Note G - Income Taxes

12 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Income Tax Disclosure [Text Block]

G. Income Taxes

During fiscal 2024, we recorded U.S.-based domestic tax benefit of $2.2 million and negligible foreign tax benefit. During fiscal 2023, we recorded U.S.-based domestic tax expense of $0.8 million and foreign tax expense of $0.2 million.

The following is a geographical breakdown of (loss) income before income taxes (in thousands):

	2024			2023
United States	$	(9,046	)	$	2,588
Foreign		(418	)		967
Total (loss) income before income taxes	$	(9,464	)	$	3,555

The (benefit) provision for income taxes for the years ended June 30 consisted of the following (in thousands):

	2024			2023
Current:
Federal	$	(55	)	$	843
State		41			211
Foreign		66			221
		52			1,275
Deferred:
Federal		(2,007	)		(246	)
State		(223	)		4
Foreign		(69	)		—
		(2,299	)		(242	)
Total (benefit) provision for income taxes	$	(2,247	)	$	1,033

Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):

	2024			2023
Deferred tax assets:
Inventory capitalization	$	279		$	220
Inventory reserves		148			164
Lease liability		8,497			2,018
Net operating loss carry forward		1,505			433
Accrued compensation		140			166
Capitalized research and experimentation		694			412
Accrued contingent fee		207			219
Stock-based compensation		129			81
Forward contracts		—			56
Tax credit carry forward		682			229
Pension liability		67			103
Other, net		215			88
Total gross deferred tax assets		12,563			4,189
Deferred tax liabilities:
Withholding taxes		(134	)		(401	)
Fixed assets		(1,485	)		(1,451	)
Forward contracts		(54	)		—
Lease asset		(7,694	)		(1,951	)
Other, net		(26	)		(31	)
Deferred tax liabilities		(9,393	)		(3,834	)
Net deferred tax assets	$	3,170		$	355

As of June 30, 2024, the Company had U.S. federal net operating loss carryforwards of $4.6 million which may be carried forward indefinitely. The Company has state net operating loss carryforwards of $6.6 million, which, if unutilized, will begin to expire beginning in fiscal year 2031. The Company also has foreign net operating loss carryforwards of $0.3 million, which, if unutilized, will begin to expire in fiscal year 2031. The Company has federal and state tax credits of $0.8 million, which, if unutilized, will begin to expire in fiscal year 2041.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of the net operating loss carry forwards and research and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. We did not have any ownership changes that met this criterion during the fiscal years ended June 30, 2024 and June 30, 2023.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2019 and forward are subject to examination by the U.S. tax authorities. Our tax years for the fiscal years ended June 30, 2018 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2023 and forward are subject to assessment by the Swiss tax authorities.

NAIE’s effective tax rate for the fiscal year ended  June 30, 2024 for Swiss federal, cantonal and communal taxes is approximately 1%. This rate is lower than our historical effective rate for NAIE because NAIE recognized a pre-tax loss and the calculated benefit for the year was mostly offset by a capital tax that is calculated based on net equity regardless of whether the company recognized a profit or not.

As part of the Tax Cuts and Jobs Act of 2017 (the Tax Act), we were required to recognize a one-time deemed repatriation transition tax during the fiscal year ended June 30, 2018 based on our total post-1986 earnings and profits (E&P) from our Swiss subsidiary, NAIE. This accumulated E&P amount has historically been considered permanently reinvested thereby allowing us to defer recognizing any U.S. income tax on the amount. We no longer consider undistributed foreign earnings from NAIE as of December 31, 2017 as indefinitely reinvested. We consider earnings accumulated subsequent to December 31, 2017 as indefinitely reinvested.

For tax years commencing on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017, also eliminates the ability to immediately deduct research and development costs. Instead, taxpayers are mandated to capitalize these expenses and amortize them over five years for research conducted within the United States and 15 years for research conducted abroad, as stipulated in IRC Section 174. There is ongoing consideration in Congress for legislation that may revoke or postpone this capitalization and amortization requirement; however, there is no guarantee that this provision will undergo repeal or any other form of modification. Should this requirement remain unchanged, it will result in a reduction of our tax deduction for research and development expenses in the forthcoming years. During fiscal 2024, NAIE declared a dividend of $5.4 million to NAI, which was paid in the first quarter of fiscal 2025. During fiscal 2023, NAIE declared and paid dividends to NAI in the amount of $14.7 million. These amounts are part of the undistributed earnings that we recorded a one-time deemed repatriation transition tax on in fiscal 2018 and therefore we did not recognize any additional tax on these dividends. However, as part of these dividends, we were required to pay a 5% Swiss withholding tax totaling $0.3 million in fiscal 2024 and $0.7 million in fiscal 2023 which were also accrued for as part of the implementation of the Tax Act in fiscal 2018.

A reconciliation of our income tax (benefit) provision computed by applying the statutory federal income tax rate of 21% for fiscal 2024 and for fiscal 2023 to net (loss) income before income taxes for the year ended June 30 is as follows (dollars in thousands):

	2024			2023
Income taxes computed at statutory federal income tax rate	$	(2,033	)	$	749
State income taxes, net of federal income tax expense		(215	)		90
Permanent differences		(20	)		8
Foreign tax rate differential		131			18
Tax credits		(170	)		(347	)
Stock based compensation		93			61
Global intangible low-taxed income (GILTI)		—			355
Return to provision - differences		(33	)		99
Income tax (benefit) provision as reported	$	(2,247	)	$	1,033
Effective tax rate		(23.7	)%		29.1	%

We expect our U.S. federal statutory rate to be 21% for fiscal years going forward.