Note 10 - Income taxes



Loss from continuing operations before income taxes (in thousands)	2017	2016
Domestic	($7,924)	($9,261)
Foreign	(2,285)	(4,512	)
Total	($10,209)	($13,773)



Components of income tax benefit (in thousands)	2017		2016
Current
Federal		$—	($106)
Foreign	697		837
State and other	28		(1,309	)
Total current income tax expense (benefit)	725		(578	)
Deferred
Federal	(33)		—
Foreign	(925)		(33)
State and other	—		—
Total deferred income tax benefit	(958)		(33)
Total income tax benefit	($233)		$(611)

The U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion anti-abuse tax, respectively. Since the Company is a fiscal taxpayer, the Company is subject to a blended rate of 33.83% as of January 31, 2018. In addition, in 2017 the Company was subject to the onetime transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of January 31, 2018. As the Company collects and prepares necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make future adjustments to the provisional amounts. The accounting for the tax effects of the Tax Act will be completed in 2018.

Provisional amounts for the following income tax effects of the Tax Act have been recorded as of January 31, 2018 and are subject to change during 2018.

One-time transition tax

The Tax Act requires us to pay U.S. income taxes on accumulated earnings of its foreign subsidiaries not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. After going through the steps of the deemed repatriation calculation, the aggregate deferred foreign income inclusion is estimated at $23.2 million. This income is fully offset by the use of NOL carryforwards and the current year domestic loss, resulting in no regular tax on the income.

As a result of the onetime transition tax, the Company estimates it will no longer have its foreign earnings subject to U.S. tax. Earnings in the Company's subsidiaries in Canada, and Denmark, are not permanently reinvested, and earnings in the India subsidiary are partially permanently reinvested. With the enactment of the mandatory repatriation, U.S. income taxes will no longer be calculated on the deferred impact of the non-permanently reinvested portion. Going forward these earnings will be subject to tax in their local jurisdiction, and only the impact of the India dividend distribution tax and Canadian withholding taxes will be recorded.

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 the Middle Eastern subsidiaries.

Deferred tax effects

As a result of the Tax Act, the Company revalued deferred balances to a tax rate of 21% as of the date of enactment, which resulted in a tax expense of $2.2 million and tax benefit of $0.4 million related to a reduction in the federal benefit of state taxes. This tax expense is fully offset by a valuation allowance, therefore, there was no impact to the income statement.

Global intangible low taxed income ("GILTI")

The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of this Tax Act. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for the treatment of the GILTI tax. Therefore, the Company has not recorded any amounts related to potential GILTI tax in its financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI. Because the Company remains in a domestic NOL carryforward position and has a valuation allowance on its deferred tax assets, the Company does not expect an impact to the income statement.

The effective tax rate ("ETR") in 2017 has been significantly impacted by the Company reporting a pre-tax loss for the year, a portion of which was generated by the subsidiary in the U.A.E., which receives no tax benefit due to a zero tax rate in that country and due to the impact of the full valuation allowance maintained against domestic deferred tax assets.

The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of 33.83% was as follows:



(In thousands)	2017		2016
Tax benefit at federal statutory rate	($3,459)		($4,683)
Federal rate change	2,243		—
State benefit, net of federal income tax effect	(440	)	(103		)
Excess income tax on share-based compensation	(183	)	—
Domestic valuation allowance	(1,206	)	838
Permanent differences other	162		205
Valuation allowance for state NOLs	297		122
Differences in foreign tax rate	732		2,131
Foreign tax credit	—		(1,249)
Domestic deferred tax true ups	(364	)	—
Repatriation	1,880		1,338
Valuation allowance for foreign NOLs	—		(36		)
Nontaxable income from the Canadian joint venture	—		551
Nondeductible interest	—		242
All other, net expense	105		33
Total income tax benefit	($233)			($611	)

The Company has a U.S. Federal operating loss carryforward of $12.7 million that will begin to expire in the year ending January 31, 2031.

The deferred tax asset ("DTA") for state NOL carryforwards of $2.2 million relates to amounts that expire at various times from 2022 to 2031.

The Company has a DTA foreign NOL carryforward of $0.3 million for its subsidiary in Saudi Arabia that can be carried forward indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the foreign 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.

For the year ending January 31, 2018, the Company has determined that there is not a greater than 50% likelihood that all of the domestic DTAs will be realized based on the available evidence. The Company recorded a full valuation allowance against the remaining domestic net DTAs on January 31, 2013 net of uncertain tax positions ("UTP"). The Company continues to have a valuation allowance on its domestic DTAs since domestic losses continue to be generated.

The Company has a deferred tax asset of $9.7 million for U.S. foreign tax credits after considering the impact of the repatriated foreign earnings. The excess foreign tax credits are subject to a ten-year carryforward and will begin to expire in January 31, 2022.



Components of deferred income tax assets (in thousands)	2017		2016
U.S. Federal NOL carryforward	$1,795		$7,765
Deferred compensation	341		346
Research tax credit	2,703		2,703
Foreign NOL carryforward	332		185
Foreign tax credit	9,749		4,695
Stock compensation	506		804
Other accruals not yet deducted	270		514
State NOL carryforward	2,157		1,574
Accrued commissions and incentives	423		765
Inventory valuation allowance	96		110
Other	81		5
Deferred tax assets, gross	18,453		19,466
Valuation allowance	(17,198	)	(16,551	)
Total deferred tax assets, net of valuation allowances	$1,255		$2,915

Components of the deferred income tax liability
Depreciation	($1,941)		($2,778)
Foreign subsidiaries unremitted earnings	(101	)	(1,750	)
Prepaid	(64	)	(69	)
Total deferred tax liabilities	($2,106)		($4,597)

Deferred tax liability, net	($851)		($1,682)

Balance sheet classification
Long-term assets	$391		$147
Long-term liability	(1,242	)	(1,829	)
Total deferred tax liabilities, net of valuation allowances	($851)		($1,682)

The following table summarizes UTP activity, excluding the related accrual for interest and penalties:



(In thousands)	2017		2016
Balance at beginning of the year	$1,331		$1,313
Increases in positions taken in a prior period	6		3
Increases in positions taken in a current period	5		19
Decreases due to lapse of statute of limitations	(34	)	(4	)
Decreases due to settlements	(7	)	—
Balance at end of the year	$1,301		$1,331

Included in the total UTP liability were estimated accrued interest and penalty of less than $0.1 million in both January 31, 2018 and January 31, 2017. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheets. The Company's policy is to include interest and penalties in income tax expense. On January 31, 2018, 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, 2018 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). Thus, $1.3 million of the amount accrued on January 31, 2018 would impact the ETR, if reversed.

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. The Internal Revenue Service, ("IRS"), began an audit of the fiscal year ended January 31, 2015 in August 2016. In 2017, the tax audit concluded with no change made to the reported tax. Tax years related to January 31, 2014, 2015 and 2016 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2002 through January 31, 2009 are subject to adjustment on audit, up to the amount of research tax credit generated in those years.

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.