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INCOME TAXES
 12 Months Ended
May 31, 2024
INCOME TAXES  
INCOME TAXES

 5. INCOME TAXES

 

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

 

 

 

Year Ended May 31,

 

 (In thousands)

 

2024

 

 

2023

 

 

2022

 

Domestic

 

$12,355

 

 

$14,541

 

 

$9,416

 

Foreign

 

 

103

 

 

 

76

 

 

 

125

 

 

 

$12,458

 

 

$14,617

 

 

$9,541

 

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

 

 

 

Year Ended May 31,

 

 (In thousands)

 

2024

 

 

2023

 

 

2022

 

Federal income taxes:

 

 

 

 

 

 

 

 

 

Current

 

$6

 

 

$28

 

 

$59

 

Deferred

 

 

(14,377)

 

 

-

 

 

 

-

 

State income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

14

 

 

 

-

 

 

 

5

 

Deferred

 

 

(6,396)

 

 

-

 

 

 

-

 

Foreign income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

55

 

 

 

32

 

 

 

27

 

Deferred

 

 

-

 

 

 

-

 

 

 

-

 

 

 

$(20,698)

 

$60

 

 

$91

 

 

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

 

 

 

Year Ended May 31,

 

 (In thousands)

 

2024

 

 

2023

 

 

2022

 

U.S. federal statutory tax rate

 

 

21.0%

 

 

21.0%

 

 

21.0%

State taxes, net of federal tax effect

 

 

(51.1)

 

 

-

 

 

 

0.1

 

Foreign rate differential

 

 

0.2

 

 

 

0.7

 

 

 

0.3

 

Stock-based compensation

 

 

(8.4)

 

 

(9.1)

 

 

(11.0)

Research and development credit

 

 

(1.5)

 

 

(2.3)

 

 

(1.3)

Change in valuation allowance

 

 

(126.0)

 

 

(9.3)

 

 

(4.7)

PPP Loan

 

 

-

 

 

 

-

 

 

 

(3.7)

Other

 

 

(0.3)

 

 

(0.6)

 

 

0.4

 

Effective tax rate

 

 

(166.1)%

 

 

0.4%

 

 

1.1%

 

The components of the net deferred tax assets and liabilities are as follows:

 

 

 

May 31,

 

(In thousands)

 

2024

 

 

2023

 

Deferred tax assets:

 

 

 

 

 

 

Net operating losses

 

$9,344

 

 

$11,964

 

Lease liability

 

 

1,310

 

 

 

1,335

 

Credit carryforwards

 

 

6,739

 

 

 

6,235

 

Inventory reserves

 

 

1,070

 

 

 

938

 

Reserves and accruals

 

 

855

 

 

 

1,200

 

Capitalized research and development

 

 

2,645

 

 

 

1,187

 

Other

 

 

23

 

 

 

297

 

Less: valuation allowance

 

 

-

 

 

 

(21,859)

 

 

 

21,986

 

 

 

1,297

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

(1,213)

 

 

(1,297)

Net deferred tax assets

 

$20,773

 

 

$-

 

 

The valuation allowance decreased by $21.9 million during fiscal 2024, $1.1 million during fiscal 2023, and $0.3 million during fiscal 2022. As of May 31, 2023, the Company maintained a valuation allowance on all the U.S. net deferred tax assets as it was determined that it was more likely than not that the Company would not recognize the benefits of these assets. The Company continued to record a valuation allowance through the first nine months of fiscal 2024. In the fourth quarter of fiscal 2024, the Company concluded that the valuation allowance related to the U.S. federal and state deferred tax assets was no longer required due to existence of sufficient positive evidence to support that it is more likely than not that its deferred tax assets are realizable.

At May 31, 2024 and 2023, the Company has federal net operating loss carryforwards of approximately $34.6 million and $47.0 million respectively, to reduce future taxable income. A portion of the federal net operating losses will begin to expire in 2033. Federal net operating losses of $14.4 million will carryforward indefinitely and would be subject to an 80% taxable income limitation in the year utilized. At May 31, 2024 and 2023, the Company has state net operating loss carryforwards of $29.8 million and $30.2 million respectively, to reduce future taxable income. The state net operating loss carryforwards will begin to expire in 2028.

 

At May 31, 2024 and 2023, the Company has federal research and development credit carryforwards of approximately $3.3 million and $2.9 million, respectively, to offset future tax liability. The federal credit carryforwards began to expire in 2022. At May 31, 2024 and 2023, the Company has state research and development credit carryforwards of approximately $7.1 million and $6.6 million respectively, to offset future tax liability. The state credit carryforwards are not subject to expiration. The Company also has alternative minimum tax credit carryforwards of $30 thousand for state purposes. The credits may be used to offset regular tax and do not expire.

 

Sections 382 and 383 of the Internal Revenue Code limit the annual use of NOL carryforwards and tax credit carryforwards, respectively, following an ownership change. NOL carryforwards may be subject to annual limitations under Section 382 (or comparable provisions of state law) if certain changes in ownership of our company were to occur. In general, an ownership change occurs for the purposes of Section 382 if there is a more than 50% change in ownership of a company by 5% shareholders over a 3-year testing period. During the year ended May 31, 2024, we completed a Section 382 study and determined that there is no limitation on the Company’s ability to utilize its NOLs under Section 382.

 

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)

 

 

 

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

 

Increases related to prior year tax positions

 

 

90

 

Increases related to current year tax positions

 

 

168

 

Balance at May 31, 2023

 

 

2,276

 

Increases related to prior year tax positions

 

 

35

 

Decreases related to prior year tax positions

 

 

(28)

Increases related to current year tax positions

 

 

233

 

Decreases related to current year tax positions

 

 

(32)

Balance at May 31, 2024

 

$2,484

 

 

As of May 31, 2024 and 2023, the total amount of unrecognized tax benefits was approximately $2.5 million and $2.3 million, respectively. The unrecognized tax benefit of $2.5 million would impact the effective tax rate, if recognized. The Company had zero accrued interest and accrued penalties related to unrecognized tax benefit as of May 31, 2024. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months. The Company 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. The Company is not currently under audit with the Internal Revenue Service, or any foreign, state or local jurisdictions, nor has it been notified of any other potential future income tax audit.