Income Taxes

12 Months Ended

Feb. 28, 2013

Income Taxes [Abstract]

Income Taxes

7. Income Taxes

Pretax loss is as follows:

	Years Ended
	February 28, 2013			February 29, 2012
	(In thousands)
Domestic	$	(3,839	)	$	(1,503	)
Foreign		180			144
	$	(3,659	)	$	(1,359	)

Significant components of the provision for income taxes on continuing operations are as follows:

	Years Ended
	February 28, 2013			February 29, 2012
	(In thousands)
Current:
Federal	$	—		$	—
State		(7	)		24
Foreign		15			38
		8			62
Deferred:
Federal		(1,689	)		9,085
State		(248	)		938
Foreign		—			—
Deferred tax asset valuation allowance		1,937			(10,023	)
		—			—
	$	8		$	62

The provision for income taxes on continuing operations differed from the amount computed by applying the U.S. federal statutory rate to income before income taxes due to the effects of the following:

	Years Ended
	February 28, 2013			February 29, 2012
	(In thousands)
Federal income tax rate		34.0	%		34.0	%
State income taxes, net of federal income tax benefit		5.7			4.3
Foreign Taxes		0.8			0.8
Research and development credits		2.0			1.2
Permanent differences		(0.1	)		(0.8	)
Adjustment to prior year deferred taxes		10.9			(8.1	)
Reversal of deferred tax asset related to Section 382		—			(773.5	)
Valuation allowance		(52.9	)		736.9
Changes in uncertain tax positions		—			—
Benefit for Federal research and development credits monetized		—			—
Other		(0.6	)		0.7
		(0.2	)%		(4.5	)%

The deferred tax assets and liabilities were comprised of the following:

	Years Ended
	February 28, 2013			February 29, 2012
	(In thousands)
Sales returns	$	263		$	325
Inventory and accounts receivable		794			1,137
Accrued liabilities		117			168
Intangibles		507			526
Credits		400			—
Fixed assets		438			609
Stock-based compensation		439			400
Other		9			14
Net operating losses		19,522			17,374
Total deferred tax assets		22,489			20,553
Less valuation allowance		(22,489	)		(20,553	)
	$	—		$	—

The change in valuation allowance for the years ended February 28, 2013 and February 29, 2012 was $1.9 million and $10.0 million, respectively, to recognize the uncertainty of realizing the benefits of the Company’s deferred tax assets. The valuation allowances were recorded because there is insufficient objective evidence at this time to recognize those assets for financial reporting purposes. Ultimate realization of the benefit of the deferred tax assets is dependent upon the Company generating sufficient taxable income in future periods including periods prior to the expiration of certain underlying tax credits.

As of February 28, 2013, the Company has approximately $62.5 million and $62.5 million of net operating loss carryforwards available to offset future taxable income for federal and state income tax purposes, respectively. These net operating loss carryforwards are before any limitation under Section 382 (see discussion below) and will begin to expire during the fiscal years ending February 28, 2023 for federal income tax purposes and February 28, 2014 for state income tax purposes. Prior year stock option compensation expense included in the net operating losses is negligible. The Company has foreign tax credits and research and experimentation and manufacturing incentive credits of approximately $3.8 million for federal tax purposes. The Company has $0.9 million for CA tax purposes. These credits are before any limitation under Section 382 (see discussion below) and will begin to expire during the fiscal years ending February 28, 2014 and February 28, 2021, respectively. The future realization of these credits is dependent upon the Company generating sufficient income both outside the United States and within the United States.

Section 382 Limitation

Utilization of the net operating loss and tax credit carry-forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may limit the amount of NOL carry-forwards and tax credit carry-forwards that can be utilized annually to offset future taxable income and tax, respectively. Consequently, Management has performed an analysis of whether an ownership change has occurred for tax reporting purposes. Based upon our analysis, we believe that a Section 382 ownership change has occurred and approximately $14.5 million and $8.0 million of federal and state NOLs, respectively, $0.8 million and $0.5 million of federal and state research and development credits, respectively, and $3.8 million of foreign tax credits may expire unutilized. As a result, we removed these assets from the above schedule of deferred tax assets. Since any recognizable deferred tax assets would be fully reserved, future changes in our unrecognized tax benefits will not impact our effective tax rate.

As of February 28, 2013, the Company has approximately $47.8 million and $54.5 million of net operating loss carryforwards, after application of the 382 limitation available to offset future taxable income for federal and state income tax purposes, respectively. These net operating loss carryforwards will begin to expire during the fiscal years ending February 28, 2023 for federal income tax purposes and February 28, 2013 for state income tax purposes. The Company has no foreign tax credits after application of the 382 limitation and has research and experimentation and manufacturing incentive credits of approximately $0.1 million after application of the 382 limitation, which begin to expire during the fiscal year ending February 28, 2021. The future realization of these credits is dependent upon the Company generating sufficient income both outside the United States and within the United States.

Unrecognized Tax Benefits

The Company is subject to income taxes in the United States and Mexico. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite a belief that its tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of income tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of the prescribed authoritative guidance.

As of February 28, 2013 and as of February 29, 2012, the Company had no unrecognized tax benefits. Management does not anticipate that there will be a material change in the balance of unrecognized tax benefits within the next 12 months.

The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of February 28, 2013 and as of February 29, 2012, no interest and penalties related to uncertain tax positions were accrued.

The tax years 2008 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the amount of a net operating loss carryforward can be adjusted for federal tax purposes for the three years (four years for the major state jurisdictions in which the Company operates) after the net operating loss is utilized.