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Critical Accounting Policies and Estimates | 3 Months Ended
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Aug. 31, 2024
Accounting Policies [Abstract] |
Critical Accounting Policies and Estimates | 5. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Inventories, net: Our consolidated inventories were stated at the lower of cost and net realizable value, generally using a weighted-average cost method. Our net inventories include approximately $95.0 million of finished goods, $11.7 million of raw materials and $4.3 million of work-in-progress as of August 31, 2024, as compared to approximately $93.9 million of finished goods, $12.2 million of raw materials and $4.0 million of work-in-progress as of June 1, 2024. Provisions for obsolete or slow-moving inventories are recorded based upon regular analysis of stock rotation privileges, obsolescence, the exiting of certain markets and assumptions about future demand and market conditions. Inventory reserves were approximately $6.1 million as of August 31, 2024 and $6.0 million as of June 1, 2024. Revenue Recognition: Our customers are generally not resellers, but rather businesses that incorporate our products into their processes, from which they generate an economic benefit. The goods are also distinct in that each item sold to the customer is clearly identified on both the purchase order and resulting invoice. Each product we sell benefits the customer independently of the other products. Each item on each purchase order from the customer can be used by the customer unrelated to any other products we provide to the customer. Revenue is recognized when control transfers since it is not always based on delivery of the goods. The Company’s revenue includes the following streams: • Manufacturing/assembly • Distribution • Services revenue Manufacturing/assembly typically includes the products that are manufactured or assembled in our manufacturing facility. These products can either be built to the customer’s prints/designs or are products that we stock in our warehouse to sell to any customer that places an order. The manufacturing business does not include a separate service bundled with the product sold or sold in addition to the product. Our contracts for customized products generally include termination provisions if a customer cancels its order. However, we recognize revenue at a point in time because the termination provisions normally do not require, upon cancellation, the customer to pay fees that are commensurate with the work performed. Each purchase order explicitly states the goods or services that we promise to transfer to the customer. The promises to the customer are limited only to those goods or services. The performance obligation is our promise to deliver both goods that were produced by the Company and resale of goods that we purchase from our suppliers. Our shipping and handling activities for destination shipments are performed prior to the customer obtaining control. As such, they are not a separate promised service. The Company elects to account for shipping and handling as activities to fulfill the promise to transfer the goods. The goods we provide to our customers are distinct in that our customers benefit from the goods we sell them through use in their own processes. Distribution typically includes products purchased from our suppliers, stocked in our warehouses and then sold to our customers. The distribution business does not include a separate service bundled with the product sold or sold on top of the product. Revenue is recognized when control of the promised goods is transferred to our customers, which is simultaneous with the title transferring to the customer, in an amount that reflects the transaction price consideration that we expect to receive in exchange for those goods. Control refers to the ability of the customer to direct the use of and obtain substantially all the remaining benefits from the goods. Our transaction price consideration is fixed, unless otherwise disclosed below as variable consideration. Generally, our contracts require our customers to pay for goods after we deliver products to them. Terms are generally on open account, payable net 30 days in North America, and vary throughout Asia/Pacific, Europe and Latin America subject to customary credit checks. Repair, installation or training activities generate services revenue. The services we provide are relatively short in duration and are typically completed in one or two weeks. Therefore, at each reporting date, the amount of unbilled work is insignificant. The services revenue has consistently accounted for less than 5% of the Company’s total revenues and is expected to continue at that level. Contracts with customers: A revenue contract exists once a customer purchase order is received, reviewed and accepted. Each accepted purchase order identifies a distinct good or service as the Company's performance obligation. The goods include standard products purchased from a supplier and stocked on our shelves, customized products purchased from a supplier, products that are customized or have value added to them in house prior to shipping to the customer and manufactured products. Prior to accepting a customer purchase order, we review the credit worthiness of the customer. Purchase orders are deemed to meet the collectability criterion once the customer’s credit is approved. The Company receives advance payments or deposits from our customers before revenue is recognized resulting in contract liabilities. Contract liabilities are included in accrued liabilities in the unaudited consolidated balance sheets. Contract Balances: Contract balances were as follows (in thousands):
