Note

- Income taxes

Income/(loss) from continuing operations before income taxes (in thousands)	2018			2017
Domestic	$	(2,331	)	$	(7,924	)
Foreign		3,952			(2,285	)
Total	$	1,621		$	(10,209	)

Components of income tax expense/(benefit) (in thousands)	2018		2017
Current
Federal	$	48	$	—
Foreign		1,695		697
State and other		196		28
Total current income tax expense (benefit)		1,939		725
Deferred
Federal		—		(33	)
Foreign		211		(925	)
State and other		—		—
Total deferred income tax benefit		211		(958	)
Total income tax expense/(benefit)	$	2,150	$	(233	)

The U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on

December 22, 2017

and introduced significant changes to U.S. income tax law. Effective in

2018,

the Tax Act reduces the U.S. statutory tax rate from

35%

21%,

effective

January 1,

and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion anti-abuse tax, respectively. Since the Company is a fiscal taxpayer, the Company was subject to a blended federal rate of

33.83%

as of

January 31, 2018.

In addition, in

2017

the Company was subject to the onetime transition tax on accumulated foreign subsidiary earnings

not

previously subject to U.S. income tax. The Company is subject to a current and deferred federal tax rate of

21%

as of

January 31, 2019.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of

January

31,

2018,

as permitted by SAB

118.

The accounting for the tax effects of the Tax Act have been completed as of

January 31, 2019,

and the Company recorded a tax expense of less than

$0.1

million related to the

one

-time transition tax.

One-time transition tax

The

2017

provisional estimate of the aggregate deferred foreign income inclusion of

$23.2

million was adjusted to

$22.2

million during

2018.

At the time the provisional estimate was prepared, the Company expected to offset the inclusion with Net Operating Losses ("NOLs"). However, when preparing the tax return for the period the Company elected to claim foreign tax credits against the transition tax to preserve the NOLs. The net impact to the deferred balances was an increase in the NOL Deferred Tax Asset ("DTA") of

$4.9

million and a decrease in the foreign tax credit DTA of

$7.4

million. The changes in balances were offset by valuation allowances and did

not

impact tax expense. The transition tax of

$7.5

million was mostly offset by the use of foreign tax credit carryforwards, resulting in a net tax expense of less than

$0.1

million. There was

tax impact on the related adjustments to the deferred balances due to the Company applying a valuation allowance against the net deferred balances.

As a result of the onetime transition tax, the Company estimates that distributions from foreign subsidiaries will

longer be subject to U.S. tax. Earnings in the Company's subsidiaries in Canada, and Denmark, are

not

permanently reinvested, and earnings in the India subsidiary are partially permanently reinvested. The earnings will be subject to tax in their local jurisdiction, and the impact of the India dividend distribution tax and Canadian withholding taxes will be considered. As such, the Company has accrued a liability of

$0.4

million in

2018

related to these taxes.

U.S. income and foreign withholding taxes have

not

been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. The Company intends to permanently reinvest the undistributed earnings of the Middle Eastern subsidiaries. The Middle Eastern subsidiaries have unremitted earnings of

$26.3

million as of

January 31, 2019,

all of which has been subject to the transition tax in the U.S. Unremitted earnings of

$18.7

million in the United Arab Emirates would

not

be subject to withholding tax in the event of a distribution,

$7.5

million of unremitted earnings in Saudi Arabia would be subject to withholding tax of

$1.5

million, and the

$4.6

million of earnings permanently reinvested in India would be subject to dividend distribution tax of

$0.9

million.

Deferred tax effects

As a result of the Tax Act, in

2017,

the Company revalued deferred balances to a tax rate of

21%

as of the date of enactment, which resulted in a tax expense of

$2.2

million and

tax benefit of

$0.4

million r

elated to a reduction in the federal benefit of state taxes. This tax expense was fully offset by a valuation allowance, therefore, there was

impact to the income statement.

Global intangible low taxed income ("GILTI")

Beginning for tax years starting after

December 31, 2017,

the Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. The Company has elected to account for the tax effects of these provisions in the period that is subject to such tax and the impact is reflected in the Company’s full year provision.

However, the inclusion of

$2.1

million during the p

eriod does

not

result in additional tax expense since the Company has NOL carryforwards and a valuation allowance applied against the net domestic deferred tax assets.

The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of

21%

2018

and

33.83%

2017

was as follows:

(In thousands)	2018			2017
Tax benefit at federal statutory rate	$	340		$	(3,459	)
Federal rate change		—			2,243
State benefit, net of federal income tax effect		145			(440	)
Excess income tax on share-based compensation		—			(183	)
Domestic valuation allowance		(2,612	)		(1,206	)
Domestic return to provision		2,617			—
Global Intangible Low Tax Income Inclusion		438			—
Permanent differences other		126			162
Valuation allowance for state NOLs		76			297
Differences in foreign tax rate		334			732
Tax effects of Canadian acquisition amalgamation		—			(364	)
Deferred tax on unremitted earnings		413			1,880
Foreign withholding taxes		252			245
All other, net expense		21			(140	)
Total income tax expense/(benefit)	$	2,150		$	(233	)

The Company's worldwide effective tax rates ("ETR") were

132.7%

and

2.3%

2018

and

2017,

respectively. The change in the ETR from the prior year to the current year is largely due to the fact that the Company is in a positive operating income position in certain taxable jurisdictions. Additional factors include the tax benefit of a Canadian business combination which was realized in

2017,

and the valuation allowance against the domestic deferred tax asset. Due to this, even relatively small changes to ordinary income will have a large impact to the ETR. The income tax expense in

2018

$2.2

million, compared to income tax benefit of

$0.2

million in

2017.

