Note 15. Income Taxes

The components of loss from continuing operations before income taxes for the years ended October 31, 2015, 2014, and 2013 were as follows (in thousands):



	2015			2014			2013
U.S.	$	(26,459	)	$	(35,167	)	$	(31,044	)
Foreign	(2,951		)	(3,228		)	(3,904		)
Loss before income taxes	$	(29,410	)	$	(38,395	)	$	(34,948	)

There was current income tax expense of $0.3 million, $0.5 million and $0.4 million related to foreign withholding taxes and income taxes in South Korea and no deferred federal income tax expense (benefit) for the years ended October 31, 2015, 2014 and 2013. Franchise tax expense, which is included in administrative and selling expenses, was $0.2 million for each of the years ended October 31, 2015, 2014 and 2013.

The reconciliation of the federal statutory income tax rate to our effective income tax rate for the years ended October 31, 2015, 2014 and 2013 was as follows:



	2015		2014		2013
Statutory federal income tax rate	(34.0	)%	(34.0	)%	(34.0	)%
Increase (decrease) in income taxes resulting from:
State taxes, net of Federal benefits	(0.1	)%	(1.8	)%	(1.7	)%
Foreign withholding tax	0.9	%	1.0	%	0.9	%
Net operating loss adjustment and true-ups	4.7	%	(25.4	)%	0.1	%
Nondeductible expenditures	0.1	%	14.5	%	0.8	%
Change in state tax rate	1.6	%	(0.8	)%	10.5	%
Other, net	0.4	%	0.4	%	4.1	%
Valuation allowance	27.3	%	47.1	%	20.3	%
Effective income tax rate	0.9	%	1.0	%	1.0	%

Our deferred tax assets and liabilities consisted of the following at October 31, 2015 and 2014 (in thousands):



	2015			2014
Deferred tax assets:
Compensation and benefit accruals	$	8,389		$	7,591
Bad debt and other allowances	1,109			1,859
Capital loss and tax credit carry-forwards	12,998			13,486
Net operating losses (domestic and foreign)	257,373			247,170
Deferred license revenue	9,313			8,894
Inventory valuation allowances	77			521
Investment in partnerships	—			404
Accumulated depreciation	535			590
Gross deferred tax assets:	289,794			280,515
Valuation allowance	(289,794		)	(280,515		)
Deferred tax assets after valuation allowance	—			—
Deferred tax liability:
In process research and development	(3,377		)	(3,377		)
Net deferred tax liability	$	(3,377	)	$	(3,377	)

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 deferred tax assets. Approximately $4.6 million of the valuation allowance will reduce additional paid in capital upon subsequent recognition of any related tax benefits. In connection with our 2012 acquisition of Versa we recorded a deferred tax liability for IPR&D, which has an indefinite life. Accordingly, we do not consider it to be a source of taxable income in evaluating the recoverability of our deferred tax assets.

At October 31, 2015, we had federal and state NOL carryforwards of $721.0 million and $406.0 million, respectively, for which a portion of the NOL has not been recognized in connection with share-based compensation. The Federal NOL carryforwards expire in varying amounts from 2020 through 2035 while state NOL carryforwards expire in varying amounts from fiscal year 2015 through 2035. Additionally, we had $11 million of state tax credits available, of which $1.0 million expires in fiscal year 2018. The remaining credits do not expire.

Certain transactions involving the Company’s beneficial ownership occurred in fiscal year 2014 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 year 2015 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 fiscal year 2015 under Section 382. The acquisition of VERSA in fiscal year 2013 triggered a Section 382 ownership change which will limit the future usage of some of the Federal and state NOLs. The Federal and state NOLs that are non 382-limited are included in the NOL deferred tax assets as disclosed.

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, 2015 and 2014 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 South Korea and Germany. We are open to examination by the Internal Revenue Service and various states in which we file for fiscal years 1999 to the present. We are currently not under any income tax examinations.