14.

INCOME TAXES

December 22, 2017,

the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or Tax Reform Act. The Tax Reform Act makes broad and complex changes to the U.S. tax code that will affect the Company’s fiscal year ending

August 31 2018,

including, but

not

limited to, reducing the U.S. federal corporate tax rate from

35%

21%

effective

January 1, 2018,

generally eliminating U.S. federal income taxes on dividends received from foreign subsidiaries and joint ventures after

December 31, 2017,

and imposing a

one

-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries and joint ventures. The Company is subject to a blended U.S. federal tax rate of

25.7%

for the fiscal year ending

August 31, 2018

as a result of the reduction of the U.S. federal corporate tax rate from

35%

21%

effective

January 1, 2018.

The Company recognized provisional amounts for certain income tax effects of the Tax Reform Act in its

2018

interim consolidated financial statements for the period ended

February 28, 2018

in accordance with SAB

No.

118,

which provides SEC staff guidance for the application of ASC Topic

740,

Income Taxes

, in the reporting period in which the Tax Reform Act was signed into law. SAB

No.

118

provides a

one

-year measurement period beginning with the period of enactment of the Tax Reform Act during which the Company can record adjustments to the provisional amounts previously recorded. Accordingly, the Company’s deferred tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate from

35%

21%

effective

January 1, 2018

resulting in provisional income tax expense of

$700,000,

and a corresponding decrease of

$700,000

in net deferred tax assets recognized during the year ended

August 31, 2018.

In addition, the Company calculated a provisional deemed repatriation tax of

$489,000,

which the Company expects to fully offset with foreign tax credit carryforwards for which the Company had

not

previously recognized a tax benefit, resulting in

change in income tax expense for the year ended

August 31, 2018.

The Company completed its accounting for the income tax effects of the Tax Reform Act during the

three

months ended

August 31, 2018.

For fiscal

2018,

the Company recorded tax expense of

$632,523

due to the re-measurement of the Company’s net deferred tax assets to reflect the reduction in the U.S. corporate income tax rate which included income tax expense of

$700,000

recognized during the interim period ended

February 28, 2018,

and a tax benefit of

$67,477

recorded upon completion of the accounting for the income tax effects of the Tax Reform Act during the

three

months ended

August 31, 2018.

The re-measurement of the Company’s net deferred tax assets to reflect the reduction in the U.S. corporate income tax rate increased the Company’s fiscal

2018

effective tax rate by approximately

7.8%.

In addition, the Company completed its accounting for the deemed repatriation tax during the year ended

August 31, 2018.

The Company recognized deemed repatriation tax of

$604,000

for fiscal

2018,

which was fully offset with foreign tax credit carryforwards for which the Company had

not

previously recognized a tax benefit, resulting in

change to income tax expense for fiscal

2018

due to the utilization of foreign tax credit carryforwards.

The provision for income taxes for the fiscal years ended

August

31,

2018

and

2017

approximates the following:

	Fiscal Year Ended August 31,
	2018			2017
Current:
Federal	$	—		$	—
State		1,000			62,000
Foreign		671,000			754,000
		672,000			816,000
Deferred:
Federal		477,000			(135,000	)
State		24,000			(9,000	)
Foreign		(297,000	)		28,000
		204,000			(116,000	)
	$	876,000		$	700,000

Reconciliations of the expected federal income tax at the statutory rate (

25.7%

in fiscal

2018

and

35%

in fiscal

2017

) with the provisions for income taxes for the fiscal years ended

August 31, 2018

and

2017

are as follows:

	Fiscal Year Ended August 31,
	2018			2017
Tax computed at statutory rates	$	2,081,000		$	1,591,000
State income tax, net of federal benefit		25,000			53,000
Tax effect on equity in income of international joint ventures		(1,903,000	)		(1,998,000	)
Tax effect on dividends received from joint ventures and investment at carrying value		—			3,159,000
Tax effect of foreign operations		101,000			841,000
Deemed repatriation		4,011,000			—
Foreign tax credit		(3,783,000	)		(3,680,000	)
Research and development credit		(10,000	)		(212,000	)
Valuation allowance		(173,000	)		989,000
Stock based compensation		57,000			81,000
Non-controlling interest		(103,000	)		(143,000	)
Deferred rate change		633,000			—
Other		(60,000	)		19,000
	$	876,000		$	700,000

The Company has

not

provided U.S. income taxes or foreign withholding taxes with respect to its portion of the cumulative undistributed earnings of certain foreign subsidiaries and joint ventures that are essentially permanent in duration. The Tax Reform Act generally eliminated U.S. federal income taxes on dividends received from the Company’s foreign subsidiaries and joint ventures after

December 31, 2017.

