Income Taxes

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 7 - Income Taxes

 A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate of 34% for 2011 and 2010 compared to the Company’s income tax expense for the years ended December 31, 2011 and January 1, 2011 is as follows:

		2011		2010
Income tax expense (benefit) at statutory rate	$	(2,684,000)	$	(698,000)
(Increase) decrease resulting from:
State income taxes, net of federal tax effect		(382,000)		(93,000)
Nondeductible expenses		135,000		74,000
Change in effective tax rate		(26,000)		67,000
Change in valuation allowance		2,953,000		642,000
Other		4,000		8,000
	$	-	$	-

The deferred income tax assets and liabilities consisted of the following components as of December 31, 2011 and January 1, 2011:

		2011		2010
Deferred tax assets:
Net operating loss carryforward	$	4,757,000	$	2,920,000
Stock options and restricted stock		1,620,000		589,000
Inventory reserve		88,000		64,000
Allowance for doubtful accounts		4,000		7,000
Accrued expenses		86,000		36,000
Intangibles		63,000		66,000
Deferred rent		42,000		43,000
		6,660,000		3,725,000
Less valuation allowance		6,493,000		3,540,000
		167,000		185,000
Deferred tax liabilities:
Leasehold improvements and equipment		(129,000)		(148,000)
Prepaid expenses		(38,000)		(37,000)
		(167,000)		(185,000)
	$	-	$	-

The Company has tax net operating loss carryforwards available to offset future federal taxable income and future state taxable income of approximately $12,187,000 and $11,425,000, respectively which begin to expire in year ending December 31, 2023 and 2013, respectively. Under the Internal Revenue Code, certain ownership changes may subject the Company to annual limitations on the utilization of its net operating loss carryforward. The Company has determined that the stocks issued in the year 2010 created a change in control under the Internal Revenue Code Section 382. This limitation is not expected to be significant.