INCOME TAXES

12 Months Ended

Feb. 28, 2022

INCOME TAXES

INCOME TAXES

7. INCOME TAXES

The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended February 28, 2022, and February 28, 2021.

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for fiscal year ended February 28, 2022, and February 28, 2021, is as follows:

	2022					2021
Net Income/(Loss) Before Taxes	$	3,508,000				$	1,381,000
Provision/(Benefit) at statutory rate		737,000		21.0	%		290,000		21.0	%
State Tax Provision/(Benefit) net of federal benefit		56,000		1.6	%		50,000		3.6	%
Permanent Book/Tax Differences		(170,000	)	-4.8	%		-		0.0	%
Change in Valuation Allowance		(623,000	)	-17.8	%		(340,000	)	-24.6	%
True-Up & Adjustments		-		-0.0	%		-		0.0	%
Other		-		0.0	%		-		0.0	%
Income Tax Provision / (Benefit)	$	-				$	-
Effective income tax rate		0.00	%				0.00	%

Total net deferred taxes are comprised of the following at February 28, 2022 and February 28, 2021:

Deferred Tax Asset (Liability):	2022			2021
Accrued Liabilities	$	49,000		$	57,000
Inventory Allowance		1,363,000			1,406,000
Section 263A Capitalized Costs		-			54,000
Net Operating Loss Carryforwards		2,065,000			2,456,000
Other		14,000			15,000
Depreciation		(132,000	)		(6,000	)
Total Deferred Tax Assets (Liabilities)		3,359,000			3,982,000
Valuation allowance		(3,359,000	)		(3,982,000	)
	$	-		$	-

A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $3,359,000 and $3,982,000 for the years ended on February 28, 2022 and February 28, 2021 respectively, is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. Certain provisions of the CARES Act could impact the 2019 income tax provision computations of the Company and will be reflected in the period of enactment (tax year 2020). The CARES Act, among other things, contains modifications on the limitation of business interest expense under Section 163(j), allow for NOL carryovers and carrybacks to offset 100% of taxable income for taxable years before 2021, and includes a technical correction to the TCJA with respect to Qualified Improvement Property ("QIP") where such property has a 15-year recovery period for purposes of the general depreciation system of Section 168(a). The Company has evaluated the impact of the CARES Act, and it believes that none of the modifications or tax law changes will result in any material benefit.

As of February 28, 2022, the Company estimates it has approximately $9.1 million of Federal and $6.2 million of state net operating loss (“NOL”) carryforwards as compared to $10.1 million of Federal and $9.3 million of state net operating loss carryforwards as of February 28, 2021. Of the Federal NOL carryforwards, in fiscal 2022 we utilized the amounts that were scheduled to expire in 2022 and 2023. The remaining balance will begin to expire in 2029. Such net operating losses are available to offset future taxable income, if any. As the utilization of such net operating losses for tax purposes is not assured, the deferred tax asset has been fully reserved through the recording of a 100% valuation allowance.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that could be used annually in the future to offset taxable income. A formal Section 382 study has not been completed to determine if an ownership change has occurred and if its net operating losses are subject to an annual limitation. Such annual limitations could affect the utilization of NOL and tax credit carryforwards in the future.              

The Federal net operating loss carryforwards will expire as follows:        

Fiscal Year Ending February 28/29	Amount
2029		7,514,000
2037		322,000
indefinite		1,254,000
Total	$	9,090,000