Note 7 - Income Tax Provision (Benefit)

12 Months Ended

Oct. 31, 2024

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 7 – Income tax provision (benefit)

The provision (benefit) for income taxes for the fiscal years ended October 31, 2024 and 2023 consists of the following (in thousands):

	2024		2023
Current:
Federal	$	-	$	(501	)
State		93		6
		93		(495	)
Deferred:
Federal		1,942		(438	)
State		761		(239	)
		2,703		(677	)
	$	2,796	$	(1,172	)

Income tax at the federal statutory rate is reconciled to our actual net provision (benefit) for income taxes as follows (in thousands, except percentages):

	2024						2023
				% of Pretax						% of Pretax
	Amount			Loss			Amount			Income
U.S. federal statutory tax rate	$	(799	)		21.0	%	$	(893	)		21.0	%
State and local taxes, net of federal tax benefit		(170	)		4.5	%		(212	)		5.0	%
Permanent differences		14			-0.4	%		15			-0.4	%
Stock options		45			-1.2	%		88			-2.1	%
R&D credits		(102	)		2.7	%		(238	)		5.6	%
Uncertain tax position reserves		3			-0.1	%		13			-0.3	%
Return-to-provision adjustments		(34	)		0.9	%		(69	)		1.6	%
Change in the valuation allowance on deferred tax assets		3,839			-100.9	%		124			-2.9	%
Income tax expense	$	2,796			-73.5	%	$	(1,172	)		27.5	%

The significant components of deferred income taxes were as follows (in thousands):

	2024			2023
Deferred Tax Assets:
Allowance for obsolete and slow moving inventory	$	522		$	434
Allowance for credit losses		39			63
Compensation accruals		264			275
Stock-based compensation awards		328			213
Uniform capitalization		277			208
Lease liability		5,221			5,177
Others		55			94
Capitalized Section 174 Costs		1,209			864
Research and development tax credit		282			128
163(j) interest carryforward		347			118
Gross deferred tax assets		8,544			7,574
Valuation allowance		(3,962	)		(124	)
Total deferred tax assets		4,582			7,450
Deferred Tax Liabilities:
Amortization / intangible assets		(172	)		(192	)
ROU assets		(3,880	)		(3,942	)
Depreciation / equipment and furnishings		(740	)		(822	)
Gross deferred tax liabilities		(4,792	)		(4,956	)
Net deferred tax asset/(liabilities)	$	(210	)	$	2,494

Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 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 October 31, 2024. 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 recorded a partial valuation allowance of $3.8 million against its federal and combined state deferred tax assets as of October 31, 2024. The change in valuation allowance was $3.8 million and $0.1 million for fiscal 2024 and 2023, respectively.

At October 31, 2024, the Company has gross state net operating loss (NOL) carryforwards of $0.6 million. The state NOL carryforwards of $0.6 million will begin to expire in 2029 unless previously utilized. At October 31, 2024, the Company also has IRC 163(j) interest carryforwards of $1.5 million, which will carry forward indefinitely. At October 31, 2024, the Company also has US federal and state research and development credit carryforwards of $0.1 million and $0.3 million, respectively. The federal credit carryforwards will begin to expire in 2044 unless previously utilized. The state credit carryforwards of $0.2 million will begin to expire in 2029 unless previously utilized and the remainder will carry forward indefinitely.

The provision (benefit) for income taxes was $2.8 million or (73.5%) and ($1.2 million) or 27.5% of income before income taxes for fiscal 2024 and 2023, respectively. The fiscal 2024 effective tax rate differed from the statutory federal rate of 21% primarily as a result of the tax benefit from research and development tax credits, the change in valuation allowance for deferred tax assets and state taxes as shown in the effective tax rate reconciliation table above.

The Company recognizes the benefit of tax positions taken or expected to be taken in its tax returns in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by authorities. Recognized tax positions are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement.         

A reconciliation of the beginning and ending balance to total uncertain tax positions in fiscal years ended October 31, 2024 and 2023 are as follows:

	2024			2023
Balance, at beginning of year	$	178		$	121
Increase for tax positions related to the current year		47			78
Increase (decrease) for tax positions related to prior years		(10	)		2
Statute of limitations expirations		(29	)		(23	)
Balance, at end of year	$	186		$	178

We had gross unrecognized tax benefits of $186,000 and $178,000 attributable to U.S. federal and state research tax credits as of October 31, 2024 and 2023, respectively. During fiscal 2024, the increase in our gross unrecognized tax benefit was primarily related to increased federal and state research tax credits being generated. The uncertain tax benefit of $81,000 is recorded as a reduction to deferred tax assets and the remainder is recorded in income taxes payable in our consolidated balance sheet and if recognized in the future would impact our effective tax rate. We recognize interest and penalties related to uncertain tax positions in income tax expense. We recognized expense of approximately $28,000 and $20,000 during the years ended October 31, 2024 and 2023, respectively. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, it is possible that certain changes may occur within the next twelve months, but we do not anticipate that our accrual for uncertain tax positions will change by a material amount over the next twelve-month period.

We are subject to taxation in the United States and state jurisdictions. Our tax years for October 31, 2021 and forward are subject to examination by the United States and October 31, 2020 and forward with state tax authorities.