7. INCOME TAXES

12 Months Ended

May 31, 2021

Income Tax Disclosure [Abstract]

7. INCOME TAXES

7. INCOME TAXES 

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

	Year Ended May 31,
	2021		2020		2019
Domestic	$	(13,064)	$	(2,751)	$	(5,273)
Foreign		10,860		(15)		65
	$	(2,204)	$	(2,766)	$	(5,208)

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

	Year Ended May 31,
	2021		2020		2019
Federal income taxes:
Current	$	163	$	--	$	--
Deferred		--		--		--
State income taxes:
Current		13		(30)		(6)
Deferred		--		--		--
Foreign income taxes:
Current		1		(6)		(21)
Deferred		--		--		--
	$	177	$	(36)	$	(27)

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

	Year Ended May 31,
	2021			2020			2019
U.S. federal statutory tax rate		21.0	%		21.0	%		21.0	%
State taxes, net of federal tax effect		0.6			1.4			(1.0)
Foreign rate differential		9.8			(21.5)			(0.7)
Stock-based compensation		(4.7)			(4.0)			(2.8)
Research and development credit		4.0			--			1.5
Change in valuation allowance		(32.1)			4.3			(15.6)
Federal rate change impact		--			--			--
Federal AMT refund		--			--			--
ASU 2016-09 adoption		--			--			--
Controlled Foreign Corporation Liquidation		9.8			--			--
Other		(0.4)			(2.5)			(2.9)
Effective tax rate		8.0	%		(1.3)	%		(0.5)	%

    The components of the net deferred tax assets and liabilities are as follows (in thousands):

	Year Ended May 31,
	2021		2020
Deferred tax assets:
Net operating losses	$	15,584	$	13,634
Lease Liability		372		483
Credit carryforwards		5,298		5,089
Inventory reserves		1,006		1,005
Reserves and accruals		890		739
Other		450		319
		23,600		21,269
Deferred tax liabilities:
Operating lease right-of-use assets		(342)		(449)
Less: Valuation allowance		(23,258)		(20,820)
Net deferred tax assets (liabilities)	$	--	$	--

    The valuation allowance increased by $2,438,000 during fiscal 2021, decreased by $118,000 during fiscal 2020, and increased by $813,000 during fiscal 2019. As of May 31, 2021 and 2020, the Company concluded that it is more likely than not that the deferred tax assets will not be realized and therefore provided a full valuation allowance against the deferred tax assets. The Company will continue to evaluate the need for a valuation allowance against its deferred tax assets on a quarterly basis.

    At May 31, 2021 and 2020, the Company has federal net operating loss carryforwards of approximately $64,298,000 and $54,601,000 respectively, to reduce future taxable income. A portion of the federal net operating losses will begin to expire in 2024. Federal net operating losses of $13,383,000 will carryforward indefinitely and would be subject to an 80% taxable income limitation in the year utilized. At May 31, 2021 and 2020, the Company has state net operating loss carryforwards of $29,812,000 and $29,386,000, respectively, to reduce future taxable income. The state net operating loss carryforwards will begin to expire in 2028.

    At May 31, 2021 and 2020, the Company has federal research and development credit carryforwards of approximately $2,201,000 and $2,113,000 respectively, to offset future tax liability. The federal credit carryforwards will begin to expire in 2022. At May 31, 2021 and 2020, The Company has state research and development credit carryforwards of approximately $5,955,000 and $5,782,000 respectively, to offset future tax liability. The credit carryforwards are not subject to expiration. The Company also has alternative minimum tax credit carryforwards of $34,000 for state purposes. The credits may be used to offset regular tax and do not expire.

    ATS Japan was completely liquidated in July 2020. Thus, there is no more foreign net operating loss carryforward related to the Japan entity to the future.

    Internal Revenue Code of 1986, as amended (“IRC”) Section 382 (“§382”) limits the use of NOL and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In general, if we experience a greater than 50% aggregate change in ownership over a 3-year period, we are subject to an annual limitation under IRC §382 on the utilization of the Company’s pre-change NOL carryforwards. California and other states have similar laws. The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization.

    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):

Beginning balance as of May 31, 2018	$	1,785
Decreases related to prior year tax positions		(41)
Increases related to current year tax positions		65
Balance at May 31, 2019	$	1,809
Decreases related to prior year tax positions		(11)
Increases related to current year tax positions		54
Balance at May 31, 2020	$	1,852
Increases related to prior year tax positions		11
Increases related to current year tax positions		65
Balance at May 31, 2021	$	1,928

    As of May 31, 2021 and 2020, the Company has not recorded interest and penalties associated with its unrecognized tax benefits. The Company’s unrecognized gross tax benefits would not reduce the annual effective tax rate if recognized because it has recorded a full valuation allowance on its deferred tax assets. The Company does not foresee any material changes to the gross unrecognized tax benefit within the next twelve months. The Company’s 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.

    On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have material impact to income taxes as the Company is in a historical loss position.

    On December 27, 2020, the Consolidated Apportions Act of 2021 (“CCA”), a tax, funding and spending bill was signed into law and the Company does not believe the CAA will materially impact the 2021 income tax provision.

    On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 (“AB 85”) into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022. We analyzed the provisions of AB 85 and determined there was no impact on our provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on our condensed consolidated financial statements and disclosures.