Annual report pursuant to Section 13 and 15(d)

15. Income Taxes

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15. Income Taxes
12 Months Ended
Mar. 31, 2016
Income Tax Disclosure [Abstract]  
Income Taxes

The Company has the following net deferred tax assets:

 

    March 31,  
    2016     2015  
Deferred tax assets:                
Net operating loss carryforwards   $ 36,454,000     $ 36,661,000  
Research and development tax credit carryforwards     1,710,000       1,667,000  
Stock-based compensation     5,083,000       4,880,000  
Reserves and accruals     1,111,000       1,731,000  
Other deferred tax assets     241,000       49,000  
State income taxes     (1,000 )     (1,000 )
Basis difference in assets     8,000       5,000  
Total deferred tax assets   $ 44,606,000     $ 44,992,000  
Deferred tax liabilities:                
Unrealized gain on Ruthigen           (1,105,000 )
Net deferred tax asset     44,606,000       43,887,000  
Valuation allowance     (44,606,000 )     (43,887,000 )
Net deferred tax asset   $     $  

 

The Company’s recorded income tax expense, net of the change in the valuation allowance, for each of the periods presented is as follows:

 

    Years Ended March 31,  
    2016     2015  
Income tax (benefit)   $ (719,000 )   $ (2,613,000 )
Change in valuation allowance     719,000       2,613,000  
Net income tax expense   $     $  

 

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

 

    Years Ended March 31,  
    2016     2015  
Expected federal statutory rate     (34.0% )     (34.0% )
State income taxes, net of federal benefit     (1.8% )     (1.8% )
Research and development credit     (0.4% )     (0.2% )
Foreign earnings taxed at different rates     0.7%       0.5%  
Effect of state net operating loss expiration     5.5%      
Effect of permanent differences     (3.3% )     (20.6% )
Impact of foreign exchange rate fluctuations on foreign deferred income taxes     8.5%       25.0%  
Impact of change in foreign net operating loss     6.3%       (9.6% )
Cancellation of stock options and other true-ups     0.0%     (2.7% )
Adjustment of NOL due to Ruthigen deconsolidation     0.0%       8.6%  
True-up of state deferred assets     11.4%       3.0%  
      (7.1% )     (31.8% )
Change in valuation allowance     7.1%       31.8%  
Totals     0.0%       0.0%  

 

At March 31, 2016, the Company had net operating loss carryforwards for federal, state and foreign income tax purposes of approximately $92,883,000, $42,588,000 and $11,666,000, respectively. The federal net operating loss carryforwards will expire at various dates, if not utilized, beginning in the fiscal year ending March 31, 2021. The state net operating loss carryforwards will expire at various dates, if not utilized, beginning in the fiscal year ending March 31, 2018. The foreign net operating loss carryforwards will expire at various dates, if not utilized, beginning in the fiscal year ending March 31, 2018. The Company also had, at March 31, 2016, federal and state research credit carryforwards of approximately $870,000 and $790,000, respectively. The federal credits will expire, if not utilized at various dates, beginning in the fiscal year ending March 31, 2026, and the state credits do not expire. The Company also had, at March 31, 2016 foreign tax credits carryforwards of approximately $50,000. The foreign credits will expire, if not utilized at various dates, beginning in the fiscal year ending March 31, 2024.

 

The Company has completed a study to assess whether a change in control has occurred or whether there have been multiple changes of control since the Company’s formation through March 31, 2016. The Company determined, based on the results of the study, no change in control occurred for purposes of Internal Revenue Code section 382. The Company, after considering all available evidence, fully reserved for these and its other deferred tax assets since it is more likely than not such benefits will not be realized in future periods. The Company has incurred losses for both financial reporting and income tax purposes for the year ended March 31, 2016. Accordingly, the Company is continuing to fully reserve for its deferred tax assets. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly.

 

As a result of certain realization requirements of Accounting Standards Codification Topic 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at March 31, 2016 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting purposes. Equity will be increased by approximately $533,000 if and when such deferred tax assets are ultimately realized. 

 

The Company only recognizes tax benefits from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. To date, the Company has not recognized such tax benefits in its consolidated financial statements.

 

The Company has identified its federal tax return and its state tax return in California as major tax jurisdictions. The Company also filed tax returns in foreign jurisdictions, principally Mexico and The Netherlands. The Company’s evaluation of uncertain tax matters was performed for tax years ended through March 31, 2016. Generally, the Company is subject to audit for the years ended March 31, 2015, 2014 and 2013 and may be subject to audit for amounts relating to net operating loss carryforwards generated in periods prior to March 31, 2015. The Company has elected to retain its existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continues to reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of its income tax provision or benefit as well as its outstanding income tax assets and liabilities. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments.

 

The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease within 12 months of March 31, 2016. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.