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Income Taxes
 12 Months Ended
Aug. 31, 2012
Income Taxes  
Income Taxes

 

12. Income Taxes

        The Company's income (loss) from continuing operations before income taxes is primarily derived from the operations in Taiwan and, therefore, income tax expense (benefit) attributable to income from continuing operations is primarily incurred in Taiwan.

        The statutory income tax rate in Taiwan is 17%. An additional 10% corporate income tax is assessed on undistributed income for the entities in Taiwan, but only to the extent such income is not distributed or set aside as legal reserve before the end of the following year. The 10% surtax is recorded in the period the income is earned, and the reduction in the surtax liability is recognized in the period the distribution to stockholders or the setting aside of legal reserve is finalized in the following year.

        The Company's income (loss) before income taxes for the years ended August 31, 2012, 2011 and 2010 consist of the following (in thousands):

 
   Years Ended August 31,  
 
   2012   2011   2010  

U.S. operations

   $ (17,361 ) $ (5,342 ) $ (625 )

Foreign operations

     (32,588 )   (10,071 )   11,720  
               

Income (loss) before income taxes

   $ (49,949 ) $ (15,413 ) $ 11,095  
               

        The components of income tax expense for the years ended August 31, 2012, 2011 and 2010 consist of the following (in thousands):

 
   Years Ended August 31,  
 
   2012   2011   2010  

Current:

                    

U.S. federal

   $ —   $ —   $ —  

U.S. state

     —     —     —  

Foreign

           38     851  
               

Total current

   $ —   $ 38   $ 851  
               

Deferred:

                    

U.S. federal

     —     —   $ —  

U.S. state

     —     —     —  

Foreign

     —     687     (584 )
               

Total deferred

   $ —   $ 687     (584 )
               

Total income tax expense

   $ —   $ 725   $ 267  
               

        Income tax expense differed from the amounts computed by applying the statutory U.S. federal income tax rate of 34% to pretax income (loss) for the years ended August 31, 2012, 2011 and 2010 as a result of the following (in thousands):

 
   Years Ended August 31,  
 
   2012   2011   2010  

Computed "expected" income tax expense (benefit)

   $ (16,983 ) $ (5,240 ) $ 3,772  

State tax—net of federal benefit

     —     —     —  

Foreign tax rate differential

     2,487     586     (1,920 )

Decrease (increase) in investment credits

     —     (1,907 )   43  

Valuation allowance

     14,089     7,179     (1,628 )

Other

     407     107     —  
               

Income tax expense

   $ —   $ 725   $ 267  
               

        Net deferred tax assets (liabilities) as of August 31, 2012 and 2011 consist of the following (in thousands):

 
   August 31,
2012 		  August 31,
2011 		 

Deferred tax assets:

              

Inventories, primarily due to inventory obsolescence and lower of cost or market provisions

   $ 1,810   $ 1,303  

Income tax credits

     1,912     2,962  

Allowance for doubtful accounts

     362     236  

Accruals and other

     171     134  

Property, plant and equipment

     1,292     12  

Stock-based compensation

     651     405  

Foreign investment loss

     5,506     942  

Net operating loss carryforwards

     11,522     3,633  
           

Total gross deferred tax assets

     23,226     9,627  

Less: Valuation allowance

     (22,474 )   (9,346 )
           

Deferred tax assets, net of valuation allowance

   $ 752   $ 281  
           

Deferred tax liabilities:

              

Property, plant and equipment

   $ (25 ) $ (46 )

Intangible assets

     (180 )   (233 )

Accruals and other

     (547 )   (2 )
           

Total gross deferred tax liabilities

     (752 )   (281 )
           

Net deferred tax assets

   $ —   $ —  
           

        A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax loss carryforwards utilizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of August 31, 2012 and 2011, the Company established full valuation allowances of $22.5 million and $9.3 million, respectively, to offset the net deferred tax assets due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets.

        During the years ended August 31, 2012, 2011 and 2010, the change in the beginning of the year valuation allowance as a result of changes in estimates was an increase (a decrease) of $0, $584 thousand and $(1,163) thousand, respectively.

        As of August 31, 2012, unused net operating loss carryforwards and income tax credits were as follows (in thousands):

 
   August 31,
2012 		  Expiration
Year 		 

U.S. federal net operating loss carryforwards

   $ 6,976     2025 - 2032  

U.S. state net operating loss carryforwards

     489     2017 - 2024  

Foreign net operating loss carryforwards (expiring over the next 5 years)

     2,224     2013 - 2017  

Foreign net operating loss carryforwards (expiring in more than 5 years)

     26,665     2018 - 2023  

Foreign income tax credit carryovers

     1,912     2013 - 2015  
             

Total unused net operating loss carryforwards and income tax credits

   $ 38,266        
             

        Internal Revenue Code section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income that can be offset by net operating carryforwards after a change in control of a loss corporation. Generally, after a control change, a loss corporation cannot deduct operating loss carryforwards in excess of the Section 382 Limitation. Management believes that any limitation imposed by Section 382 should not have a significant impact on the utilization of its operating loss carryforwards against taxable income in future periods.

Uncertain Tax Positions

        A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended August 31, 2012, 2011 and 2010 consist of the following (in thousands):

 
   Years Ended August 31,  
 
   2012   2011   2010  

Unrecognized benefit—beginning of year

   $ 330   $ 252   $ 119  

Gross increases—current year tax positions

     —     —     89  

Gross increases—prior years tax positions

     —     78     44  

Settlements of prior years tax positions

     (185 )   —     —  
               

Unrecognized benefit—end of year

   $ 145   $ 330   $ 252  
               

        The entire amount of the unrecognized tax benefits would impact the Company's effective tax rate if recognized. The impact would be offset by an adjustment to the valuation allowance.

        Accrued interest and penalties related to unrecognized tax benefits were immaterial. The Company files income tax returns in the United States, various states and certain foreign jurisdictions. The tax years 2005 through 2011 remain open in most jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or other foreign jurisdictions. The Company does not expect that the total amount of unrecognized tax benefits will change significantly within the next 12 months.