NOTE 11 — PROVISION FOR INCOME TAXES

The Company accounts for taxes in accordance with ASC 740, “Income Taxes”, which requires the recognition of tax benefits or expense on the temporary differences between the tax basis and book basis of its assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.

Tax years 2012 through 2015 remain open to examination by federal and state tax jurisdictions. The Company has various foreign subsidiaries for which tax years 2009 through 2015 remain open to examination in certain foreign tax jurisdictions.

The Company’s income tax expense for the year ended March 31, 2015 and the Company’s income tax benefit for the year ended March 31, 2014 both consist of federal, state and local taxes attributable to GCP, which does not file a consolidated income tax return with the Company, and foreign taxes. As of March 31, 2015, the Company had federal net operating loss carryforwards of approximately $80,200,000 for U.S. tax purposes, which expire through 2035, and foreign net operating loss carryforwards of approximately $19,900,000, which carry forward without limit of time. Utilization of the U.S. tax losses may be limited by the “change of ownership” rules as set forth in section 382 of the Internal Revenue Code.

The pre-tax income, on a financial statement basis, from foreign sources totaled $90,466 for the year ended March 31, 2015 and $168,233 for the year ended March 31, 2014.

The Company did not have any undistributed earnings from foreign subsidiaries at March 31, 2015 and 2014.

Income taxes consist of the following:

	Federal		State and Local		Total
March 31, 2015:
Current		608,589		382,232		990,821
Deferred		214,958		73,220		288,178
Total		823,547		455,452		1,278,999

March 31, 2014:
Current		—		31,068		31,068
Deferred		(550,482)		(71,000)		(621,482)
Total		(550,482)		(39,932)		(590,414)

For the year ended March 31, 2015 the Company incurred $19,501 in interest and penalties which has been included in general and administrative expense on the accompanying consolidated statements of operations.

The following table reconciles the effective income tax rate and the federal statutory rate of 34%.

	Years ended March 31,
	2015		2014
	%		%
Computed expected tax benefit, at 34%		(34.00)		(34.00)
Permanent items		3.10		0.80
Change in valuation allowance		78.30		5.80
Net change in fair value of warrant liability		0.00		25.20
Effect of foreign rate differential		1.80		0.50
Taxes included in minority interest		14.70		(0.30)
Intercompany profit		2.60		(0.50)
Other		3.50		3.10
State and local taxes, net of federal benefit		(11.70)		(7.46)

Income tax expense (benefit)		58.30		(6.86)

The Company revised its prior year presentation of the reconciliation of the effective income tax rate to conform to the current year presentation.

In connection with the investment in GCP, the Company recorded a deferred tax liability on the ascribed value of the acquired intangible assets of $2,222,222, increasing the value of the asset. The deferred tax liability is being reversed over the amortization period of the intangible asset (15 years). For the year ended March 31, 2015 the Company recognized $1,278,999 of income tax expense, net and for the year ended March 31, 2014, the Company recognized $590,414 of income tax benefit, net.

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below.

	March 31,
	2015		2014
Deferred income tax assets:
Foreign currency transactions	$	74,000	$	72,000
Accounts receivable		5,000		5,000
Inventory		518,000		304,000
Stock based compensation		2,440,000		2,125,000
Amortization of intangibles		—		206,000
Net operating loss carryforwards — U.S.		32,676,000		32,186,000
Net operating loss carryforwards — foreign		1,990,000		1,974,000
Other		2,000		2,000

Total gross assets		37,705,000		36,874,000
Less: Valuation allowance		(37,668,000)		(36,401,000)

Net deferred asset	$	37,000	$	473,000

Deferred income tax liability:
Intangible assets acquired in acquisition of subsidiary	$	(629,444)	$	(629,444)
Intangible assets acquired in investment in GCP		(740,708)		(888,863)

Net deferred income tax liability	$	(1,370,152)	$	(1,518,307)

In preparation of tax returns there was a true-up of March 31, 2014 net operating loss carryforwards - US by $2,520,000 that was offset by a change in the valuation allowance of $2,520,000.

Through March 31, 2013, the Company recorded a full valuation allowance against its deferred tax assets as it believed it was more likely than not that such deferred tax assets would not be realized. The Company released its deferred tax asset valuation allowance allocated to GCP as of March 31, 2014 due to management’s determination that it was “more likely than not” that the GCP’s deferred tax assets would be realized. “More likely than not” is defined as greater than 50% probability of occurrence. Management considered the guidance in paragraphs 21-23 of ASC 740-10-30 in forming its conclusion. A determination as to the ultimate realization of the deferred tax assets is dependent upon management’s judgment and evaluation of both positive and negative evidence, forecasts of future taxable income, applicable tax planning strategies, and an assessment of current and future economic and business conditions. In 2014, GCP was in a position of cumulative profitability on a pre-tax basis, considering its operating results for the three years ended March 31, 2014. Management concluded that this record of cumulative profitability in recent years, in addition to a long range forecast showing continued profitability for GCP, provided sufficient positive evidence that the net U.S. federal tax benefits more likely than not would be realized. Accordingly, in the year ended March 31, 2014, the Company released the valuation allowance against GCP’s net federal deferred assets, resulting in a $473,330 benefit in provision for income taxes for the year ended March 31, 2014. The Company recognized the $473,330 benefit in provision for income taxes as an expense for the year ended March 31, 2015. In addition, at March 31, 2014, the Company changed its estimate of the cumulative deferred tax asset allocated to the amortization of intangibles. The Company’s income tax benefit and effective tax rate for the years ended March 31, 2015 and 2014 reflect the impact of this valuation allowance reversal and change in estimate.

The valuation allowance for deferred tax assets as of March 31, 2015 and 2014 was approximately $37,668,000 and $36,401,000, respectively. The net change in the total valuation allowance for the years ended March 31, 2015 and 2014 was $1,267,000 and $258,000, respectively. The Company does not offset its deferred tax assets and liabilities because its deferred tax assets and liabilities are in different taxable entities which do not file consolidated returns.