Quarterly report pursuant to Section 13 or 15(d)

Note 9 - Income Taxes

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Note 9 - Income Taxes
 9 Months Ended
Jun. 30, 2011
Income Tax Disclosure [Text Block]
NOTE 9 – Income Taxes

The Company accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of its assets and liabilities, and for net operating loss and tax credit carryforwards.

The Company completes a detailed analysis of its deferred income tax valuation allowances on an annual basis or more frequently if information comes to our attention that would indicate that a revision to its estimates is necessary.  In evaluating the Company’s ability to realize its deferred tax assets, management considers all available positive and negative evidence on a country by country basis, including past operating results and forecast of future taxable income.  In determining future taxable income, management makes assumptions to forecast U.S. federal and state, U.K. and Malaysia operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies.   These assumptions require significant judgment regarding the forecasts of the future taxable income in each tax jurisdiction, and are consistent with the forecasts used to manage the Company’s business.   It should be noted that through 2005, the Company realized significant losses on a consolidated basis.  The Company has a history of taxable income for three consecutive years in the U.S. and two of the past three years in the U.K., which was used to determine the amount of time the Company can reasonably expect to generate taxable income in the future.  In management’s analysis to determine the amount of the deferred tax asset to recognize, management projected future taxable income for the subsequent three years for each tax jurisdiction.

As of June 30, 2011, the Company had federal and state net operating loss carryforwards of approximately $34,512,000 and $27,817,000, respectively, for income tax purposes expiring in years 2011 to 2029.  The Company’s U.K. subsidiary, The Female Health Company-UK, plc has U.K. net operating loss carryforwards of approximately $69,089,000 as of June 30, 2011, which can be carried forward indefinitely to be used to offset future U.K. taxable income.  The Company’s Malaysian subsidiary, The Female Health Company (M) SDN.BHD, has net operating loss carryforwards of approximately $125,000 as of June 30, 2011, which can be carried forward indefinitely to be used to offset future Malaysian taxable income.  With the increasing demand for and profitability of the FC2 female condom, the Company expects utilization of its net operating losses in both the U.K. and the U.S. will continue.  However, because some of the U.S. Federal tax losses have a net loss carryforward limitation of fifteen years, it is possible that some of the Company’s early losses carried forward in the U.S. will not be fully utilized.  The U.K. net operating losses do not expire.  The losses incurred in Malaysia are related to the recent start-up and are expected to be utilized over the next several years.

A reconciliation of income tax expense (benefit) and the amount computed by applying the statutory Federal income tax rate to income before income taxes for the three and nine months ended June 30, 2011 and 2010 is as follows:

 
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Income tax expense at statutory rates
  $ 147,000     $ 16,000     $ 309,000     $ 426,000  
State income tax, net of federal benefits
    27,000       2,000       57,000       66,000  
Effect of AMT expense
    -       (34,140 )     -       8,860  
Non-deductible expenses
    1,000       1,000       2,000       3,000  
Effect of foreign income tax
    (33,000 )     7,787       (179,000 )     23,071  
Utilization of NOL carryforwards
    (67,420 )     (22,000 )     (364,725 )     (728,000 )
Increase (decrease)  in valuation allowance
    (59,314 )     3,000       199,991       233,000  
Income tax expense (benefit)
  $ 15,266     $ (26,353 )   $ 24,266     $ 31,931