However, the Company will still be subject to foreign withholding taxes upon repatriation of any undistributed earnings that are

not

essentially permanent in duration. The Company recorded tax expense of

$79,000

and

$3,000

during fiscal

2018

and fiscal

2017,

respectively, representing foreign withholding taxes to be paid with respect to the portion of the cumulative undistributed earnings of foreign subsidiaries and joint ventures that the Company determined were

not

essentially permanent in duration.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The tax effect of the temporary differences and tax carryforwards comprising the net deferred taxes shown on the consolidated balance sheets as of

August

31,

2018

and

2017

are as follows:

	August 31,
	2018			2017
Accrued compensation	$	430,600		$	310,300
Inventory costs		58,900			87,000
Accrued joint venture expenses		—			15,200
Other accrued expenses		63,700			74,000
Goodwill and other intangible assets		695,800			1,317,700
Stock-based compensation		197,500			241,600
Foreign tax credit carryforward		5,789,600			6,105,700
Other credit and loss carryforwards		3,241,200			3,473,100
Total deferred tax assets		10,477,300			11,624,600
Valuation allowance		(8,654,500	)		(9,578,700	)
Total deferred tax assets after valuation allowance		1,822,800			2,045,900
Property and equipment		(124,600	)		(206,000	)
Other		(146,200	)		(83,300	)
Total deferred tax liabilities		(270,800	)		(289,300	)
Net deferred tax assets	$	1,552,000		$	1,756,600

As of

August 31, 2018,

the Company had foreign tax credit carryforwards of approximately

$5,789,600

which will begin to expire if

not

utilized prior to

August 31, 2021.

In addition, the Company had federal and state tax credit carryforwards of

$2,865,000

as of

August 31, 2018

which begin to expire in fiscal

2019.

These federal and state tax credit carryforwards consist primarily of federal and Minnesota research and development credit carryforwards. The Company also has foreign net operating loss carryforwards of

$376,100

as of

August 31, 2018,

which will begin to expire in fiscal

2021.

As of

August 31, 2018,

the Company has recorded a valuation allowance of

$5,789,600

with respect to the foreign tax credit carryforwards. In addition, the Company has recorded a valuation allowance of

$2,864,900

with respect to federal and state tax credit carryforwards.

As of

August 31, 2017,

the Company had recorded a valuation allowance of

$6,105,700

with respect to the foreign tax credit carryforwards. In addition, the Company had recorded a valuation allowance of

$2,855,100

with respect to federal and state tax credit carryforwards and had recorded a valuation allowance of

$618,000

with respect to its foreign net operating loss carryforwards.

The Company records a tax valuation allowance to reduce deferred tax assets to the amount expected to be realized when it is more likely than

not

that some portion or all its deferred tax assets will

not

be realized. The Company determined based on all available evidence, including historical data and projections of future results, that it is more likely than

not

that all its deferred tax assets, except for its foreign tax credit carryforward and federal and Minnesota research and development credit carryforwards will be fully realized. The Company determined that its deferred tax asset related to foreign tax credit carryforwards will

not

be realized due to insufficient foreign source taxable income within the carryforward period and the fact that for ordering purposes the foreign tax credit carryforwards are

not

allowed to be utilized until after any current year foreign tax credits are utilized. In addition, based on historical data and future projections, the Company determined that it is more likely than

not

that its deferred tax asset related to federal and Minnesota research and development credit carryforwards will

not

be realized due to insufficient federal and Minnesota taxable income within the carryforward period after considering the foreign tax credit usage.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

	Fiscal Year Ended August 31,
	2018			2017
Gross unrecognized tax benefits – beginning balance	$	250,000		$	238,000
Gross decreases - prior period tax positions		(12,000	)		(4,000	)
Gross increases – current period tax positions		4,000			16,000
Gross unrecognized tax benefits – ending balance	$	242,000		$	250,000

The entire amount of unrecognized tax benefits would affect the effective tax rate if recognized. It is

not

expected that the amount of unrecognized tax benefits will change significantly in the next

months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the Company’s income tax provision. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. There was

liability for the payment of interest and penalties as of both

August 31, 2018

and

August 31, 2017.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. With few exceptions, as of

August 31, 2018,

the Company is

longer subject to federal, state, local, or foreign examinations by tax authorities for years prior to

August 31, 2015.