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INCOME TAXES | 12 Months Ended
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May 31, 2022
INCOME TAXES |
INCOME TAXES | 7. INCOME TAXES: Domestic and foreign components of income (loss) before income tax (expense) benefit are as follows (in thousands):
|  | Year Ended May 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Domestic |  | $ | 9,416 |  |  | $ | (13,064 | ) |  | $ | (2,751 | )
Foreign |  |  | 125 |  |  |  | 10,860 |  |  |  | (15 | )
|  | $ | 9,541 |  |  | $ | (2,204 | ) |  | $ | (2,766 | )
The income tax (expense) benefit consists of the following (in thousands):
|  | Year Ended May 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Federal income taxes: |  |  |  |  |  |  |  |  |
Current |  | $ | (59 | ) |  | $ | 163 |  |  | $ | - |
Deferred |  |  | - |  |  |  | - |  |  |  | - |
State income taxes: |  |  |  |  |  |  |  |  |  |  |  |
Current |  |  | (5 | ) |  |  | 13 |  |  |  | (30 | )
Deferred |  |  | - |  |  |  | - |  |  |  | - |
Foreign income taxes: |  |  |  |  |  |  |  |  |  |  |  |
Current |  |  | (27 | ) |  |  | 1 |  |  |  | (6 | )
Deferred |  |  | - |  |  |  | - |  |  |  | - |
|  | $ | (91 | ) |  | $ | 177 |  |  | $ | (36 | )
The Company’s effective tax rate differs from the U.S. federal statutory tax rate, as follows:
|  | Year Ended May 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
US federal statutory tax rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
State taxes, net of federal tax effect |  |  | 0.1 |  |  |  | 0.6 |  |  |  | 1.4 |
Foreign rate differential |  |  | 0.3 |  |  |  | 9.8 |  |  |  | (21.5 | )
Stock-based compensation |  |  | (11.0 | ) |  |  | (4.7 | ) |  |  | (4.0 | )
Research and development credit |  |  | (1.3 | ) |  |  | 4.0 |  |  |  | - |
Change in valuation allowance |  |  | (4.7 | ) |  |  | (32.1 | ) |  |  | 4.3 |
Controlled Foreign Corporation Liquidation |  |  | - |  |  |  | 9.8 |  |  |  | - |
PPP Loan |  |  | (3.7 | ) |  |  | - |  |  |  | - |
Other |  |  | 0.4 |  |  |  | (0.4 | ) |  |  | (2.5 | )
Effective tax rate |  |  | 1.1 | % |  |  | 8.0 | % |  |  | (1.3 | )%
The components of the net deferred tax assets and liabilities are as follows (in thousands):
|  | Year Ended May 31, |
|  | 2022 |  |  | 2021 |
Deferred tax assets: |  |  |  |  |  |
Net operating losses |  | $ | 14,912 |  |  | $ | 15,584 |
Lease Liability |  |  | 218 |  |  |  | 372 |
Credit carryforwards |  |  | 5,535 |  |  |  | 5,298 |
Inventory reserves |  |  | 934 |  |  |  | 1,006 |
Reserves and accruals |  |  | 1,360 |  |  |  | 890 |
Other |  |  | 220 |  |  |  | 450 |
|  |  | 23,179 |  |  |  | 23,600 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Operating lease right-of-use assets |  |  | (199 | ) |  |  | (342 | )
Less: Valuation allowance |  |  | (22,980 | ) |  |  | (23,258 | )
Net deferred tax assets (liabilities) |  | $ | - |  |  | $ | - |
The valuation allowance decreased by $278,000 during fiscal 2022, increased by $2,438,000 during fiscal 2021, and decreased by $118,000 during fiscal 2020. As of May 31, 2022 and 2021, 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, 2022 and 2021, the Company has federal net operating loss carryforwards of approximately $61,068,000 and $64,298,000 respectively, to reduce future taxable income. A portion of the federal net operating losses will begin to expire in 2024. Federal net operating losses of $14,425,000 will carryforward indefinitely and would be subject to an 80% taxable income limitation in the year utilized. At May 31, 2022 and 2021, the Company has state net operating loss carryforwards of $30,043,000 and $29,812,000, respectively, to reduce future taxable income. The state net operating loss carryforwards will begin to expire in 2028. At May 31, 2022 and 2021, the Company has federal research and development credit carryforwards of approximately $2,362,000 and $2,201,000 respectively, to offset future tax liability. The federal credit carryforwards will begin to expire in 2022. At May 31, 2022 and 2021, The Company has state research and development credit carryforwards of approximately $6,152,000 and $5,955,000 respectively, to offset future tax liability. The credit carryforwards are not subject to expiration. 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. Internal Revenue Code of 1986, as amended (“IRC”) Section 382 (“§382”) limits the use of NOL and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In general, if we experience a greater than 50% aggregate change in ownership over a 3-year period, we are subject to an annual limitation under IRC §382 on the utilization of the Company’s pre-change NOL carryforwards. California and other states have similar laws. The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. 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. 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, 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 |
Increases related to prior year tax positions |  |  | 11 |
Increases related to current year tax positions |  |  | 65 |
Balance at May 31, 2021 |  | $ | 1,928 |
Increases related to prior year tax positions |  |  | 12 |
Increases related to current year tax positions |  |  | 78 |
Balance at May 31, 2022 |  | $ | 2,018 |
As of May 31, 2022 and 2021, the Company has not recorded interest and penalties associated with its unrecognized tax benefits. The Company’s unrecognized gross tax benefits would not reduce the annual effective tax rate if recognized because it has recorded a full valuation allowance on its deferred tax assets. The Company does not foresee any material changes to the gross unrecognized tax benefit within the next twelve months. The Company’s policy is to recognize interest and penalties in income tax expense. The Company’s federal and state income tax returns are subject to possible examination by the taxing authorities until the expiration of the related statutes of limitations on those tax returns. In general, the federal income tax returns have a three-year statute of limitations, and the state income tax returns have a four-year statute of limitations. The Company’s foreign income tax returns are also subject to examination by the foreign tax authorities with the longest statute of limitations period of four-year.

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