LEASES

12 Months Ended

May 31, 2023

LEASES

LEASES

10. LEASES

The Company leases its manufacturing and office space under operating leases. The principal administrative and production facility is located in Fremont, California, in a 51,289 square foot building. The Company entered into a non-cancelable operating lease agreement for its United States manufacturing and office facility, which was renewed in December 2022 and expires in September 2030. The Company leases a 492 square foot sales and support office in Utting, Germany. The lease, which began on February 1, 1992 and expires on January 31, 2025, contains an automatic twelve months renewal, at rates to be determined, if no notice is given prior to six months from expiration. The Company leases a facility in the Philippines located in a 2,713 square foot building in Clark Freeport Zone, Pampanga. The lease, which began on January 1, 2021 and expires on December 31, 2025, contains an option to renew for another three years at rates stipulated in the contract, notice for renewal is given six months from expiration. Under the lease agreements, the Company is responsible for payments of utilities, taxes and insurance.

The Company has only operating leases for real estate including corporate offices, warehouse space and certain equipment. A lease with an initial term of 12 months or less is generally not recorded on the consolidated balance sheets, unless the arrangement includes an option to purchase the underlying asset, or renew the arrangement that the Company is reasonably certain to exercise (short-term leases). The Company recognizes lease expense on a straight-line basis over the lease term for short-term leases that the Company does not record on its balance sheets. The Company’s operating leases have remaining lease terms of one year to seven years.

The Company determines whether an arrangement is or contains a lease based on the unique facts and circumstances present at the inception of the arrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

In December 2022, the Company amended its lease agreement to extend the lease term of an existing office facility located in the United States, which is considered a lease modification not accounted for as a separate contract. The total commitments, net of tenant incentives expected to be received, under the modified lease are $8.6 million. The modified lease expires in fiscal 2031 and contains an option to further extend the lease. The lease modification resulted in an increase in the Company’s operating lease right-of-use assets and operating lease liabilities of $5.9 million each.

The weighted average remaining lease term for the Company’s operating leases was 7.3 years at May 31, 2023 and the weighted average discount rate was 7.5%.

The Company’s operating lease cost was $923,000, $766,000 and $761,000 for the years ended May 31, 2023, 2022 and 2021, respectively.

The following table presents supplemental cash flow information related to the Company’s operating leases (in thousands):

	Year Ended May 31,
	2023		2022		2021
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$	835	$	813	$	779

    The following table presents the maturities of the Company’s operating lease liabilities as of May 31, 2023 (in thousands):

Fiscal year	Operating Leases
2024	$	608
2025		1,143
2026		1,174
2027		1,195
2028		1,234
Thereafter		3,075
Total future minimum operating lease payments		8,429
Less: imputed interest		(2,129	)
Present value of operating lease liabilities	$	6,300