INCOME TAXES

12 Months Ended

Feb. 29, 2024

INCOME TAXES

INCOME TAXES

9. INCOME TAXES

The Company incurred a deferred tax benefit due to the release of the valuation allowance for the tax year ended February 29, 2024. The release was based on the Company expecting to be profitable such that all its historical net operating losses would be used up before any expiration.

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for fiscal year ended February 29, 2024, and February 28, 2023, is as follows:  

	2024					2023
Net Income/(Loss) Before Taxes	$	2,777,000				$	826,000
Provision/(Benefit) at statutory rate		583,000		21.0	%		173,000		21.0	%
State Tax Provision/(Benefit) net of federal benefit		28,000		1.0	%		55,000		6.7	%
Permanent Book/Tax Differences		16,000		0.6	%		-		0.0	%
Change in Valuation Allowance		(3,193,000	)	-115.0	%		(166,000	)	-20.1	%
R&D Credit		-		0.0	%		(50,000	)	-6.1	%
True-Up & Adjustments		-		0.0	%		(12,000	)	-1.5	%
Bargain purchase price - MEI acquisition		(458,000	)	0.0	%		-		0.0	%
Income Tax Provision / (Benefit)		(3,024,000	)				-
Effective income tax rate		-108.87	%				0.00	%

Total net deferred taxes are comprised of the following at February 29, 2024 and February 28, 2023:

Deferred Tax Asset (Liability):	2024			2023
Accrued Liabilities	$	79,000		$	59,000
Inventory Allowance		1,212,000			1,198,000
Allowance for Sales Reserve		119,000			119,000
Net Operating Loss Carryforwards		2,086,000			2,577,000
Other		1,000			8,000
Capitalized R&D		70,000			119,000
R&D Credit Carryforward		50,000			-
Unrealized Gains		(82,000	)		(229,000	)
MEI accrual to cash		(140,000	)		-
Inventory FMV adjustment		(7,000	)		-
Net book value of intangible assets		(792,000	)		-
Prepaid expenses		(41,000	)		-
Net Book Value of Fixed Assets		(718,000	)		(658,000	)
Total Deferred Tax Assets (Liabilities)		1,837,000			3,193,000
Valuation allowance		-			(3,193,000	)
	$	1,837,000			-

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 no valuation allowance is necessary since the deferred tax asset is more likely than not to be realized for the year ended February 29, 2024, whereas a valuation allowance of $3,193,000 for the year ended on February 28, 2023 was 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 29, 2024, the Company estimates it has approximately $8.7 million of Federal and $5.7 million of state net operating loss (“NOL”) carryforwards as compared to $10.7 million of Federal and $7.8 million of state net operating loss carryforwards as of February 28, 2023.  The remaining balance of federal NOL carryforwards will begin to expire in 2029.  Such net operating losses are available to offset future taxable income, if any. In management’s opinion, as of February 29, 2024, the utilization of such net operating losses for tax purposes is more likely than not, therefore the deferred tax asset has no valuation allowance as of February 29, 2024.  

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	$	4,985,000
2037		322,000
indefinite		3,405,000
Total	$	8,712,000