The Company accrues taxes in various countries where they are generating income while applying a valuation allowance in the U.S. which attributes to the unusually large ETR.

Components of deferred income tax assets (in thousands)	2018			2017
U.S. Federal NOL carryforward	$	7,480		$	1,795
Deferred compensation		382			341
Research tax credit		2,703			2,703
Foreign NOL carryforward		390			332
Foreign tax credit		2,305			9,749
Stock compensation		459			506
Other accruals not yet deducted		349			270
State NOL carryforward		2,552			2,157
Accrued commissions and incentives		643			423
Inventory valuation allowance		112			96
Other		159			81
Deferred tax assets, gross		17,534			18,453
Valuation allowance		(16,199	)		(17,198	)
Total deferred tax assets, net of valuation allowances	$	1,335		$	1,255

Components of the deferred income tax liability
Depreciation	$	(1,734	)	$	(1,941	)
Foreign subsidiaries unremitted earnings		(498	)		(101	)
Prepaid		(80	)		(64	)
Total deferred tax liabilities	$	(2,312	)	$	(2,106	)

Deferred tax liability, net	$	(977	)	$	(851	)

Balance sheet classification
Long-term assets	$	458		$	391
Long-term liability		(1,435	)		(1,242	)
Total deferred tax liabilities, net of valuation allowances	$	(977	)	$	(851	)

The Company has a gross U.S. Federal operating loss carryforward of

$35.6

million that will begin to expire in the year ending

January

31,

2031.

The DTA for state NOL carryforwards of

$2.6

million relates to amounts that expire at various times from

2022

2031.

The Company has a DTA foreign NOL carryforward of

$0.4

million for its subsidiary in Saudi Arabia that can be carried forward indefinitely and does

not

have a valuation allowance recorded against it. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the foreign tax jurisdictions.

The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates, evaluates future sources of taxable income and tax planning strategies and

may

make further adjustments based on management's outlook for continued profits in each jurisdiction.

For the year ending

January

31,

2019,

the Company has determined that there is

not

a greater than

50%

likelihood that all of the domestic DTAs will be realized based on the available evidence. The Company recorded a full valuation allowance against the remaining domestic net DTAs on

January

31,

2013

net of uncertain tax positions ("UTP"). The Company continues to have a valuation allowance on its domestic DTAs since domestic losses continue to be generated.

The Company has a deferred tax asset of

$2.3

million for U.S. foreign tax credits after considering the impact of the repatriated foreign earnings and the

one

-time transition tax. The foreign tax credit deferred tax asset is fully offset with a valuation allowance. The excess foreign tax credits are subject to a

ten

-year carryforward and will begin to expire in

January

31,

2026.

The following table summarizes UTP activity, excluding the related accrual for interest and penalties:

(In thousands)	2018			2017
Balance at beginning of the year	$	1,301		$	1,331
Increases in positions taken in a prior period		9			6
Increases in positions taken in a current period		147			5
Decreases due to lapse of statute of limitations		(10	)		(34	)
Decreases due to settlements		—			(7	)
Balance at end of the year	$	1,447		$	1,301

Included in the total UTP liability were estimated accrued interest and penalty of less than

$0.1

million in both

January

31,

2019

and

January

31,

2018.

These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet and recognized as an expense during the period. The Company's policy is to include interest and penalties in income tax expense. On

January

31,

2019,

the Company did

not

anticipate any significant adjustments to its unrecognized tax benefits within the next

twelve

months. Included in the balance on

January

31,

2018

were amounts offset by deferred taxes (i.e., temporary differences) or amounts that could be offset by refunds in other taxing jurisdictions (i.e., corollary adjustments). Upon reversal,

$.3

million of the amount accrued on

January

31,

2019

would impact the future ETR.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Internal Revenue Service, ("IRS"), began an audit of the fiscal year ended

January

31,

2015

August 2016.

2017,

the tax audit concluded with

change made to the reported tax. Tax years related to

January 31, 2015,

2016

and

2017

are open for federal and state tax purposes. In addition, federal and state tax years

January 31, 2002

through

January 31, 2009

are subject to adjustment on audit, up to the amount of research tax credit generated in those years. Any NOL carryover can still be adjusted by the IRS in future year audits.

The Company's management periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time

may

change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate

may

increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for federal, foreign and state tax issues are included in other long-term liabilities on the consolidated balance sheet.