Note 10 – Income Taxes

Income (loss) before the provision (benefit) for income taxes consists of the following:

		2013		2012
US	$	(8,675,878)	$	(4,014,238)
Foreign		(354,253)		(330,549)
Total	$	(9,030,131)	$	(4,344,787)

The provision (benefit) for income taxes in the accompanying consolidated financial statements consists of the following:

	2013		2012
Current
Federal	$	(216,275)	$	(374,432)
State		48,235		112,024
Foreign		(22,621)		65,318
	$	(190,661)	$	(197,090)

Deferred
Federal	$	-	$	200,313
State		-		59,351
Foreign		(112,299)		(103,598)
		(112,299)		156,066
Income tax expense (benefit)	$	(302,960)	$	(41,024)

A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:

	2013			2012
Tax due at statutory rate		34.00	%		34.00	%

State tax provision, net of federal		4.96	%		5.22	%
Valuation allowance		-35.28	%		-35.98	%
Permanent differences		-0.23	%		-0.86	%
Tax credits generated		0.28	%		0.50	%
Foreign rate differential and other		-0.38	%		-1.93	%
Total		3.35	%		0.95	%

The Company’s effective tax rate differs from the federal, statutory rate in 2013 and 2012 primarily due to a full valuation allowance on the U.S. deferred tax assets recorded during the year.

Net deferred tax assets (liabilities) consisted of the following at September 30, 2013:

	Domestic		Foreign		Worldwide

Credits	$	1,473,068	$	-	$	1,473,068
NOLs		243,400		36,447		279,847
Stock compensation		337,456		-		337,456
Accruals		541,362		-		541,362
Intangibles		2,564,415		-		2,564,415
Other		233,030		-		233,030
Gross deferred tax assets		5,392,731		36,447		5,429,178

Valuation allowance		(4,848,636)		-		(4,848,636)
Deferred tax assets, net		544,095		36,447		580,542

Depreciation		(544,095)		(70,858)		(614,953)
Intangibles		-		(98,360)		(98,360)
Gross deferred tax liabilities		(544,095)		(169,218)		(713,313)

Net deferred tax asset (liability)	$	-	$	(132,771)	$	(132,771)

Net deferred tax assets (liabilities) consisted of the following at September 30, 2012:

	Domestic		Foreign		Worldwide

Credits	$	1,362,543	$	-	$	1,362,543
NOLs		170,522		41,868		212,390
Stock compensation		170,362		-		170,362
Accruals		497,335		-		497,335
Intangibles		73,681		-		73,681
Other		205,154		-		205,154
Gross deferred tax assets		2,479,597		41,868		2,521,465

Valuation allowance		(1,700,949)		-		(1,700,949)
Deferred tax assets, net		778,648		41,868		820,516

Depreciation		(778,648)		(65,948)		(844,596)
Intangibles		-		(220,989)		(220,989)
Gross deferred tax liabilities		(778,648)		(286,937)		(1,065,585)

Net deferred tax asset (liability)	$	-	$	(245,069)	$	(245,069)

In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based upon the Company’s current losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against its U.S. net deferred tax assets.

As of September 30, 2013 and 2012, the Company has no federal net operating losses. As of September 30, 2013 and 2012 the Company has state net operating losses of $4.2 million and $2.7 million, respectively. The state net operating losses begin expiring in 2031. At September 30, 2013 and 2012, the Company has foreign net operating loss carryforwards of approximately $182,000 which can be carried forward indefinitely.

As of September 30, 2013 and 2012, the Company has federal research credits of $1.3 million and $1.2 million, respectively. The federal credits begin expiring in fiscal year 2028. As of September 30, 2013 and 2012, the Company has state research credits of $148,000 and $197,000, respectively. The state credits begin expiring in fiscal year 2023.

As of September 30, 2013 and 2012, the Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of September 30, 2013 and 2012, the Company has no accrued interest or penalties related to uncertain tax positions.

The Company is subject to taxation in the United States and the United Kingdom. At September 30, 2013, domestic tax years from fiscal 2010 through fiscal 2013 remain open to examination by the taxing authorities and tax years 2012 and 2013 remain open in the United Kingdom.