Note 7 - Income Taxes

12 Months Ended

Jan. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 7 - Income taxes

Income/(loss) from continuing operations before income taxes (in thousands)	2021			2020
Domestic	$	(3,357	)	$	(3,288	)
Foreign		11,684			(4,487	)
Total	$	8,327		$	(7,775	)

Components of income tax expense/(benefit) (in thousands)	2021			2020
Current
Federal	$	1		$	18
Foreign		2,317			413
State and other		144			105
Total current income tax expense		2,462			536
Deferred
Federal		—			—
Foreign		(197	)		(669	)
State and other		—			—
Total deferred income tax expense/(benefit)		(197	)		(669	)
Total income tax expense/(benefit)	$	2,265		$	(133	)

Repatriation of foreign earnings

As a result of the onetime transition tax from the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”), the Company estimates that distributions from foreign subsidiaries will no longer be subject to incremental U.S. tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends received deduction. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested. Earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. The Company's liability has remained consistent at $0.2 million as of January 31, 2022 and 2021, respectively, related to these taxes.

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 its Middle Eastern and Indian subsidiaries. The Middle Eastern and Indian subsidiaries have unremitted earnings of $22.7 million and $0.8 million, respectively, as of January 31, 2022, all of which has been subject to the transition tax in the United States. Unremitted earnings of $19.2 million in the United Arab Emirates would not be subject to withholding tax in the event of a distribution, and $3.5 million of unremitted earnings in Saudi Arabia would be subject to withholding tax of $0.2 million. The Company has not recorded a deferred tax liability related to any financial reporting basis over tax basis related to the investment in these foreign subsidiaries as it is not practical to estimate.

The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of 21% was as follows:

(In thousands)	2021			2020
Tax expense at federal statutory rate	$	1,749		$	(1,633	)
State expense, net of federal income tax effect		148			(97	)
Deferred compensation adjustment		456			(5	)
Domestic valuation allowance		(636	)		1,807
Domestic return to provision		(6	)		(485	)
Global Intangible Low Tax Income Inclusion		742			-
Nontaxable Paycheck Protection Program Loan Forgiveness Proceeds		-			(662	)
Permanent differences other		56			282
Valuation allowance for state NOLs		(29	)		183
Differences in foreign tax rate		(430	)		527
Foreign rate change		(31	)		18
Deferred tax on unremitted earnings		(55	)		(176	)
Foreign withholding taxes		178			209
All other, net expense		123			(101	)
Total income tax expense/(benefit)	$	2,265		$	(133	)

The Company's worldwide effective tax rates ("ETR") were 27.2% and 1.7% in 2021 and 2020, respectively. The change in the ETR from the prior year to the current year is largely due to the Company’s valuation allowance against its domestic deferred tax asset and changes to the mix of income in various jurisdictions.

Components of deferred income tax assets (in thousands)	2021			2020
U.S. Federal NOL carryforward	$	8,424		$	8,626
Deferred compensation		350			508
Research tax credit		2,573			2,686
Foreign NOL carryforward		448			543
Foreign tax credit		2,580			2,580
Stock compensation		62			442
Other accruals not yet deducted		276			245
State NOL carryforward		2,730			2,678
Accrued commissions and incentives		483			362
Inventory valuation allowance		116			106
Lease liability		418			541
Accrued pension		-			18
Other		17			95
Deferred tax assets, gross		18,477			19,430
Valuation allowance		(16,905	)		(17,746	)
Total deferred tax assets, net of valuation allowances	$	1,572		$	1,684
Components of the deferred income tax liability
Depreciation	$	(643	)	$	(981	)
Foreign subsidiaries unremitted earnings		(231	)		(289	)
Prepaid		(54	)		(21	)
Accrued pension		(159	)		-
Right of use asset		(386	)		(484	)
Total deferred tax liabilities	$	(1,473	)	$	(1,775	)
Deferred tax asset/(liability), net	$	99		$	(91	)
Balance sheet classification
Long-term assets	$	811		$	823
Long-term liability		(712	)		(914	)
Total deferred tax assets/(liabilities), net of valuation allowances	$	99		$	(91	)

The Company has a gross U.S. Federal operating loss carryforward of $40.1 million. Of this amount, $33.8 million will begin to expire between tax years 2030 and 2037 and the remainder has an indefinite carryforward.

The deferred tax asset ("DTA") for state net operating loss ("NOL") carryforwards of $2.7 million relates to amounts that expire at various times from 2022 to 2032.

The Company has a DTA foreign NOL carryforward of $0.4 million for its subsidiary in Saudi Arabia. The NOL in Saudi Arabia can be carried forward indefinitely and does not have a valuation allowance recorded against it. The NOL in India was fully utilized in 2021. The ultimate realization of this tax benefit is dependent upon the generation of enough 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. 

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the domestic cumulative loss incurred leading up to the period ended January 31, 2013. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2013, a full valuation allowance was recorded against the domestic deferred tax assets as the Company has determined that they are not more likely than not to be realized based upon the available evidence. As of January 31, 2022, the Company has not released the valuation allowance as the objective negative evidence in the form of cumulative losses continues to exist. The amount of the domestic deferred tax assets considered realizable, however, could be increased if objective negative evidence in the form of cumulative losses is no longer present.

The Company has a deferred tax asset of $2.6 million for U.S. foreign tax credits after considering the impact of the repatriated foreign earnings and the one-time transition tax. The foreign tax credit deferred tax asset is fully offset with a valuation allowance. The excess foreign tax credits are subject to a ten-year carryforward and will begin to expire on January 31, 2026.

The following table summarizes uncertain tax position ("UTP") activity, excluding the related accrual for interest and penalties:

(In thousands)	2021			2020
Balance at beginning of the year	$	1,591		$	1,545
Increases in positions taken in a prior period		(4	)		2
Increases in positions taken in a current period		66			65
Decreases due to lapse of statute of limitations		(8	)		(21	)
Decreases due to settlements		(34	)		-
Balance at end of the year	$	1,611		$	1,591

Included in the total UTP liability were estimated accrued interest and penalties of $0.2 million in  January 31, 2022 and 2021, respectively. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet and recognized as an expense during the period. The Company's policy is to include interest and penalties in income tax expense. On January 31, 2022, 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, 2022 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). Upon reversal, $0.6 million of the amount accrued on  January 31, 2022 would impact the future ETR.

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. Tax years related to January 31, 2019, 2020 and 2021 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2003 through January 31, 2009 are subject to adjustment on audit, up to the amount of research tax credit generated in those years. Any NOL carryover can still be adjusted by the Internal Revenue Service in future year audits.

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.