INCOME TAXES

12 Months Ended

May 31, 2016

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

6.    INCOME TAXES

Income tax (expense) benefit from continuing operations for the years ended May 31, 2016 and 2015 consists of the following:

	2016		2015
Current:
U.S. Federal	$	-	$	-
State and local		(800)		17,024
Total current		(800)		17,024
Deferred:
U.S. Federal		(579,414)		267,418
State and local		(123,586)		30,582
Total deferred		(703,000)		298,000
Income tax (expense) benefit	$	(703,800)	$	315,024

Income tax benefit (expense) from continuing operations differs from the amounts computed by applying the U.S.

Federal income tax rate of 35 percent to pretax income as a result of the following:

Years ended May 31,	2016		2015
Computed "expected" tax benefit	$	274,479	$	226,024
Increase (reduction) in income taxes resulting from:
Change in valuation allowance		(1,038,000)		--
State income taxes, net of federal benefit		34,276		27,000
Research and development tax credits		21,844		63,000
Permanent tax differences and other		3,601		(1,000)
Income tax (expense) (benefit)	$	(703,800)	$	315,024

The tax effect of significant temporary differences is presented below:

Years ended May 31,	2016		2015
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts and sales returns	$	3,000	$	7,000
Inventory valuation		11,000		9,000
Compensated absences and deferred payroll		60,000		45,000
Net operating loss carryforwards		705,000		484,000
Tax credit carryforwards		268,000		239,000
Deferred rent expense		3,000		13,000
Other		82,000		56,000
Total deferred tax assets		1,132,000		853,000
Less valuation allowance		(1,038,000)		--
		94,000		853,000
Deferred tax liabilities:
Accumulated depreciation of property and equipment		(53,000)		(109,000)
Net deferred tax asset	$	41,000	$	744,000

The Company has provided a valuation allowance of approximately $1,038,000 and $0 as of May 31, 2016 and 2015, respectively. The net change in the valuation allowance for the years ended May 31, 2016 and 2015 was an increase of approximately $1,038,000 and $0, respectively.

At May 31, 2016 and 2015, the Company has federal income tax net operating loss carryforwards of approximately $2,247,000 and $1,445,000 respectively. Of the reported net operating loss carryforwards, approximately $467,000 are related to windfall tax benefits from the exercise of the Company’s stock options by certain employees. Pursuant to ASC 718, the federal benefit of approximately $163,000 associated with this portion of the net operating loss will be credited to additional paid-in capital when the tax benefits are actually realized. The federal net operating loss carryforwards begin to expire in 2030. At May 31, 2016 and 2015, the Company has California state income tax net operating loss carryforwards of approximately $1,417,000 and $913,000, respectively.

At May 31, 2016, the Company has federal research and development tax credit carryforward of approximately $233,000.  The federal credits begin to expire in 2027.  The Company also had similar credit carryforwards for state purposes of $35,000 at May 31, 2016.

Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the Company's net operating loss ("NOL") and credit carryforwards may be limited by statute because of a cumulative change in ownership of more than 50%. Pursuant to Sections 382 and 383 of the Code, the annual use of the Company's NOLs would be limited if there is a cumulative change of ownership (as that term is defined in Section 382(g) of the Code) of greater than 50% in a three year period. Based on management's analysis the Company does not believe that a cumulative change in ownership of greater than 50% has taken place.

For the fiscal year ended May 31, 2016 and 2015, the Company did an analysis of its ASC 740 position and has not identified any uncertain tax positions as defined under ASC 740. Should such position be identified in the future and should the Company owe interest and penalties as a result of this, these would be recognized as interest expense and other expense, respectively, in the consolidated financial statements. The Company is no longer subject to any significant U.S. federal tax examinations by tax authorities for years before fiscal year 2012.