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Note 7 - Income Taxes
 12 Months Ended
Jan. 31, 2023
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

Note 7 - Income taxes

 

Income/(loss) from continuing operations before income taxes (in thousands)

 

2022

  

2021

 

Domestic (1)

 $(5,392) $(3,357)

Foreign

  14,950   11,684 

Total

 $9,558  $8,327 

 

(1) The domestic loss from continuing operations before income taxes includes corporate overhead costs.

 

Components of income tax expense/(benefit) (in thousands)

 

2022

  

2021

 

Current

        

Federal

 $(3) $1 

Foreign

  2,971   2,317 

State and other

  166   144 

Total current income tax expense

  3,134   2,462 

Deferred

        

Federal

  -   - 

Foreign

  479   (197)

State and other

  -   - 

Total deferred income tax expense/(benefit)

  479   (197)

Total income tax expense

 $3,613  $2,265 

 

As a result of the onetime transition tax from the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”), the Company estimates that distributions from foreign subsidiaries will no longer be subject to incremental U.S. tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends received deduction. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested. Earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. The Company's liability was $0.6 million and $0.2 million as of January 31, 2023 and 2022, respectively, 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 its Middle Eastern and Indian subsidiaries. The Middle Eastern and Indian subsidiaries have unremitted earnings of $28.2 million and $8.4 million, respectively, as of January 31, 2023, all of which has been subject to the transition tax in the United States. Unremitted earnings of $22.8 million in the United Arab Emirates would not be subject to withholding tax in the event of a distribution, and $5.4 million of unremitted earnings in Saudi Arabia would be subject to withholding tax of $0.3 million. The Company has not recorded a deferred tax liability related to any financial reporting basis over tax basis related to the investment in these foreign subsidiaries as it is not practical to estimate.

 

The Inflation Reduction Act ("IRA") was signed into law in August 2022. The Company has evaluated the provisions of the IRA and does not expect any material impact to its consolidated provision for income taxes. 

 

The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of 21% was as follows:

 

(In thousands)

 

2022

  

2021

 

Tax expense at federal statutory rate

 $2,007  $1,749 

State expense, net of federal income tax effect

  110   148 

Deferred compensation adjustment

  (32)  456 

Domestic valuation allowance

  (590)  (636)

Domestic return to provision

  390   (6)

Global Intangible Low-Taxed Income inclusion

  1,206   742 

Valuation allowance for state NOLs

  133   (29)

Differences in foreign tax rate

  (410)  (430)

Deferred tax on unremitted earnings

  438   (55)

Foreign withholding taxes

  304   178 

Research tax credit

  220   80 

Pension Settlement

  (115)  - 

All other, net expense

  (48)  68 

Total income tax expense/(benefit)

 $3,613  $2,265 

 

The Company's worldwide effective tax rates ("ETR") were 37.8% and 27.2% in the years ended January 31, 2023 and 2022, respectively. The change in the ETR was primarily due to additional tax expense for the Global Intangible Low-Taxed Income inclusion, the absence of recognizing tax benefits on losses in the United States due to a full valuation allowance and changes in the mix of income and loss in the various tax jurisdictions.

 

Components of deferred income tax assets (in thousands)

 

2022

  

2021

 

U.S. Federal NOL carryforward

 $7,197  $8,424 

Deferred compensation

  276   350 

Research tax credit

  2,258   2,573 

Foreign NOL carryforward

  318   448 

Foreign tax credit

  2,580   2,580 

Stock compensation

  43   62 

Other accruals not yet deducted

  305   276 

State NOL carryforward

  2,744   2,730 

Accrued commissions and incentives

  851   483 

Inventory valuation allowance

  107   116 

Lease liability

  278   418 

Other

  165   17 

Deferred tax assets, gross

  17,122   18,477 

Valuation allowance

  (15,993)  (16,905)

Total deferred tax assets, net of valuation allowances

 $1,129  $1,572 
         

Components of the deferred income tax liability

        

Depreciation

 $(415) $(643)

Foreign subsidiaries unremitted earnings

  (591)  (231)

Prepaid

  (70)  (54)

Accrued pension

  -   (159)

Right of use asset

  (266)  (386)

Total deferred tax liabilities

 $(1,342) $(1,473)
         

Deferred tax (liability)/asset, net

 $(213) $99 
         

Balance sheet classification

        

Long-term assets

 $696  $811 

Long-term liability

  (909)  (712)

Total deferred tax assets/(liabilities), net of valuation allowances

 $(213) $99 

 

As of January 31, 2023 the Company had a deferred tax asset of $7.2 million related to gross U.S. Federal net operating loss ("NOL") carryforwards of $34.3 million, of which $26.9 million will expire between tax years 2033 and 2038, with the remainder not subject to expiration. As of January 31, 2023 the Company had a deferred tax asset of $2.7 million related to gross state NOLs of $45.5 million that expire between 2023 and 2032 As of January 31, 2023 the Company had a deferred tax asset of $0.3 million related to gross foreign NOLs of $1.6 million for its subsidiary in Saudi Arabia, which can be carried forward indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of the tax benefit is dependent upon the future generation of operating income in the respective 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. 

 

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets.  A significant piece of objective negative evidence evaluated was the domestic cumulative loss incurred over the three-year period ended January 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

 

On the basis of this evaluation, as of January 31, 2023, a full valuation allowance was recorded against the domestic deferred tax assets.  The amount of the domestic deferred tax assets considered realizable, however, could be increased if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for future growth.

 

The Company has a deferred tax asset of $2.6 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 on January 31, 2026.

 

The following table summarizes uncertain tax position ("UTP") activity, excluding the related accrual for interest and penalties:

 

(In thousands)

 

2022

  

2021

 

Balance at beginning of year

 $1,611  $1,591 

Decreases in positions taken in a prior period

  -   (4)

Increases in positions taken in a current period

  159   66 

Decreases due to lapse of statute of limitations

  (3)  (8)

Decreases due to settlements

  (94)  (34)

Balance at end of year

 $1,673  $1,611 

 

Included in the total UTP liability were estimated accrued interest and penalties of $0.3 million and $0.2 million as of  January 31, 2023 and 2022, respectively. 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, 2023, 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, 2023 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, $0.9 million of the amount accrued on  January 31, 2023 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. Tax years related to January 31, 2019, 2020, 2021 and 2022 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2004 through January 31, 2010, 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 Internal Revenue Service 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.