11. Income Taxes:

Income taxes are recorded in accordance with ASC Topic 740, which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing NOL and tax credit carry-forwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled, and are reflected in the consolidated financial statements in the period of enactment.

The components of income taxes are as follows:

	For the Fiscal Year Ended September 30,
	2013			2012			2011

Current provision (benefit):
Federal	$	432,211		$	46,792		$	183,527
State	(2,731		)	(9,476		)	(518		)

Total current provision	429,480			37,316			183,009

Deferred (benefit) provision:
Federal	(255,154		)	(2,435,049		)	—
State	(54,484		)	670			751

Total deferred (benefit) provision	(309,638		)	(2,434,379		)	751

Total current and deferred (benefit) provision	$	119,842		$	(2,397,063	)	$	183,760

Following is a reconciliation of the statutory federal rate to the Company’s effective income tax rate:

	For the Fiscal Year Ended September 30,
	2013		2012		2011

U.S. Federal statutory tax rate	34.0	%	34.0	%	34.0	%
State income taxes, net of federal benefit	(1.3	)%	6.5	%	(7.1	)%
Permanent items	(2.9	)%	(1.8	)%	(0.4	)%
Research and development tax credits	(27.4	)%	(3.6	)%	(27.5	)%
Valuation allowance	(0.8	)%	(433.5	)%	14.2	%
Change in unrecognized tax benefits	4.4	%	(13.5	)%	7.2	%

Effective income tax rate	6.0	%	(411.9	)%	20.4	%

On January 1, 2013, Congress enacted the American Taxpayer Relief Act of 2012 which retroactively reinstated and extended the Research and Development Tax Credit (“R&D Tax Credit”) from January 1, 2012 to December 31, 2013. The current year effective income tax rate reflects the benefit of the retroactive application of the R&D Tax Credit for nine months from the fiscal year ended September 30, 2012, plus a full year benefit for the fiscal year ended September 30, 2013 as required by ASC Topic 740.

In December of 2010, Congress enacted a two-year extension of the R&D Tax Credit, which retroactively reinstated and extended the R&D Tax Credit for amounts paid or incurred from January 1, 2010 to December 31, 2011. The Company recognized the entire impact of this retroactive extension in the quarter ended December 31, 2010, as required by ASC Topic 740. The Company’s effective tax rate for the year ended September 30, 2011 reflects the benefit of the R&D Tax Credit generated over the period January 1, 2010 through September 30, 2011. The amount reported above for the year ended September 30, 2012 reflects R&D Tax Credits generated from October 1, 2011 through December 31, 2011.

The deferred tax effect of temporary differences giving rise to the Company’s deferred tax assets and liabilities consists of the components below:

	As of September 30,
	2013						2012
	Current			Non Current			Current			Non Current
Deferred tax assets:
Reserves and accruals	$	1,657,601		$	196,312		$	1,514,711		$	240,390
Research and development credits	349,195			548,952			80,000			774,318
NOL carryforwards - state	1,600			1,246,615			—			1,236,554
Stock options	—			714,040			—			614,087
Depreciation	—			(626,063		)	—			(576,589		)
Other	—			4,023			—			6,304
	2,008,396			2,083,879			1,594,711			2,295,064

Less valuation allowance	(5,717		)	(1,432,881		)	(6,549		)	(1,448,177		)
Total net deferred tax assets	2,002,679			650,998			1,588,162			846,887

Deferred tax liabilities:
Depreciation	—			(132,202		)	—			(128,998		)

Total deferred tax liabilities	—			(132,202		)	—			(128,998		)

Net deferred tax asset	$	2,002,679		$	518,796		$	1,588,162		$	717,889

At September 30, 2013, the Company had state NOL carryforwards of $21.4 million, which begin to expire in varying amounts after the fiscal year ending September 30, 2026. In addition, the Company has federal R&D Tax Credit carryforwards of approximately $690,000, which begin to expire in varying amounts after fiscal year ending September 30, 2029, and state R&D Tax Credit carryforwards of $208,000 (net of federal impact), which begin to expire in varying amounts after the fiscal year ending September 30, 2023.

Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowances recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies which are both prudent and feasible. ASC Topic 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets.

At September 30, 2013, the balance of the deferred tax valuation allowance relates principally to NOL of certain state taxing jurisdictions. The valuation allowance decreased by $16,000 for the year ended September 30, 2013, primarily due to the partial reversal of state valuation allowances related to state NOL and other deferred tax assets, based on forecasts of future taxable income. In the event the Company were to determine that it would be able to realize additional state deferred tax assets in the future, an adjustment would be made to the valuation allowance which would reduce the provision for income taxes. The Company will continue to maintain the balance of the valuation allowance until an appropriate level of profitability is sustained to warrant a conclusion that it is no longer more likely than not that a portion of these net deferred tax assets will not be realized in future periods. There is currently no assurance of such future income before taxes. The Company believes that its estimate of future taxable income is inherently uncertain, and if its current or future operations generate losses, further adjustments to the valuation allowance are possible.

At September 30, 2012, the Company considered all available evidence, including the recent history of income before income taxes, together with projections of profitability in future periods. As a result of this analysis, the Company determined that the positive evidence, which related primarily to the recent history of income before income taxes, and projections of future profits, was sufficient to conclude that it was appropriate to reverse $2.4 million of valuation allowances previously recorded against its net federal deferred tax assets.

Following is a reconciliation of beginning and ending balances of total amounts of gross unrecognized tax benefits:

	For the Fiscal Year Ended September 30,
	2013			2012			2011
Balance at beginning of year	$	403,000		$	491,000		$	425,000
Unrecognized tax benefits related to prior years	—			—			—
Unrecognized tax benefits related to current year	120,000			12,000			67,000
Settlements	—			—			—
Decrease in unrecognized tax benefits due to the lapse of applicable statute of limitations	(31,000		)	(100,000		)	(1,000		)

Balance at end of year	$	492,000		$	403,000		$	491,000

The total liabilities associated with the unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate were $492,000, $403,000 and $491,000 at September 30, 2013, 2012 and 2011, respectively. It is not anticipated that the balance of unrecognized tax benefits at September 30, 2013 will change significantly over the next twelve months. The balance of unrecognized tax benefits as reflected in the table above at September 30, 2013 and 2012, are recorded on the balance sheet as a reduction to deferred tax assets, except for approximately $10,000 and $92,000 which are included in Other Liabilities at September 30, 2013 and 2012, respectively.

The Company’s policy is to recognize interest accrued and, if applicable, penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company has accrued approximately $1,000 and $4,000 for the payment of interest, net of tax benefits, at September 30, 2013 and 2012, respectively. There is no accrual recorded for penalties.

For the fiscal year ended September 30, 2013, 2012 and 2011, the Company recognized expense (benefit) of $(3,000), $(8,000) and $4,000, respectively, for interest (net of federal impact) within income tax expense.

The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of related tax laws and regulations and require significant judgment to apply. The Company’s federal income tax returns for the fiscal years ended September 30, 2011 and thereafter are open years subject to examination by the Internal Revenue Service (“IRS”). The Company files income tax returns in various state jurisdictions, as appropriate, with varying statutes of limitation. During fiscal year 2012, the IRS examined the Company’s income tax return for the year ended September 30, 2010, and no adjustments resulted from this examination. There are no state income tax examinations in process at this time.