INCOME TAXES

12 Months Ended

Feb. 29, 2012

Notes to Financial Statements

INCOME TAXES

NOTE 9:   INCOME TAXES

Income tax expense (benefit) consists of the following:

	Current		Deferred			Total
Year ended February 29, 2012:
U.S. federal	$	—		143,269			143,269
State		70,861		25,283			96,144
Total income tax expense (benefit)	$	70,861		168,552			239,413
Year ended February 28, 2011:
U.S. federal	$	—		(586,693	)		(586,693	)
State		130,665		(108,140	)		22,525
Total income tax expense (benefit)	$	130,665		(694,833	)		(564,168	)

The income tax provision differs from the expected amount of income tax expense determined by applying a combined U.S. federal and state income tax rate of 39% to pretax income for the years ended February 29, 2012 and February 28, 2011 as follows:

	2012		2011
Expected tax expense	$	170,585	$	451,463
Permanent differences		6,276		19,199
True up of state tax payable		62,552		--
Change in valuation allowance		--		(1,034,830	)
Income tax expense (benefit)	$	239,413	$	(564,168	)

Deferred tax assets are as follows:

	February 29, 2012			February 28, 2011
Deferred tax assets:
NOL carryforwards	$	722,140		$	966,293
Allowance for doubtful accounts		-			3,781
Inventory reserves		3,073			105,675
Depreciation		(12,972	)		(15,805	)
Accrued expenses		13,157			38,381
Stock compensation		177,650			29,479
Legal claim		62,552			-
State taxes		-			44,426
Other		43,826			5,748
Valuation allowance		(483,145	)		(483,145	)
Net deferred tax asset	$	526,281		$	694,833

Prior to the fiscal year ended February 28, 2010, the Company had a history of losses and accumulated significant net operating loss carryforwards (NOL’s). Due to the uncertainty of the Company’s ability to utilize these NOL’s, a full valuation allowance was provided against deferred tax assets as of February 28, 2010.  For the years ended February 29, 2012 and February 28, 2011, the Company achieved pretax income and was able to utilize U.S. federal NOL carryforwards of approximately $700,000 and $1.4 million, respectively.  As the Company now has reported pretax income in the last three years and anticipates continued profitability in the future, there is currently a more optimistic outlook as to whether the Company will be able to utilize the NOL’s before expiration. As a result, the Company reversed a portion of the valuation allowance, resulting in recognition of a tax benefit of approximately $564,000 for the year ended February 28, 2011.  As of February 29, 2012, the Company has approximately $1.6 million and $2.8 million of remaining NOL carryforwards for federal and state purposes, respectively, which expire in various years through 2027.  Based upon the level of historical taxable income and projections for future taxable income over the periods in which the items underlying the Company’s deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at February 28, 2012. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced.

The Company includes interest and penalties, if any, arising from the underpayment of income taxes in the consolidated statements of income in the provision for income taxes. As of February 28, 2012 and 2011, the Company had no accrued interest or penalties related to uncertain tax positions. The tax years that remain subject to examination by major taxing jurisdictions are fiscal years 2008 through 2011 for federal purposes and fiscal years 2007 through 2011 for state purposes.