13. Income Taxes

On December 22, 2017, the legislation commonly known as the Tax Cuts and Jobs Act (the “TCJA” or the “Act”) was enacted into law. The Act made comprehensive changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing rules related to uses and limitations of net operating loss carry-forwards created in tax years beginning after December 31, 2017 as well as the repeal of the current carryback provisions for net operating losses arising in tax years ending after December 31, 2017; (3) immediate full expensing of certain qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate alternative minimum tax; (6) repeal of the deduction for income attributable to domestic production activities; and (7) changes in the manner in which international operations are taxed in the U.S. including a mandatory one-time transition tax on the accumulated untaxed earnings of foreign subsidiaries of U.S. shareholders.

In response to the TCJA, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TJCA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment. For the year ended April 30, 2018, the Company recorded a provisional decrease in its deferred tax assets and liabilities for the reduction in the federal tax rate with a corresponding adjustment to the valuation allowance. During the year ended April 30, 2019, the Company completed the accounting for the tax effects of the TCJA with no material changes to the provisional estimate recorded in prior periods.

The TCJA also established the Global Intangible Low-Taxed Income (“GILTI”) provisions that impose a tax on foreign income in excess of a deemed return on tangible assets on foreign corporations. The Company does not anticipate being subject to GILTI due to the sale of Gillam in Fiscal 2018 and the treatment of FEI-Asia as a disregarded entity for U.S. tax purposes.

The income before provision for income taxes consisted of (in thousands):

	Year Ended April 30,
	2019			2018
U.S.	$	(4,713	)	$	(10,785	)
Foreign		2,240			(490	)
	$	(2,473	)	$	(11,275	)

The provision for income taxes consisted of the following (in thousands):

	2019			2018
Current:
Federal	$	8		$	(869	)
Foreign		196			-
State		99			(124	)
Current provision		303			(993	)
Deferred:
Federal		-			10,702
Foreign		(247	)		267
State		-			1,200
Deferred (benefit) tax		(247	)		12,169

Total provision	$	56		$	11,176

The following table reconciles the reported income tax expense (benefit) with the amount computed using the federal statutory income tax rate (in thousands):

	2019			2018
Statutory rate	$	(519	)	$	(3,352	)
State and local tax		(32	)		(352	)
Valuation allowance on deferred tax assets		1,419			9,393
Effect of foreign operations		(51	)		606
Nondeductible expenses		87			1
Sale of Subsidiary Stock		(863	)		-
Uncertain tax positions		101			(388	)
Nontaxable life insurance cash value increase		(120	)		(111	)
Tax credits		(28	)		(163	)
Change in tax rate		225			5,323
Stock-based compensation		-			271
Other items		(163	)		(52	)
	$	56		$	11,176

The components of deferred taxes are as follows (in thousands):

	2019			2018
Deferred tax assets:
Employee benefits	$	5,092		$	5,078
Inventory		1,649			1,129
Accounts receivable		204			213
Tax credits		1,300			1,213
Other assets		148			139
Capital Loss carry-forward		2,455			1,385
Net operating loss carry-forwards		5,556			6,451
Total deferred tax asset		16,404			15,608
Deferred tax liabilities:
Property, plant and equipment		(1,344	)		(1,639	)
Other liabilities		(343	)		(821	)
Deferred state income tax		(767	)		(727	)
Net deferred tax asset		13,950			12,421
Valuation allowance		(13,950	)		(12,688	)
Net deferred tax liability	$	-		$	(267	)

The components of the deferred tax asset were as follows (in thousands):

	2019			2018
Gross deferred assets	$	13,950		$	12,421
Valuation allowance		(13,950	)		(12,688	)
Net deferred tax (liability) asset	$	-		$	(267	)

In assessing the realizability of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amounts expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carry-forwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.

As required by the authoritative accounting guidance on accounting for income taxes, the Company evaluates the realizability of its deferred tax assets at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more-likely-than-not realizable, the Company establishes a valuation allowance. As of April 30, 2019 and 2018, the Company had a full valuation allowance against its U.S. net deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense. For the years ended April 30, 2019 and 2018, the valuation allowance increased by approximately $1.3 million and $9.4 million, respectively.

As of April 30, 2019, the Company has U.S. federal net operating losses of $23 million of which $4 million begins to expire in Fiscal 2023 through 2031 and which are subject to annual limitation under Internal Revenue Code Section 382. The remaining U.S. federal net operating losses of $18.9 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $9.9 million expires in 2023. The Company also has state net operating loss carry-forwards, R&D tax credits, and state tax credits that expire in various years and amounts.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, is as follows (in thousands):

	2019			2018
Balance at the beginning of the fiscal year	$	1,264		$	1,626
Additions based on positions taken in the current year		-			-
Additions based on positions taken in prior years		142			-
Decreases based on positions taken in prior years		(119	)		(304	)
Lapse in statute of limitations		(29	)		(58	)
Balance at the end of the fiscal year	$	1,258		$	1,264

The entire amount reflected in the table above at April 30, 2019, if recognized, would reduce our effective tax rate. As of April 30, 2019, and 2018, the Company had $64,000 and $10,000, respectively, accrued for the payment of interest and penalties. For the fiscal years ended April 30, 2019 and 2018, the Company recognized interest and penalties of $54,000 and $3,000, respectively. Although it is difficult to predict or estimate the change in the Company’s unrecognized tax benefits over the next twelve months, the Company believes that it is reasonably possible that decreases in unrecognized tax benefits of up to $40,000 may be recognized during the next twelve months.

The Company is subject to taxation in the U.S. federal, various state and local jurisdictions, and foreign jurisdictions. The Company is no longer subject to examination of its federal income tax returns by the Internal Revenue Service for fiscal years 2016 and prior. During Fiscal 2018, the Company closed an Internal Revenue Service examination of its Fiscal 2016 tax return with no change to the tax liability reported. The Company is no longer subject to examination by the taxing authorities in its foreign jurisdictions for Fiscal 2015 and prior. Net operating losses and tax attributes generated by domestic and foreign entities in closed years and utilized in open years are subject to adjustment by the tax authorities.