Income Taxes

9 Months Ended

Oct. 31, 2012

Income Taxes [Abstract]

Income Taxes

7. Income Taxes

The effective tax rate for the three months ended October 31, 2012 was (0.5%) primarily due to Texas state income tax expense, which is based primarily on gross margin.

The effective tax rate for the nine months ended October 31, 2012 was (1.7%) primarily due to Texas state income tax expense, which is based primarily on gross margin. During the fourth quarter of fiscal 2011 we established a valuation allowance. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we considered all available positive and negative evidence, including our ability to carry back operating losses to prior periods, projected future taxable income, tax planning strategies and the reversal of deferred tax liabilities. Based on this analysis, we determined, and we continue to believe, that it is more likely than not that our deferred tax assets will not be realized. As such, we evaluated and increased the valuation allowance to approximately $11.5 million at October 31, 2012. Our effective rate is significantly lower than statutory rates due to the valuation allowance. We will reassess the valuation allowance quarterly, and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.