Annual report pursuant to Section 13 and 15(d)

Note 12 - Income Taxes

v3.21.1
Note 12 - Income Taxes
12 Months Ended
Oct. 31, 2020
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

Note 12. Income Taxes 

 

The sources of income before income taxes for the fiscal year ended October 31, 2020, the Successor period from December 6, 2018 through October 31, 2019, and the predecessor period from November 1, 2018 through December 5, 2018 are as follows:

 

   

Successor

   

 

 
          (As Restated)     Predecessor  

(in thousands)

  Year Ended October 31, 2020     December 6, 2018 through October 31, 2019     November 1, 2018 through December 5, 2018  

United States

  $ (49,688 )   $ (21,366 )   $ (26,974 )

Foreign

    (16,540 )     1,660       207  

Total

  $ (66,228 )   $ (19,706 )   $ (26,767 )

 

The components of the provision for income taxes for the fiscal year ended October 31, 2020, the Successor period from December 6, 2018 through October 31, 2019, and the predecessor period from November 1, 2018 through December 5, 2018 are as follows:

 

   

Successor

   

Predecessor

 

(in thousands)

  Year Ended October 31, 2020     December 6, 2018 through October 31, 2019     November 1, 2018 through December 5, 2018  

Current tax provision (benefit):

                       

Federal

  $ (4,299 )   $ -     $ -  

Foreign

    (9 )     1,108       134  

State and local

    361       409       31  

Total current tax provision (benefit)

    (3,947 )     1,517       165  
                         

Deferred tax provision (benefit):

                       

Federal

  $ 759     $ (3,317 )   $ (3,474 )

Foreign

    126       (571 )     (86 )

State and local

    (1,914 )     (932 )     (797 )

Total deferred tax benefit

    (1,029 )     (4,820 )     (4,357 )
                         

Net benefit for income taxes

  $ (4,977 )   $ (3,303 )   $ (4,192 )

 

For the fiscal year ended October 31, 2020, the Successor period from December 6, 2018 through October 31, 2019, and the Predecessor period from November 1, 2018 through December 5, 2018, the income tax provision differs from the expected tax provision computed by applying the U.S. federal statutory rate to income before taxes as a result of the following:

 

      (As Restated)        
   

Successor

   

Predecessor

 

(in thousands)

  Year Ended October 31, 2020     December 6, 2018 through October 31, 2019     November 1, 2018 through December 5, 2018  

Income tax benefit per federal statutory rate of 21% for each period

  $ (13,967 )   $ (4,140 )   $ (5,622 )

State income taxes, net of federal deduction

    (150 )     (468 )     (635 )

Foreign rate differential

    108       (48 )     (6 )

Meals and entertainment

    127       187       24  

Transaction costs

    -       18       1,414  

Change in deferred tax rate

    (1,654 )     (95 )     30  

Stock-based compensation

    105       -       6  

Equity contribution

    -       127       -  

Nontaxable interest income net of foreign income inclusions

    717       (257 )     (62 )

Deferred tax on undistributed foreign earnings

    (255 )     236       68  

Impact of tax reform in the U.K. (see discussion below)

    859       -       -  

Deferred finance costs

    -       -       586  
Goodwill impairment     9,812       -       -  
Impact of US tax reform from CARES Act     (1,381 )     -       -  
Settlement with related party     420       -       -  
Change in fair value of warrant liabilities     55       1,363       -  

Other

    227       (226 )     5  

Income tax benefit

  $ (4,977 )   $ (3,303 )   $ (4,192 )

 

The tax effects of the temporary differences giving rise to the Company’s net deferred tax liabilities for fiscal years ending October 31, 2020 and October 31, 2019 are summarized as follows:

 

(in thousands)

  Year Ended October 31, 2020     December 6, 2018 through October 31, 2019  

Deferred tax assets:

               

Accrued insurance reserve

  $ 1,637     $ 1,334  

Accrued sales and use tax

    75       77  

Accrued bonuses and vacation

    1,521       353  
Accrued payroll tax     676       -  

Foreign tax credit carryforward

    80       80  
State tax credit carryforward     70       -  

Interest expense carryforward

    4,089       9,181  

Stock-based compensation

    3,127       893  

Prepaid expenses

    -       4  

Other

    335       435  

Net operating loss carryforward

    10,308       17,385  

Total deferred tax assets

  $ 21,918     $ 29,742  

Valuation allowance

    (63 )     (63 )

Net deferred tax assets

  $ 21,855     $ 29,679  
                 

Deferred tax liabilities:

               

Intangible assets

    (27,504 )     (36,593 )

