7. INCOME TAXES

12 Months Ended

May 31, 2014

7. INCOME TAXES:

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

	Year Ended May 31,
	2014			2013			2012
Domestic	$	438		$	(3,392	)	$	(3,590	)
Foreign		(31	)		3			186
	$	407		$	(3,389	)	$	(3,404	)

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

	Year Ended May 31,
	2014			2013			2012
Federal income taxes:
Current	$	--		$	--		$	--
Deferred		--			--			--
State income taxes:
Current		(30	)		(21	)		(12	)
Deferred		--			--			--
Foreign income taxes:
Current		45			(9	)		27
Deferred		--			--			--
	$	15		$	(30	)	$	15

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

	Year Ended May 31,
	2014			2013			2012
U.S. federal statutory tax rate		34.0	%		34.0	%		34.0	%
State taxes, net of federal tax effect		4.7			(0.4	)		(0.2	)
Foreign rate differential		(11.9	)		0.2			2.9
Stock-based compensation		34.5			(4.4	)		(6.0	)
Research and development credit		(20.5	)		3.0			0.1
Change in valuation allowance		(45.8	)		(33.0	)		(30.2	)
Other		1.3			(0.3	)		(0.2	)
Effective tax rate		(3.7	)%		(0.9	)%		0.4	%

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

	Year Ended May 31,
	2014			2013

Net operating losses	$	12,368		$	11,903
Credit carryforwards		4,192			4,028
Inventory reserves		1,822			2,667
Reserves and accruals		2,899			2,913
Other		703			679

		21,984			22,190

Less: Valuation allowance		(21,984	)		(22,190	)
Net deferred tax assets	$	--		$	--

The valuation allowance decreased by $206,000 during fiscal 2014, and increased by $1,080,000 during fiscal 2013, and $711,000 during fiscal 2012. As of May 31, 2014 and 2013, 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, 2014, the Company had federal and state net operating loss carryforwards of $32,672,000 and $28,185,000, respectively. These carryforwards will begin to expire in 2024 and 2014, respectively. At May 31, 2014, the Company also had federal and state research and development tax credit carryforwards of $1,959,000 and $4,452,000, respectively. The federal credit carryforward will begin to expire in 2016, 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 $91,000 for federal tax purposes and $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 $959,000 are available to reduce future foreign taxable income. The foreign net operating losses will begin to expire in 2018.

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, 2011	$	1,093
Decreases related to prior year tax positions		--
Decreases related to lapse of statute of limitations		(71	)

Balance at May 31, 2012	$	1,022

Decreases related to prior year tax positions		--
Decreases related to lapse of statute of limitations		(15	)

Balance at May 31, 2013	$	1,007

Decreases related to prior year tax positions		--
Decreases related to lapse of statute of limitations		(34	)

Balance at May 31, 2014	$	973

If the ending balance of $973,000 of unrecognized tax benefits at May 31, 2014 were recognized, $71,000 would affect the effective income tax rate. In accordance with the Company’s accounting policy, it recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company had accrued interest and penalties of $11,000 at May 31, 2014.

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 – 2013 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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