6.           Income Taxes

The difference between the statutory federal income tax rate on the Company’s pre-tax loss and the Company’s effective income tax rate is summarized as follows:

 

Significant components of the Company’s deferred tax assets as of October 31, 2013 and 2012 are shown below.  In determining whether the deferred tax assets will be realized, the Company considered numerous factors, including historical profitability, estimated future taxable income and the industry in which it operates.  As of October 31, 2013 and 2012, a valuation allowance was recorded to fully offset the net deferred tax assets, as it was determined by management that the realization of the net deferred tax assets were not likely to occur in the foreseeable future.  The valuation allowance increased $115,939 during the fiscal year ended October 31, 2013, attributable primarily to the Company’s continuing operating losses for the fiscal year ended October 31, 2013 and the Company’s belief that its remaining net operating losses would not be realized.

 

The tax effects of temporary differences and net operating loss carryforwards that give rise to deferred taxes consist of the following:

 

As of October 31, 2013, the Company had federal and state operating losses of approximately $16,568,000 and $3,142,000, respectively.  The federal operating losses expire in the years 2022 through 2033 and the state operating losses expire in the years 2015 through 2033.

 

Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and similar state provisions.  The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred.  The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change.

The Company’s fiscal 2011, 2012 and 2013 federal and state income tax returns are open for examination by the applicable governmental authorities.