|  | August 31, 2024 |  |  | June 1, 2024 |  |  | May 27, 2023 |
Accounts receivable |  | $ | 30,862 |  |  | $ | 24,845 |  |  | $ | 30,067 |
Contract liabilities |  |  | 4,527 |  |  |  | 4,520 |  |  |  | 3,283 |
During the three months ended August 31, 2024 and September 2, 2023, the Company recognized $0.9 million and $1.5 million, respectively, of revenue upon satisfaction of performance obligations related to amounts that were included in the contract liabilities balance as of June 1, 2024 and May 27, 2023, respectively. See Note 10, Segment & Geographic Information for a disaggregation of revenue by reportable segment and geographic region, which represents how our chief operating decision maker reviews information internally to evaluate our financial performance and to make resource allocation and other decisions for the Company. Loss Contingencies: We accrue a liability for loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. If we determine that there is at least a reasonable possibility that a loss may have been incurred, we will include a disclosure describing the contingency. Intangible Assets: Intangible assets are initially recorded at their fair market values determined by quoted market prices in active markets, if available, or by recognized valuation models. Intangible assets that have finite useful lives are amortized over their useful lives either on a straight-line basis or over their projected future cash flows and are tested for impairment when events or changes in circumstances occur that indicate possible impairment. Our intangible assets represent the fair value for customer relationships agreements acquired in connection with prior acquisitions. Technology represents the fair value acquired in connection with acquisitions and an exclusive license, manufacturing and distribution agreement. Intangible assets subject to amortization were as follows (in thousands):
|  | August 31, 2024 |  |  | June 1, 2024 |
Gross Amounts: |  |  |  |  |  |
Customer Relationships(1) |  | $ | 3,405 |  |  | $ | 3,396 |
Technology |  |  | 380 |  |  |  | 380 |
Total Gross Amounts |  | $ | 3,785 |  |  | $ | 3,776 |
Accumulated Amortization: |  |  |  |  |  |
Customer Relationships |  | $ | 1,943 |  |  | $ | 1,886 |
Technology |  |  | 260 |  |  |  | 249 |
Total Accumulated Amortization |  | $ | 2,203 |  |  | $ | 2,135 |
Net Intangible Assets |  | $ | 1,582 |  |  | $ | 1,641 |
(1) Change from prior period reflects impact of foreign currency translation. The amortization expense associated with intangible assets subject to amortization for the next five years is presented in the following table (in thousands):
Fiscal Year |  | Amortization Expense |
Remaining 2025 |  | $ | 181 |
2026 |  |  | 207 |
2027 |  |  | 193 |
2028 |  |  | 185 |
2029 |  |  | 174 |
Thereafter |  |  | 642 |
Total amortization |  | $ | 1,582 |
The weighted average number of years of amortization expense remaining is 10.0 years. Income Taxes: We recognize deferred tax assets and liabilities based on the differences between financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and determine the need for a valuation allowance based on a number of factors, including both positive and negative evidence. These factors include historical taxable income or loss, projected future taxable income or loss, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. In circumstances where we, or any of our affiliates, have incurred three years of cumulative losses which constitute significant negative evidence, positive evidence of equal or greater significance is needed to overcome the negative evidence before a tax benefit is recognized for deductible temporary differences and loss carryforwards. Accrued Liabilities: Accrued liabilities consisted of the following (in thousands):
|  | August 31, 2024 |  |  | June 1, 2024 |
Compensation and payroll taxes |  | $ | 4,153 |  |  | $ | 3,495 |
Accrued severance |  |  | 506 |  |  |  | 506 |
Professional fees |  |  | 614 |  |  |  | 487 |
Deferred revenue |  |  | 4,527 |  |  |  | 4,520 |
Other accrued expenses |  |  | 5,603 |  |  |  | 6,396 |
Accrued Liabilities |  | $ | 15,403 |  |  | $ | 15,404 |
Warranties: We offer assurance type warranties for the limited number of specific products we manufacture. We estimate the cost to perform under the warranty obligation and recognize this estimated cost at the time of the related product sale. We record expense related to our warranty obligations as cost of sales in our consolidated statements of comprehensive income. Each quarter, we assess actual warranty costs incurred on a product-by-product basis and compare the warranty costs to our estimated warranty obligation. With respect to new products, estimates are based generally on knowledge of the products and warranty experience. Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of products under warranty. Warranty reserves are included in accrued liabilities on our unaudited consolidated balance sheets. The warranty reserves are determined based on known product failures, historical experience and other available evidence. Warranty reserves were approximately $0.7 million as of August 31, 2024 and June 1, 2024.

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