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Note 9 - Income Taxes
 9 Months Ended
Jul. 31, 2025
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

Note 9 – Income taxes

 

In accordance with applicable accounting guidance, the Company is required to use an estimated annual effective tax rate to compute its tax provision during an interim period. However, there is an exception to the use of this method when a reliable estimate of the annual effective tax rate cannot be made due to the sensitivity of changes in estimates of ordinary income (loss). In that case, an entity may report the actual tax provision or benefit applicable when annual income (loss) cannot be estimated as a discrete item in the interim period. This exception was used in determining the tax provision for the nine months ended July 31, 2025.

 

We recorded income tax provisions (benefits) of $88,000 and ($52,000) for the three months ended July 31, 2025 and 2024, respectively. The effective tax rate for the three months ended July 31, 2025 and 2024 was 18.3% and 6.9%, respectively. For the nine months ended July 31, 2025 and 2024, we recorded income tax provisions of $259,000 and $2,766,000, respectively. The effective tax rate for the nine months ended July 31, 2025 and 2024 was 160.9% and (76.9%), respectively. The effective tax rate for the three months and nine months ended July 31, 2025 differed from the U.S. statutory tax rate of 21% primarily due to state taxes, various permanent differences, research and development tax credits, unrecognized tax benefits and change in valuation allowance.                                                                

 

We had $241,000 and $186,000 of unrecognized tax benefits, as of July 31, 2025 and October 31, 2024, respectively. The unrecognized tax benefits, if recognized, would result in a net tax benefit of $195,000 as of July 31, 2025.

 

The Company assesses all positive and negative evidence in determining if, based on the weight of such evidence, a valuation allowance is required to be recorded against the deferred tax assets as of July 31, 2025. The Company has evaluated future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In making such judgements, significant weight is given to evidence that can be objectively verified. After analyzing all available evidence, including the recent trend of losses, the Company has determined that it is not more likely than not that all of its deferred tax assets will be realized, and therefore, has a partial valuation allowance against its deferred tax assets. The Company's valuation allowance was $4,146,000 and $3,962,000 as of July 31, 2025 and October 31, 2024.

 

On July 4, 2025, President Donald Trump signed into law the reconciliation tax bill, commonly referred to as the “One Big Beautiful Bill Act” (OBBBA), which constitutes the enactment date under GAAP. Key corporate tax provisions of the OBBBA include the restoration of 100% bonus depreciation, the introduction of new Section 174A permitting immediate expensing of domestic research and experimental (R&E) expenditures, modifications to Section 163(j) interest expense limitations, updates to the rules governing foreign-derived intangible income (FDII), and the expansion of Section 162(m) aggregation requirements.

 

Under GAAP, the effects of changes in tax laws are recognized in the period in which the new law is enacted. Accordingly, the impact of the OBBBA is reflected in the Company’s financial statements for the third quarter of fiscal 2025, to the extent applicable, as the tax law changes primarily take effect for the fiscal year ending October 31, 2026. The tax law changes did not change the annual effective tax rate for fiscal 2025 or the valuation allowance assessment. The Company is currently evaluating the impact of the OBBBA for fiscal 2026, and an estimate of the financial effect is not available yet.