7. INCOME TAXES

12 Months Ended

May 31, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

7. INCOME TAXES:

    Domestic and foreign components of income (loss) before income tax benefit (expense) are as follows (in thousands):

	Year Ended May 31,
	2018		2017			2016
Domestic	$	433	$	(5,663	)	$	(6,794	)
Foreign		22		35			19
	$	455	$	(5,628	)	$	(6,775	)

    The income tax benefit (expense) consists of the following (in thousands):

	Year Ended May 31,
	2018			2017			2016
Federal income taxes:
Current	$	99		$	—		$	—
Deferred		—			—			—
State income taxes:
Current		(22	)		(8	)		3
Deferred		—			—			—
Foreign income taxes:
Current		(4	)		(17	)		(13	)
Deferred		—			—			—
	$	73		$	(25	)	$	(10	)

    The Company’s effective tax rate differs from the U.S. federal statutory tax rate, as follows:

	Year Ended May 31,
	2018			2017			2016
U.S. federal statutory tax rate		28.6	%		34.0	%		34.0	%
State taxes, net of federal tax effect		(16.7	)		(0.1	)		—
Foreign rate differential		39.4			0.1			0.2
Stock-based compensation		39.9			(2.8	)		(3.8	)
Research and development credit		5.9			3.1			2.1
Change in valuation allowance		(1,349.2	)		(33.8	)		(32.5	)
Federal rate change impact		1,419.7			—			—
Federal AMT refund		(20.0	)		—			—
ASU 2016-09 adoption		(169.1	)		—			—
Other		5.4			(0.9	)		(0.2	)
Effective tax rate		(16.1	)%		(0.4	)%		(0.2	)%

     The components of the net deferred tax assets are as follows (in thousands):

	Year Ended May 31,
	2018			2017
Net operating losses	$	12,918		$	18,719
Credit carryforwards		4,952			4,715
Inventory reserves		588			870
Reserves and accruals		1,419			1,566
Other		247			393
		20,124			26,263
Less: Valuation allowance		(20,124	)		(26,263	)
Net deferred tax assets.	$	—		$	—

    The valuation allowance decreased by $6,139,000 during fiscal 2018, increased by $1,635,000 during fiscal 2017, and increased by $421,000 during fiscal 2016. As of May 31, 2018 and 2017, the Company concluded that it is more likely than not that the deferred tax assets will not be realized and therefore provided a full valuation allowance against the deferred tax assets. The Company will continue to evaluate the need for a valuation allowance against its deferred tax assets on a quarterly basis.

    At May 31, 2018, the Company had federal and state net operating loss carryforwards of $50,356,000 and $31,340,000 respectively. The federal and state net operating loss carryforwards will begin to expire in 2024. At May 31, 2018, the Company also had federal and state research and development tax credit carryforwards of $2,157,000 and $5,428,000, respectively. The federal credit carryforward will begin to expire in 2019, and the California credit will carryforward indefinitely. These carryforwards may be subject to certain limitations on annual utilization in case of a change in ownership, as defined by tax law. The Company also has alternative minimum tax credit carryforwards of $34,000 for state purposes. The credits may be used to offset regular tax and do not expire.

    The Company has made no provision for U.S. income taxes on undistributed earnings of certain foreign subsidiaries because it is the Company’s intention to permanently reinvest such earnings in its foreign subsidiaries. If such earnings were distributed, the Company would be subject to additional U.S. income tax expense. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

    Foreign net operating loss carryforwards of $457,000 are available to reduce future foreign taxable income. The foreign net operating losses will expire starting fiscal year 2019.

    The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available. The aggregate changes in the balance of gross unrecognized tax benefits are as follows (in thousands):

Beginning balance as of May 31, 2015	$	919
Decreases related to prior year tax positions		(124	)
Decreases related to lapse of statute of limitations		(6	)
Balance at May 31, 2016	$	789
Decreases related to prior year tax positions		—
Decreases related to lapse of statute of limitations		—
Balance at May 31, 2017	$	789
Increases related to prior year tax positions		889
Increases related to current year tax positions		107
Balance at May 31, 2018	$	1,785

    The ending balance of $1,785,000 of unrecognized tax benefits as of May 31, 2018, if recognized, would not impact the effective tax rate.

    On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

    As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. The company is not subject to the transition tax. The one-time transition tax is based on post-1986 earnings and profits that were previously deferred from U.S. income tax. While the Company has not yet finalized its calculation of the total post-1986 earnings and profits for its foreign corporations or the impact of foreign tax credits, it has prepared a reasonable estimate and calculation of nil transition tax. The Company is continuing to evaluate the calculation and accounting of the transition tax, which may change as the Company's interpretation of the provisions of the Tax Act evolve, additional information becomes available or interpretive guidance is issued by the U.S. Treasury. The final determination will be completed no later than one year from the enactment date. Based on current year and carryover losses and valuation allowance, the Company does not expect an impact to its consolidated financial statements upon completion of the analysis.

    The new law also repeals the corporate alternative minimum tax, or AMT, effective December 31, 2017. The law repeals the corporate alternative minimum tax regime and permits existing minimum tax credits to offset the regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December 31, 2017 and before December 31, 2020 in an amount equal to 50% of the excess of the minimum tax credit over the allowable credit for the year against the regular tax liability. Any unused minimum tax credit carryforward is refundable in the following year. As result, the company recorded a benefit of $90,000 for its Federal refundable AMT credit.

    In addition, the reduction of U.S. federal corporate tax rate reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company has accounted for the reduction of $6.4 million of deferred tax assets with an offsetting adjustment to the valuation allowance.

    Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California, Germany and Japan. Tax years 1996 – 2017 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers, research and development tax credits, or other tax attributes from those years.