NOTE 5 - INCOME TAXES

The components of income tax expense (benefit) are as follows (in thousands):

	Year ended June 30,
	2013		2012			2011

Current
Federal	$	-	$	80		$	(1,161	)
State		15		8			(65	)
		15		88			(1,226	)

Deferred
Federal		-		1,038			(305	)
State		-		(3	)		15
		-		1,035			(290	)
	$	15	$	1,123		$	(1,516	)

The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2013, 2012 and 2011 is as follows:

	Year Ended June 30,
	2013			2012			2011

Statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net		(0.4	%)		0.0	%		1.0	%
Meals and entertainment		(0.5	%)		(0.5	%)		(0.4	%)
Section 199 deduction (1)		0.0	%		0.0	%		(1.3	%)
Return to provision differences and other		0.5	%		0.0	%		0.5	%
Effective rate before valuation allowance		33.6	%		33.5	%		33.8	%

Change in valuation allowance		(34.2	%)		(78.5	%)		0.0	%
Effective tax rate		(0.6	%)		(45.0	%)		33.8	%

(1) Section 199 refers to Internal Revenue Service deduction for Income Attributable to Manufacturing Activities

For the fiscal years ended June 30, 2013, 2012 and 2011, state income taxes relate to the Texas Franchise Tax and Georgia Income Tax. For the fiscal years ended June 30, 2012, 2011 and 2010, the Company evaluated the need for a valuation allowance on its deferred tax asset balances. Based on that evaluation, the Company determined as of June 30, 2011 that it was more likely than not that the Company would realize these deferred tax assets and as such that there was no valuation allowance provided. During the years ended June 30, 2013 and 2012, the Company recorded $0.9 million and $2.0 million to establish a deferred tax valuation allowance to fully reserve net deferred tax assets. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence including losses over eleven of the past twelve quarters, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under generally accepted accounting principles, the valuation allowance has been recorded to reduce our deferred tax asset to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.

At June 30, 2013 and 2012, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands):

	June 30,
	2013			2012
Deferred tax assets relating to:
Stock compensation	$	695		$	583
AMT and research and development credits		397			397
Deferred rent		106			145
Inventory		81			119
Professional fees		106			72
Accrued vacation		21			21
Accounts receivable allowance		9			9
Contribution carryovers		4			3
Net operating loss carryforwards		2,076			1,215
Total deferred tax assets		3,495			2,564

Deferred tax liablities related to depreciation differences		(611	)		(603	)

Net deferred tax assets before valuation allowance		2,884			1,961

Valuation allowance		(2,884	)		(1,961	)
Net deferred tax assets	$	-		$	-

During the year ended June 30, 2013, the net deferred tax asset increased $0.9 million which was fully offset by a valuation allowance. The increase was primarily due to the generation of additional net operating loss carryforwards during the year.

During the years ended June 30, 2013 and 2012, the Company did not utilize any net operating loss carryforwards for income tax purposes. During the years ended June 30, 2013, 2012 and 2011 $0.0 million, $0.1 million and $1.0 million respectively, of benefit was recorded to additional paid in capital which related to excess tax deductions for stock-based compensation accounted for in accordance with the FASB’s guidance.

At June 30, 2013, the Company had net operating loss carryforwards of $6.0 million which will expire, if unused, between June 30, 2031 and June 30, 2033. At June 30, 2013, the Company had various tax credit carryforwards of $0.4 million, of which $0.2 million will expire June 30, 2031 and $0.2 which may be carried forward indefinitely.