13. Income Taxes

As of December 31, 2011 and 2010 the Company had approximately $8,100,000 and $4,200,000, respectively, of federal net operating loss carryovers (“NOLs”) that may be available to offset future taxable income. The federal net operating loss carry forwards, if not utilized, will expire from 2029 to 2031. As of December 31, 2011 and 2010, the Company had approximately $3,800,000 and $0 of state net operating loss carryovers available to offset future taxable income. The state NOLs, if not utilized, will expire beginning in 2032.

The Company files income tax returns in the U.S. federal jurisdiction and various local jurisdictions and is subject to examination by the various taxing authorities. The Company’s federal and local income tax returns for tax years beginning in 2008 remain subject to examination.

In accordance with Section 382 of the Internal Revenue code, the usage of the Company's net operating loss carryforward could be limited in the event of a change in ownership. Based upon a study that analyzed the Company's stock ownership activity from inception to December 31, 2011, a change of ownership was deemed to have occurred in 2010 and 2011. These changes of ownership created an annual limitation of approximately $1,000,000 on the usage of the Company's losses which are available through 2029.

The income tax benefit for the years ended December 31, 2011 and 2010 was as follows:

	2011			2010
Federal

Current	$	-			-
Deferred		(1,685,029	)		(451,420	)

State and local

Current		-			-
Deferred		(247,798	)		-

Change in valuation allowance		1,932,827			451,420

Total tax provision (benefit)		-			-

The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

		2011			2010

Deferred tax assets:
Operating loss carryforwards	$	2,954,459		$	1,460,277
Non-qualified stock options		164,841			-
Inventory reserves		58,500			-
Allowance for bad debt		252,993			40,800
Charitable contribution carryforward		4,306			2,382
Total deferred tax assets		3,435,099			1,503,459
Valuation allowance		(3,386,076)			(1,453,249	)
Deferred tax asset, net of valuation allowance		49,023			50,210

Deferred tax liabilities:
Property and Equipment		(49,023	)		(50,210	)
Total deferred tax liabilities		(49,023	)		(50,210	)

Net deferred tax asset (liability)	$	-		$	-

Change in valuation allowance	$	1,932,827		$	451,420

The Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation allowance is established. Based upon the history of losses, management believes that it is more likely than not that future benefits of deferred tax assets will not be realized.

For the years ended December 31, 2011 and 2010, the expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense (benefit) as follows:

	December 31,
	2011			2010
Tax expense (benefit) at statutory rate		(34.0	)%		(34.0	)%
State income taxes, net of Federal tax benefit		(5.0	)%		-	%
Non-deductible stock compensation		3.6	%		4.5	%
Write-off of deferred tax assets		-	%		11.2	%
Other permanent differences		1.6	%		6.1	%
Change in valuation allowance		33.8	%		12.2	%
Effective income tax rate		-	%		-	%