NOTE 11 - INCOME TAXES

The Company is subject to United States of America (“United States” or “US”) and People's Republic of China (“China” or “PRC”) income tax on any profit generated, if any.

Income (loss) before provision for income taxes consisted of:

	2014			2013
United States	$	(10,515	)	$	(7,759	)
China		(13,557	)		(14,244	)
	$	(24,072	)	$	(22,003	)

Provision for income taxes consisted of:

	2014		2013
Current provision:
US	$	-	$	-
China		-		-
Total current provision		-		-

Deferred provision (benefit):
US		-		-
China		301		(54	)
Total Deferred provision (benefit)		301		(54	)
Total provision (benefit ) for income taxes	$	301	$	(54	)

United States

The Company is incorporated in the United States of America and is subject to United States federal taxation. The Company has no taxable income for the year so did not incur income taxes. The applicable income tax rate for the Company for both years ended December 31, 2014 and 2013 was 34%.

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2014 and 2013 is presented below:

	December 31,
		2014		2013
Net operating loss carryovers - US	$	51,415		$	49,824

Temporary differences, including
Stock based compensation		(6,532	)		(6,456	)
Fixed assets, due to differences in depreciation		(288	)		(288	)
Non-qualified options and warrants		(6,728	)		(6,728	)
Reserves on investments		(2,069	)		(2,026	)
Intangible assets, due to impairment		(2,002	)		(99	)
R&D credit		138			138
Amortization of debt discount		(1,865	)		(1,691	)

Total gross deferred tax assets - US	$	32,069		$	32,674
Valuation allowance - US		(32,069	)		(32,674	)
Net deferred tax assets	$	-		$	-

The net change in the valuation allowances for the years ended December 31, 2014 and 2013 were a decrease of $0.6 million and an increase of $1.1 million, respectively. Because there is uncertainty regarding the Company's ability to realize its deferred tax assets, a 100% valuation allowance has been established.

As of December 31, 2014, the Company had net operating loss carry forwards of approximately $151 million, in US tax Jurisdiction which expires in the years 2015 through 2030.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized for the years ended December 31, 2014 and 2013. The federal tax returns of 2010, 2011, 2012 and 2013 remain subject to examination. And the state tax returns from 2008 to 2013 remain subject to examination.

PRC

Effective January 1, 2008, the PRC Enterprise Income Tax Law, EIT Law, and Implementing Rules impose unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in PRC, unless they qualify under certain limited exceptions. As such, the Company's subsidiary in PRC is subject to an enterprise income tax rate of 25%. No provision for income taxes has been made as the Company has no taxable income for the periods.

The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets at December 31, 2014 and 2013 is presented below (in thousand):

	December 31,
	2014			2013
Deferred tax assets - PRC:
Property and equipment,
due to differences in depreciation	$	447		$	303
Inventories, due to impairment		427			236
Accrued liabilities		597			217
Net operating loss Carry forward		8,223			7,395
Total deferred tax assets, gross - PRC		9,694			8,151
Valuation allowance - PRC		(9,694	)		(7,848	)
Deferred tax assets, net of valuation allowance		-			303
Less: current portion - PRC		-			-
Non-current portion - PRC	$	-		$	303

The non-current portion of deferred tax assets were included in the “Deposits and other assets” on the accompanying consolidated balance sheets.

The net change in the valuation allowances for the years ended December 31, 2014 and 2013 was .an increase of $1.8 million and $1.8 million, respectively.

As of December 31, 2014, the Company had net operating loss carry forwards of approximately of $32.9 million in PRC tax Jurisdiction, which expires in the years 2015 through 2019.

The following table reconciled the U.S. and PRC statutory rates to the Company's effective rate for the years ended December 31, 2014 and 2013.

	December 31,
	2014			2013
U.S. statutory rate		34.0	%		34.0	%
U.S. permanent differences		-34.0	%		-34.0	%
China income tax rate		25.0	%		25.0	%
Changes in DTA valuation allowance		-25.2	%		-25.2	%

Effective tax rate		-0.2	%		-0.2	%