INCOME TAXES

12 Months Ended

Oct. 31, 2024

INCOME TAXES

INCOME TAXES

6.     INCOME TAXES

We utilize the asset and liability method of accounting for income taxes. Under this method, the provision (benefit) for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year.

The Inflation Reduction Act of 2022 (the “Inflation Reduction Act” or “IRA”) was signed into law on August 16, 2022. The IRA provides investment in clean energy, promotes reductions in carbon emissions, and extends select Affordable Care Act premium reductions. We currently do not expect that the Inflation Reduction Act will have a material impact on its income taxes.

The components of income (loss) before taxes are (in thousands):

	Year Ended October 31,
	2024		2023		2022
Income (loss) before income taxes:
Domestic	$	(15,024)	$	(3,259)	$	(232)
Foreign		5,174		10,013		12,110
	$	(9,850)	$	6,754	$	11,878

In the fiscal years set forth below, the provision (benefit) for income taxes consisted of the following (in thousands):

	Year Ended October 31,
	2024		2023		2022
Current:
U.S. taxes	$	647	$	(431)	$	1,092
Foreign taxes		1,804		2,775		3,191
		2,451		2,344		4,283
Deferred:
U.S. taxes		(3,765)		167		(839)
Foreign taxes		(518)		(287)		(204)
		(4,283)		(120)		(1,043)
Valuation allowance		8,590		141		412
	$	6,758	$	2,365	$	3,652

A comparison of income tax expense at the U.S. statutory rate to our effective tax rate is as follows:

	Year Ended October 31,
	2024			2023			2022
U.S. statutory rate		21	%		21	%		21	%
Effect of tax rate of international jurisdictions different than U.S. statutory rates		(4)	%		6	%		4	%
Valuation allowance		(87)	%		2	%		3	%
State taxes		4	%		(1)	%		1	%
Tax credits		—	%		—	%		1	%
US benefit of foreign intangible income		—	%		—	%		(3)	%
US tax on distributed and undistributed earnings		(2)	%		—	%		—	%
Stock-based compensation		(3)	%		6	%		4	%
Other		2	%		1	%		—	%
Effective tax rate		(69)	%		35	%		31	%

The Tax Reform Act enacted on December 22, 2017, made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. As of October 31, 2024, the undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested and retained for continuing operations. Accordingly, we did not accrue any withholding taxes on the undistributed earnings of our foreign subsidiaries, consistent with the position adopted on January 1, 2018.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements.

Our effective tax rate for the fiscal year ended October 31, 2024 was (69%), compared to 35% in the prior fiscal year. Income tax expense for fiscal year 2024 was $6.8 million, compared to $2.4 million for fiscal year 2023. The year-over-year increase in income tax expense for the fiscal year ended October 31, 2024 was primarily due to an $8.4 million non-cash valuation allowance on U.S. and China deferred tax assets, changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, and discrete items related to unvested stock compensation. As a result of a cumulative three-year loss in the U.S., we have an $8.3 million valuation allowance recorded against our U.S. deferred tax assets, and we did not record a tax benefit for our U.S. net losses for fiscal year ended October 31, 2024. The valuation allowance recorded during fiscal year ended October 31, 2024 reflects a full valuation allowance of the U.S. deferred tax assets and was recorded based on our conclusion that the deferred tax assets were not more likely than not going to be realized.  

As of October 31, 2024, we had deferred tax assets established for accumulated net operating loss carryforwards of $6.1 million, primarily related to federal, state and foreign jurisdictions. We also have deferred tax assets for tax credits of $0.9 million. We established a valuation allowance against these carryforwards due to the uncertainty of their full realization. As of October 31, 2024, and 2023, the balance of this valuation allowance was $9.2 million and $1.8 million, respectively.

Significant components of our deferred tax assets and liabilities as of October 31, 2024 and 2023 are as follows (in thousands):

	October 31,
	2024		2023
Deferred Tax Assets:
Accrued inventory reserves	$	1,605	$	1,580
Accrued warranty expenses		191		241
Compensation related expenses		1,800		2,222
Net derivative gain		500		683
Unrealized exchange gain		58		—
Other accrued expenses		351		344
Net operating loss carryforwards		6,115		2,249
Other credit carryforwards		948		712
Operating lease liabilities		2,924		2,818
Goodwill and intangibles		750		798
Other		118		131
		15,360		11,778
Less: Valuation allowance – net operating loss and other credit carryforwards		(9,203)		(1,810)
Deferred tax assets		6,157		9,968
Deferred Tax Liabilities:
Unrealized exchange loss		—		(159)
Property and equipment and capitalized software development costs		(1,525)		(1,915)
Operating lease - right of use assets		(2,837)		(2,731)
Other		(499)		(497)
Net deferred tax assets	$	1,296	$	4,666

As of October 31, 2024, we had net operating loss carryforwards for international and U.S. income tax purposes of $37.8 million.  Our U.S. federal net operating loss has an unlimited carryforward potential.  Our U.S. state net operating losses will either expire at various tax years from 2025 to 2044 or have unlimited carryforward potential. Our foreign net operating losses will either expire at various tax years from 2025 to 2029 or have unlimited carryforward potential.  We also have tax credits of $0.9 million which will expire at various tax years from 2025 to 2044.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands):

	2024		2023		2022
Balance, beginning of year	$	138	$	138	$	167
Additions based on tax positions related to the current year		—		—		21
Additions (reductions) related to prior year tax positions		—		—		—
Reductions due to statute expiration		(117)		—		(50)
Balance, end of year	$	21	$	138	$	138

The entire balance of the unrecognized tax benefits and related interest on October 31, 2024, if recognized, could affect the effective tax rate in future periods.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision. As of October 31, 2024, the amount of interest accrued, reported in other liabilities, was approximately $7,000 which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire in August 2025.

We file U.S. federal and state income tax returns, as well as tax returns in applicable foreign jurisdictions.

A summary of open tax years by major jurisdiction is presented below:

United States federal	Fiscal year 2021 through the current period
Germany¹	Fiscal year 2022 through the current period
Taiwan	Fiscal year 2019 through the current period
United Kingdom	Fiscal year 2018 through the current period

¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable.