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Income Taxes
 12 Months Ended
Jan. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes
Note 16—Income Taxes
The components of income (loss) before income taxes are as follows:
 
    
2022
     
2021
    
2020
  
(In thousands)                    
Domestic
    $ 5,046      $ (1,193 )    $ 1,930  
Foreign
      1,988        3,372       (560 ) 
    
 
 
     
 
 
    
 
 
  
     $ 7,034      $ 2,179     $ 1,370  
    
 
 
     
 
 
    
 
 
  
 
The components of the provision/(benefit) for income taxes are as follows:
 
    
2022
    
2021
    
2020
  
(In thousands)                   
Current:
                         
Federal
    $ (183 )    $ 1,272     $ 660  
State
      76       224       221  
Foreign
      501       420       368  
    
 
 
    
 
 
    
 
 
  
       394       1,916       1,249  
    
 
 
    
 
 
    
 
 
  
Deferred:
                         
Federal
    $ 180     $ (910 )    $ (1,364 ) 
State
      177       (189 )      (282 ) 
Foreign
      (146 )      78       8  
    
 
 
    
 
 
    
 
 
  
       211       (1,021 )      (1,638 ) 
    
 
 
    
 
 
    
 
 
  
     $ 605     $ 895     $ (389 ) 
    
 
 
    
 
 
    
 
 
  
Total income tax provision/(benefit) differs from the expected tax provision/(benefit) as a result of the following:
 
 
  
2022
 
 
2021
 
 
2020
 
(In thousands)
  
 
 
 
 
 
 
 
 
Income Tax Provision at Statutory Rate
    $ 1,477     $ 458     $ 288  
Return to Provision Adjustment
      368       (2 )      (207 ) 
State Taxes, Net of Federal Tax Effect
      143       28       (48 ) 
Denmark Statutory Audit
      —         341       —    
Foreign Rate Differential
      61       197       315  
Change in Valuation Allowance
      57       (81 )      256  
Meals and Entertainment
      9       11       31  
Canada Withholding Taxes
      —         62       —    
Global Intangible Low Taxed Income
      —         14       107  
Foreign Tax Credits
      —         —         (344 ) 
Foreign Derived Intangible Income
      (55 )      (150 )      (107 ) 
Share Based Compensation
      (95 )      171       (145 ) 
R&D Credits
      (180 )      (157 )      (209 ) 
Change in Reserves Related to ASC 740 Liability
      (245 )      (10 )      (352 ) 
PPP Loan Forgiveness
      (937 )      —         —    
Other
      2       13       26  
    
 
 
    
 
 
    
 
 
  
     $ 605     $ 895     $ (389 ) 
    
 
 
    
 
 
    
 
 
  
Our effective tax rate for 2022 was 8.6% compared to 41.1% in 2021 and (28.4)% in 2020. The decrease in the effective tax rate in 2022 from 2021 is primarily related to the PPP loan forgiveness
tax-exempt
income. Specific items decreasing the effective tax rate include PPP loan forgiveness
tax-exempt
income, R&D tax credits, foreign derived intangible income (“FDII”) deduction, and change in reserves related to ASC 740 liabilities. This decrease was offset by state taxes, return to provision adjustments, and taxes on foreign earnings.
The increase in the effective tax rate in 2021 from 2020 is primarily related to the change in mix of income between relevant jurisdictions in which we are subject to income taxes. Specific items increasing the effective tax rate include foreign rate differential, Denmark statutory audit adjustments, stock-based compensation, and Canada withholding taxes. This increase was offset by the foreign derived intangible income (“FDII”) deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized.
 
The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:
 
    
January 31,
  
    
2022
    
2021
  
(In thousands)             
Deferred Tax Assets:
                 
Inventory
    $ 2,159     $ 2,700  
Honeywell Royalty Liability
      2,655       2,590  
State R&D Credits
      1,925       1,546  
Share-Based Compensation
      593       600  
Bad Debt
      213       245  
Warranty Reserve
      198       176  
Compensation Accrual
      322       159  
Net Operating Loss
      152       154  
ASU 842 Adjustment
 –
Lease Liability
      93       125  
Unrecognized State Tax Benefits
      64       101  
Foreign Tax Credit
      154       83  
Deferred Service Contract Revenue
      61       68  
Other
      224       308  
    
 
 
    
 
 
  
       8,813       8,855  
Deferred Tax Liabilities:
                 
Accumulated Tax Depreciation in Excess of Book Depreciation
      455       752  
Intangibles
      767       399  
ASU 842 Adjustment – Lease Liability
      90       119  
Other
      318       307  
    
 
 
    
 
 
  
       1,630       1,577  
    
 
 
    
 
 
  
Subtotal
      7,183       7,278  
Valuation Allowance
      (1,778 )      (1,721 ) 
    
 
 
    
 
 
  
Net Deferred Tax Assets
    $ 5,405     $ 5,557  
 
  
 
 
 
 
 
 
 
 
 
 
 
Deferred taxes are reflected in the consolidated balance sheet as follows:
 
 
 
    
January 31,
  
    
2022
    
2021
  
Deferred Tax Assets
  
 
5,651
 
 
 
5,941
 
Deferred Tax Liabilities
  
 
(246
) 
 
 
(384
) 
 
  
 
 
 
 
 
 
 
Total Net Deferred Tax Assets
  
$
5,405
 
 
$
5,557
 
 
  
 
 
 
 
 
 
 
The valuation allowances of $1.8 million at January 31, 2022 and $1.7 million at January 31, 2021, relate to domestic research and development tax credit carryforwards and foreign tax credit carryforwards which are expected to expire unused.
At January 31, 2022, we had net operating loss carryforwards of $0.6 million in China, which expire in 2023 through 2027. We have net operating loss carryforwards of less than $0.1 million in France, which can be carried forward indefinitely. We expect to utilize the net operating loss carryforwards in China and France before expiration.
At January 31, 2022, we had state research credit carryforwards of approximately $1.6 million which expire in 2022 through 2029. Additionally, we had $0.2 million of foreign tax credit
s
. We maintain a full valuation allowance against these credits as we expect these credits to expire unused.

 
We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows:
 
    
2022
    
2021
    
2020
  
(In thousands)                   
Balance
, beginning of the year
    $ 384     $ 362     $ 618  
Increases in prior period tax positions
      63       59       —    
Increases in current period tax positions
      67       5       2  
Reductions related to lapse of statutes of limitations
      (211 )      (42 )      (26 ) 
Reductions related to settlement with tax authorities
      —         —         (232 ) 
    
 
 
    
 
 
    
 
 
  
Balance, end of the year
    $ 303     $ 384     $ 362  
    
 
 
    
 
 
    
 
 
  
During fiscal 2022 and 2021, we released $211,000 and $50,000, respectively, of accrued interest and penalties relating to a change in various unrecognized tax positions. We have accrued potential interest and penalties of $95,000 included in Income Taxes Payable in the consolidated balance sheet at January 31, 2022.
The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company was previously under audit by the IRS for the tax years ended January 31, 2015, 2016, and 2017, but on June 6, 2019, we received formal communication regarding the close of the audit with no additional changes made by the IRS. Therefore, the reserves for federal uncertain tax positions relating to the years in question have been released. In fiscal 2020, we released $232,000 relating to the federal tax exposure for the years previously under audit and $74,000 of related interest (net of federal benefit) and penalties.
U.S. income taxes have not been provided on $7.3 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical.