8. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. Pursuant to applicable statutes of limitation, returns open for adjustment by the Internal Revenue Service (“IRS”) are the consolidated federal income tax returns for tax years ended December 31, 2007 through December 31, 2010. However, material amounts of net operating loss (“NOL”) carryforwards exist at the consolidated level, originating from the 1997 – 2000 and 2002 – 2005 tax years. These NOL carryforwards were fully utilized in 2009. Although the tax returns from the years of NOL origination prior to 2004 are not generally within the statute of limitations of the Internal Revenue Code, their use in 2009 will open the returns to audit exposure, specifically verification of the returns generating said NOLs. As such, the Company’s open years for consolidated federal returns are the tax years ended December 31, 1997 through December 31, 2010. This same range also represents the vast majority of open years for state returns. The IRS previously examined the Company’s 2008 federal income tax return, which resulted in no change to the Company’s tax return. The Company was recently notified by the Internal Revenue Service that it intends to examine the Company’s 2010 federal income tax return.

A number of years may elapse before an uncertain tax position is audited and finally resolved. Settlement of any particular position would usually require the use of cash. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The Company has determined that there are no material uncertain tax positions and accordingly no associated interest and penalties are required to be accrued at December 31, 2011 and 2010, respectively.

Reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:

	December 31,
	2011			2010			2009
Taxes computed at federal tax rate	$	(5,024,711	)	$	(4,681,871	)	$	2,968,219
State income taxes, net of federal income tax benefit, excluding change in valuation allowance		(276,877	)		(236,609	)		53,372
Non-taxable income		(6,262	)		(27,200	)		(17,000	)
Meals and entertainment		5,673			6,470			6,630
Incentive stock options		(34,371	)		83,192			51,682
Other tax assets		556,051			(75,054	)		(226,837	)
Change in valuation allowance – state		404,223			943,998			-
Change in valuation allowance - federal		4,428,852			5,408,314			-
Income tax expense	$	52,578		$	1,421,240		$	2,836,066

The provision for income taxes charged to operations for the years ended December 31, 2011, 2010 and 2009, consists of the following:

	December 31,
	2011		2010			2009
Current tax expense (benefit)	$	-	$	(1,629,690	)	$	1,318,445
Deferred tax expense		52,578		3,050,930			1,517,621
Income tax expense	$	52,578	$	1,421,240		$	2,836,066

The tax effects of temporary differences that give rise to significant components of deferred tax assets at December 31, 2011 and 2010 are presented below:

	December 31,
	2011			2010
Deferred tax assets:
Net operating loss carryforward	$	8,930,293		$	2,643,774
Inventory		375,274			364,597
Accrued compensation		392,690			144,040
Stock-based compensation		4,152,772			4,453,272
Accrued expenses		174,327			2,137,237
Deferred revenue and reserves		790,959			871,218
		14,816,315			10,614,138
Deferred tax liability:
Depreciation and amortization		(4,204,895	)		(4,783,215	)

Valuation allowance - state		(1,348,221	)		(943,998	)
Valuation allowance - federal		(9,837,166	)		(5,408,314	)
Deferred tax asset (liability), net	$	(573,967	)	$	(521,389	)

The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets as follows:

	December 31,
	2011		2010
Deferred tax asset, net
Current assets	$	-	$
Noncurrent assets		-
	$	-	$	-
Deferred tax liability, net
Noncurrent liability	$	573,967	$	521,389

The Company evaluates its deferred tax assets on a regular basis to determine if valuation allowances are required. In its evaluation, the Company considers taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences and the available tax planning strategies that could be implemented, if required. Valuation allowances are established based on the consideration of all available evidence using a more likely than not standard. Based on the Company’s evaluation, a valuation allowance of $11,185,387 was established against its net deferred tax assets as of December 31, 2011. The Company’s deferred tax assets for which it has not established a valuation allowance relate to amounts than can be realized through future reversals of existing taxable temporary differences. The Company’s valuation allowance will be reversed if and when it becomes more likely than not that the Company can generate sufficient taxable income in the future to utilize the tax benefits of the related deferred tax assets. The noncurrent deferred tax liability of $573,967 relates to the excess book basis over tax basis of our goodwill. Because goodwill has an indefinite life, the reversal of the book basis over tax basis is not considered a source of taxable income to support the realization of the Company’s deferred tax assets. Subsequent revisions to the estimated net realizable value of the deferred tax asset or deferred tax liability could cause the provision for income taxes to vary significantly from period to period.

As of December 31, 2011, the Company had unused federal NOL carryforwards of approximately $24,500,000, which were generated during the year ended December 31, 2011 and 2010. As of December 31, 2011, the Company had Florida and North Carolina NOL carryforwards of approximately $7,700,000 and $6,700,000, respectively. The state NOL carryforwards, if not utilized, expire beginning December 2023.

For the years ended December 31, 2011 and 2010, employees exercised incentive stock options and sold the stock in disqualifying dispositions. For the year ended December 31, 2010 a portion of the tax benefit associated with the sale of the stock has been recognized as an income tax benefit. Generally, incentive stock options provide employees with significant tax benefits by allowing the employee to exercise stock options without being taxed on the intrinsic value on the exercise date provided the employee owns the stock for specified periods of time. Since the employer will not receive a tax benefit upon the exercise of incentive stock options, unless there is a disqualifying disposition, the compensation expense associated with incentive stock options is treated as a permanent difference between book and tax accounting and consequently affects the effective tax rate of the Company. For the year ended December 31, 2010, the disqualifying disposition of incentive stock options resulted in a related tax benefit of $583,290, which has been recorded as a reduction in income taxes payable and an increase in additional paid-in capital in the accompanying consolidated balance sheet; there were no tax benefits related to disqualifying disposition of incentive stock options during the year ended December 31, 2011.