13. VAT Tax Issue in Brazil

Please see footnote 10 of the Company’s Annual Report on Form 10-K for the year ended January 31, 2014 for a more detailed discussion.

The Bahia state tax auditors filed several claims for VAT taxes. The claims assert that the state VAT taxes are owed to the state of domicile of the ultimate importer/user and disregarded the fact that the VAT taxes had already been paid to the neighboring state.

Once the arrangement with the Bahia State Tax Department is completed, the formal judicial process could take from 5 to 10 years. The Company believes there is a strong likelihood that another amnesty would be offered by the state prior to such completion.

The Company has accepted amnesty for a smaller claim which will result in 8 monthly payments of about US $19,000 (R$ 42,000) which reflects abatement of 80% of penalty and interest. An accrual of US $153,000 has been charged to expense in Q4FY14 and US $82,000 (R$ 189,000) is included in Other Accrued Expenses on the consolidated balance sheet as of October 31, 2014.

In December 2013, the Company learned of a different VAT tax claimed by the State of Sao Paulo for a tax in the amount of approximately US $45,000 and the total claim including interest and penalty totaling approximately US $200,000. In July 2014 management settled this claim for an amount of US $75,000 (R$ 172,000) net present value which will be paid in 120 monthly installments of R$ 4,500 fixed with no interest or monetary depreciation. An amount of US $75,000 (R$ 172,000) has been charged to expense in Q2FY14.

A table summarizing all four different VAT claims remaining open and their status is listed below:

	Interest &				Approximate
Principl	Penalty		Total		for Totals
R$	R$		R$		US $		Loss Possibility	Strategy	Collateral
305,897		491,271		797,168	$	352,000	Remote	To await Judicial Process and negotiate judicial deposit	New Land
573,457		1,098,475		1,671,932		737,000	Remote	To await Judicial Process and negotiate judicial deposit	Plant
6,209,836		6,653,585		12,863,421		5,673,000	Probable	To await Judicial Process and negotiate judicial deposit	-
402,071		770,133		1,172,204		517,000	Remote	To await Judicial Process and negotiate judicial deposit	New Land
7,491,261		9,013,464		16,504,725	$	7,279,000

The R$ 6,209,836 for the larger VAT claim is intended to be paid into the next amnesty and as such is included on the condensed consolidated balance sheet as a long-term liability of US $3,361,774 as of October 31, 2014.