7. INCOME TAXES

12 Months Ended

May 31, 2020

Income Tax Disclosure [Abstract]

7. INCOME TAXES

7. INCOME TAXES:

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

	Year Ended May 31,
	2020			2019			2018
Domestic	$	(2,751	)	$	(5,273	)	$	433
Foreign		(15	)		65			22
	$	(2,766	)	$	(5,208	)	$	455

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

	Year Ended May 31,
	2020			2019			2018
Federal income taxes:
Current	$	--		$	--		$	99
Deferred		--			--			--
State income taxes:
Current		(30	)		(6	)		(22	)
Deferred		--			--			--
Foreign income taxes:
Current		(6	)		(21	)		(4	)
Deferred		--			--			--
	$	(36	)	$	(27	)	$	73

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

	Year Ended May 31,
	2020			2019			2018
U.S. federal statutory tax rate		21.0	%		21.0	%		28.6	%
State taxes, net of federal tax effect		1.4			(1.0	)		(16.7	)
Foreign rate differential.		(21.5	)		(0.7	)		39.4
Stock-based compensation		(4.0	)		(2.8	)		39.9
Research and development credit		--			1.5			5.9
Change in valuation allowance		4.3			(15.6	)		(1,349.2	)
Federal rate change impact		--			--			1,419.7
Federal AMT refund		--			--			(20.0	)
ASU 2016-09 adoption		--			--			(169.1	)
Other		(2.5	)		(2.9	)		5.4
Effective tax rate		(1.3	)%		(0.5	)%		(16.1	)%

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

	Year Ended May 31,
	2020			2019
Deferred tax assets:
Net operating losses	$	13,634		$	13,475
Lease Liability		483			--
Credit carryforwards		5,089			4,995
Inventory reserves		1,005			790
Reserves and accruals		739			1,379
Other		319			298
		21,269			20,937
Deferred tax liabilities:
Operating lease right-of-use assets		(449	)		--
Less: Valuation allowance		(20,820	)		(20,937	)
Net deferred tax assets (liabilities)	$	--		$	--

    The valuation allowance decreased by $118,000 during fiscal 2020, increased by $813,000 during fiscal 2019, and decreased by $6,139,000 during fiscal 2018. As of May 31, 2020 and 2019, 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, 2020, the Company had federal and state net operating loss carryforwards of $54,601,000 and $29,386,000, respectively. The federal and state net operating loss carryforwards will begin to expire in 2024. Federal net operating losses of $3.7 million will carryforward indefinitely. At May 31, 2020, the Company also had federal and state research and development tax credit carryforwards of $2,026,000 and $5,825,000, respectively. The federal credit carryforward will begin to expire in 2022, 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 $378,000 are available to reduce future foreign taxable income. The foreign net operating losses will expire starting fiscal year 2021.

    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, 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
Decreases related to prior year tax positions		(41	)
Increases related to current year tax positions		65
Balance at May 31, 2019	$	1,809
Decreases related to prior year tax positions		(11	)
Increases related to current year tax positions		54
Balance at May 31, 2020	$	1,852

    The ending balance of $1,852,000 of unrecognized tax benefits as of May 31, 2020, 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. During fiscal 2020 the Company finalized its calculation of the transition tax and due to carryover losses and the valuation allowance the Company determined there was no impact to the financial statements as a result of the completion of the analysis. The Company also finalized its adjustment to the deferred tax assets and offset to the valuation allowance for the reduction in the U.S. corporate tax rate to 21% with no financial statement impact.

    The tax reform repealed the corporate alternative minimum tax, or AMT, effective December 31, 2017. The minimum tax 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. The company recorded a $91,000 benefit for its federal refundable AMT credit in Q3 fiscal 2018. 50% of the refundable credit was claimed through the fiscal year 2019 federal income tax return and received by the end of fiscal year 2020. The remaining 50% of the refundable credit will be claimed through the fiscal year 2020 federal income tax return.

    On December 18, 2019, the FASB issued Accounting Standards Update ASU 2019-12 on Simplifying the Accounting for Income Taxes. The board decided to remove the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or gain from other items (for example discontinued operations or other comprehensive income). There are also provisions related to state taxes and calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The Company has not yet adopted ASU 2019-12 and believes upon adoption there would be no material impact.

    On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available.

    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 – 2019 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.