Property and equipment

    (61,761 )     (61,608 )

Prepaid expenses

    (128 )     -  

Unremitted foreign earnings

    (481 )     (527 )

Total net deferred tax liabilities

    (89,874 )     (98,728 )
                 

Net deferred tax liabilities

  $ (68,019 )   $ (69,049 )

 

As of October 31, 2020, the Company has the following tax carryforwards:

 

(in millions)

 

Balance as of October 31, 2020

 

Year that Carryforwards Begin to Expire

 

Federal net operating loss carryforwards

  $ 42.6    

N/A – Carried forward indefinitely

 

State net operating loss carryforwards

    30.4       2023  

Foreign tax carryforwards

    0.1       2026  

State credit carryforwards

    0.1       2023  

Interest expense carryforwards

    15.8    

N/A – Carried forward indefinitely

 

Total tax carryforwards

  $ 89.0          

 

The Company has provided U.S. deferred taxes on cumulative earnings of all of its non-U.S. affiliates.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, carryback opportunities, and tax planning strategies in making the assessment.  The Company believes it is more likely than not that it will realize the benefits of these deductible differences, net of the valuation allowance provided. The valuation allowance provided by the Company relates to foreign tax credit carryforwards.

 

The following table summarizes the changes in the Company's unrecognized tax benefits during the year ended October 31, 2020 and 2019, and the Predecessor period ended  December 5, 2018. The Company expects no material changes to unrecognized tax positions within the next twelve months. If recognized, none of these benefits would favorably impact the Company's income tax expense, before consideration of any related valuation allowance:

 

   

Successor

   

Predecessor

 

(in thousands)

  Year Ended October 31, 2020     December 6, 2018 through October 31, 2019     November 1, 2018 through December 5, 2018  

Balance, beginning of year

  $ 1,726     $ -     $ -  

Increase in current year position

    -       1,726       -  

Increase in prior year position

    -       -       -  

Decrease in prior year position

    (154 )     -       -  

Lapse in statute of limitations

    -       -       -  

Balance, end of year

  $ 1,572     $ 1,726     $ -  

 

As of October 31, 2020 and 2019, and December 5, 2018, the company has recognized no interest or penalties.

 

On March 17, 2020, the House of Commons in the U.K. passed a Budget Resolution under the Provisional Collection of Taxes Act of 1968 (the "Budget Resolution").  The Budget Resolution substantively enacted an increase in the U.K. corporate tax rate for tax periods after March 31, 2020 from 17% to 19%.  As a result of the Budget Resolution, the Company recorded tax expense of $0.9 million related to the remeasurement of deferred tax assets and liabilities to reflect the increase in the U.K. corporate tax rate.

 

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security "CARES" Act into law. The CARES Act included several significant business tax provisions that, among other things, eliminated the taxable income limit for certain net operating losses ("NOL") and allowed businesses to carry back NOL's arising in 2018, 2019 and 2020 to the five prior years, accelerated refunds of previously generated corporate alternative minimum tax credits, generally loosened the business interest limitation under IRC section 163(j) from 30 percent to 50 percent among other technical corrections included in the Tax Cuts and Jobs Act tax provisions.

 

During fiscal years 2016 and 2017, the Company paid federal income taxes totaling $4.3 million (at a federal income tax rate of 34%). As the Company generated NOL carryforwards during fiscal 2018 and 2019, the CARES Act allowed the Company to carry back those NOL's to the fiscal 2016 and 2017 tax returns. During fiscal 2020, the Company carried back all NOL's that were generated in fiscal year 2018 to the 2016 and part of the 2017 tax returns and also carried back a portion of the NOL's accumulated during fiscal 2019 to the remaining income from the 2017 tax return.  These carrybacks resulted in a revaluation of the NOL carryforwards from the 21% federal rate in effect prior to the CARES Act to 34%, which was the federal income tax rate for 2016 and 2017. On March 31, 2020, the Company received a demand letter alleging that the Company is required to remit to the Predecessor's shareholders certain tax refunds from carrying back certain NOL's made available as a result of the passage of the CARES Act.  In October 2020, the Company reached a settlement with the Predecessor’s shareholders, resulting in the Company agreeing to pay $2.0 million of the $4.3 million in refunds to the Predecessor’s shareholders. This $2.0 million charge was recorded in general and administrative expenses in the accompanying consolidated statements of operations.  Following the $1.4 million revaluation in the carrying value of the NOL's as a result of the carryback benefit at a higher tax rate, the net financial impact to the Company is a $0.6 million loss.  The corresponding due to related party is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets. This is expected to be settled as the income tax refunds from the IRS are received.