of our 2012 fiscal year under Section 382.

As discussed in Note 1, 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 liability for unrecognized tax benefits at October 31, 2012 and 2011 was $15.7 million. This amount is directly associated with a tax position taken in a year in which federal and state NOL carryforwards were generated. Accordingly, the amount of unrecognized tax benefit has been presented as a reduction in the reported amounts of our federal and state NOL carryforwards. 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 various states, primarily Connecticut and California, as well as income tax returns required internationally for Korea and Germany. We are open to examination by the Internal Revenue Service and various states in which we file for fiscal years 1998 to the present. We are currently not under any income tax examinations.