10.

INCOME TAXES

The Company’s loss before income taxes is primarily derived from the operations in Taiwan and income tax expense 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 a 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 loss before income taxes for the years ended August 31, 2016 and 2015 consist of the following (in thousands):


	Years Ended August 31,
	2016		2015
U.S. operations	$	(973)	$	(770)
Foreign operations		(20,331)		(12,547)
Loss before income taxes	$	(21,304)	$	(13,317)

All the income tax expense is foreign current tax expense for the year ended August 31, 2015.

Income tax expense differed from the amounts computed by applying the statutory U.S. federal income tax rate of 34% to loss before income taxes for the years ended August 31, 2016 and 2015 as a result of the following (in thousands):


	Years Ended August 31,
	2016		2015
Computed “expected” income tax benefit	$	(7,243)	$	(4,528)
Foreign tax rate differential		2,078		1,432
Valuation allowance		5,097		3,125
Other		68		(28)
Income tax expense	$	—	$	1

Net deferred tax assets (liabilities) as of August 31, 2016 and 2015 consist of the following (in thousands):


	August 31,
	2016		2015
Deferred tax assets:
Inventories, primarily due to inventory obsolescence and lower of cost or market provisions	$	1,659	$	1,346
Allowance for doubtful accounts		155		428
Accruals and other		196		123
Property, plant and equipment		4,126		2,627
Stock-based compensation		609		617
Investments in unconsolidated entities		5,560		5,587
Net operating loss carryforwards		21,396		19,086
Net operating loss carryforwards-undistributed earnings tax		9,679		7,662
Total gross deferred tax assets		43,380		37,476
Less: Valuation allowance		(43,380)		(37,476)
Deferred tax assets, net of valuation allowance	$	—	$	—

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 operating loss carryforwards utilizable. Management considers the scheduled reversal of deferred tax liabilities, carryback availability, projected future income, and tax-planning strategies in making this assessment. The Company established full valuation allowances to offset all of its deferred tax assets due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets.

As of August 31, 2016, unused net operating loss carryforwards were as follows (in thousands):


	August 31,		Expiration
	2016		Year
U.S. federal net operating loss carryforwards	$	11,578	2025-2036
Foreign net operating loss carryforwards (expiring over the next 5 years)		8,018	2017-2021
Foreign net operating loss carryforwards (expiring in more than 5 years)		94,431	2022-2026
Foreign net operating loss carryforwards (indefinite life)		107,540	—
Total unused net operating loss carryforwards	$	221,567

Unrecognized Tax Benefits

As of both August 31, 2016 and 2015, the Company had no unrecognized tax benefits.

The Company files income tax returns in the United States federal and certain foreign jurisdictions. The tax years 2005 through 2015 remain open in most jurisdictions, and previously filed in various U.S. states. Below is a summary of open tax years by major tax jurisdiction:


		Open
		Tax Year
U.S. federal		2005-2015
U.S. state		2005-2014
Foreign—Taiwan		2013-2015

The Company is not currently under examination by income tax authorities in any federal, state or foreign jurisdictions. The Company does not expect that the total amount of unrecognized tax benefits will change significantly within the next 12 months.