NOTE 5 - INCOME TAXES

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

	Year ended June 30,
	2014		2013		2012

Current
Federal	$	13	$	-	$	80
State		20		15		8
		33		15		88

Deferred
Federal		-		-		1,038
State		-		-		(3	)
		-		-		1,035
	$	33	$	15	$	1,123

The reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended June 30, 2014, 2013 and 2012 is as follows:

	Year Ended June 30,
	2014			2013			2012

Statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net		(6.9	%)		(0.4	%)		0.0	%
Meals and entertainment		1.2	%		(0.5	%)		(0.5	%)
Prior year adjustments and other		(4.0	%)		0.5	%		0.0	%
Effective rate before valuation allowance		24.3	%		33.6	%		33.5	%

Change in valuation allowance		(21.0	%)		(34.2	%)		(78.5	%)
Effective tax rate		3.3	%		(0.6	%)		(45.0	%)

For fiscal year ended June 30, 2014 and 2013, state income taxes relate to the Texas Franchise Tax and state taxes in other multiple states. For the fiscal year ended June 30, 2012, state income taxes relate to the Texas Franchise Tax and Georgia Income Tax. During the years ended June 30, 2013 and 2012, the Company recorded $0.9 million and $2.0 million, respectively, to establish a deferred tax valuation allowance to fully reserve net deferred tax assets. During the year ended June 30, 2014, the Company recorded $0.2 million release of the deferred tax valuation allowance due to taxable income generated. 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 eight 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 assets 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, 2014 and 2013, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands):

	June 30,
	2014			2013
Deferred tax assets relating to:
Stock compensation	$	834		$	695
AMT and research and development credits		410			397
Deferred rent		23			106
Inventory		58			81
Professional fees		51			106
Accrued vacation		23			21
Accounts receivable allowance		8			9
Contribution carryovers		14			4
Net operating loss carryforwards		1,751			2,076
Total deferred tax assets		3,172			3,495

Deferred tax liablities related to depreciation differences		(487	)		(611	)

Net deferred tax assets before valuation allowance		2,685			2,884

Valuation allowance		(2,685	)		(2,884	)
Net deferred tax assets	$	-		$	-

During the year ended June 30, 2014, net deferred tax assets decreased $0.2 million which was fully offset by release of a portion of the valuation allowance. The decrease was primarily due to the use of tax loss carryforwards for the year ended June 30, 2014.

During the year ended June 30, 2014, the Company utilized net operating loss carryforwards for income tax purposes of approximately $1.0 million which had previously been fully offset by a deferred tax valuation allowance in the prior year. During the year ended June 30, 2013, the Company did not utilize any net operating loss carryforwards for income tax purposes.

At June 30, 2014, the Company had net operating loss carryforwards of $5.0 million which will expire, if unused, between June 30, 2031 and June 30, 2033. At June 30, 2014, the Company had various tax credit carryforwards of $0.4 million, of which $0.2 million will expire by June 30, 2031 and $0.2 million which may be carried forward indefinitely.