Annual report pursuant to Section 13 and 15(d)

Note D - Income Taxes

v2.3.0.15
Note D - Income Taxes
 12 Months Ended
Sep. 30, 2011
Income Tax Disclosure [Text Block]
NOTE  D  –  INCOME TAXES

Realization of net operating loss carry-forward and other deferred tax temporary differences are contingent upon future taxable earnings.  The Company’s deferred tax asset was reviewed for expected utilization by assessing the available positive and negative factors surrounding its recoverability.  During the fourth quarter of fiscal year 2011, the Company reversed a portion of the deferred tax asset valuation allowance to record the valuation allowance at an amount that represents the amount of deferred tax assets that we believe are not more likely than not to be realized based upon estimates of future taxable income.   The Company considered all available positive and negative evidence, including our historical operating results, current financial condition, and potential future taxable income. The reduction in the valuation allowance in the fourth quarter resulted in a non-cash income tax benefit of approximately $2.5 million. In addition, the company released valuation allowance each quarter in an amount in which the tax benefit generated offsets the tax provision realized from the quarter’s taxable income.

Our future potential taxable income was evaluated based primarily on anticipated operating results for fiscal years 2012 through 2014. We determined that projecting operating results beyond 2011 involves substantial uncertainty and we discounted forecasts beyond 2011 as a basis to support our deferred tax assets. Based upon the assessment of all available evidence, the Company released $2,481,000 of additional valuation allowance for the year ended September 30, 2011 which was recorded as a one-time income tax benefit.  As of September 30, 2011, the Company has a remaining valuation allowance of approximately $6.0 million, of which $1.2 million is short term and $4.8 million is long-term, against its remaining deferred tax assets. The Company will continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors. If the valuation allowance is reduced, we would record an income tax benefit in the period the valuation allowance is reduced. If the valuation allowance is increased, we would record additional income tax expense.

Significant components of deferred income tax assets and liabilities are as follows at:

   
September 30,
   
September 30,
 
   
2011
   
2010
 
Current deferred income tax assets (liabilities):
           
Inventories
  $ 142,648     $ 133,182  
Accrued expenses and reserves
    148,914       120,017  
Prepaid expenses
    (54,351 )     (40,697 )
Net operating loss carry forwards and credits
    1,972,000       -  
      2,209,211       212,502  
Valuation allowance
    (1,215,211 )     (212,502 )
Net current deferred tax asset
  $ 994,000     $ -  
                 
Long-term deferred income tax assets (liabilities):
               
Intangibles
  $ 9,742     $ 23,455  
Property and equipment depreciation
    71,111       295,498  
Net operating loss carry forwards and credits
    8,639,729       11,833,662  
Stock based compensation
    36,427       32,503  
Accrued expenses and reserves
    22,059       28,673  
Goodwill
    (393,221 )     (318,656 )
      8,385,847       11,895,135  
Valuation allowance
    (4,827,050 )     (9,749,773 )
Net long-term deferred tax asset
  $ 3,558,797     $ 2,145,362  

As of September 30, 2011, the Company had U.S. federal net operating loss (NOL) carry forwards of approximately $27.3 million, representing a $9.1 million deferred tax asset. The U.S. federal net operating loss carry forwards will expire in 2020 through 2028 if not utilized.  As of September 30, 2010, the Company had U.S. federal net operating loss carry forwards of approximately $30.1 which were set to expire in fiscal years 2020 to 2028. The Company had a partial valuation allowance against this deferred tax asset as of September 30, 2011.

As of September 30, 2011, the Company had state net operating loss carry forwards of approximately $22.1 million, representing a $1.4 million deferred tax asset. The state net operating loss carry forwards will expire in 2013 through 2022 if not utilized.  The Company had a partial valuation allowance against this deferred tax asset as of September 30, 2011. As of September 30, 2010, the Company had state net operating loss carry forwards of approximately $23.0 million which were set to expire in fiscal years 2012 to 2022. The Company had a partial valuation allowance against this deferred tax asset as of September 30, 2011.

The Company completed an Internal Revenue Code Section 382 analysis of the loss carry forwards in 2009 and determined then that all of the company’s loss carry forwards are utilizable and not restricted under Section 382. The Company has not updated its Section 382 analysis subsequent to 2009 and does not believe there have been any events subsequent to 2009 that would impact the analysis.

Deferred tax assets relating to equity compensation have been reduced to reflect tax deductions in excess of previously recorded tax benefits through the year ended September 30, 2011.   The Company’s NOL carry forwards referenced above at September 30, 2011 include $580,000 of income tax deductions in excess of previously recorded tax benefits.  Although these additional tax deductions are reflected in NOL carry forwards referenced above, the related tax benefit of $212,000 will not be recognized until the deductions reduce taxes payable.  Accordingly, since the tax benefit does not reduce the Company’s current taxes payable in 2011, these tax benefits are not reflected in the Company’s deferred tax assets presented above.  The tax benefit of these excess deductions will be reflected as a credit to additional paid-in capital when recognized.

The following is a reconciliation of the federal statutory income tax rate to the consolidated effective tax rate as a percent of pre-tax income for the following periods ended:

             
   
September 30,
   
September 30,
 
   
2011
   
2010
 
Federal statutory rate
    34 %     34 %
State income taxes
    2 %     2 %
Permanent differences
    5 %     5 %
Change in valuation allowance
    (101 %)     (32 %)
Tax rate
    (60 %)     9 %

Components of the income tax expense (benefit) are as follows for the periods ended:

   
September 30,
   
September 30,
 
   
2011
   
2010
 
Current:
           
Federal
  $ 67,700     $ 17,097  
State
    23,592       15,509  
      91,292       32,606  
Deferred:
               
Federal
    1,396,292       998,162  
State
    116,289       (1,563,647 )
      1,512,581       (565,485 )
Valuation allowance
    (3,920,015 )     654,337  
Income tax expense (benefit)
  $ (2,316,142 )   $ 121,458  

As of September 30, 2011 and 2010, the current income tax payable was $49,000 and $17,000 respectively.

The Company is required to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies the interpretation to all tax positions for which the statute of limitations remained open. The Company had no liability for unrecognized tax benefits. The Company did not recognize any interest or penalties during the years ended September 30, 2011 or 2010.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, income tax examinations by tax authorities for fiscal years ending prior to 1994. The Company changed its fiscal year in 2007 to September 30.