Annual report pursuant to Section 13 and 15(d)

Note 6 - Income Taxes

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Note 6 - Income Taxes
 12 Months Ended
Sep. 30, 2012
Income Tax Disclosure [Text Block]
Note 6.        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 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 the Company realized significant losses through 2005 on a consolidated basis. Since fiscal year 2006, the Company has consistently generated taxable income on a consolidated basis, providing a reasonable future period in which the Company can reasonably expect to generate taxable income. In management’s analysis to determine the amount of the deferred tax asset to recognize, management projected future taxable income for the subsequent six years for each tax jurisdiction.

Although management uses the best information available, it is reasonably possible that the estimates used by the Company will be materially different from the actual results. These differences could have a material effect on the Company's future results of operations and financial condition.

Income before income taxes for the years ended September 30, 2012, 2011 and 2010, was taxed by the following jurisdictions.

   
2012
   
2011
   
2010
 
Domestic
  $ 6,290,684     $ 1,638,572     $ 2,676,258  
Foreign
    4,501,339       1,593,403       1,547,874  
Total
  $ 10,792,023     $ 3,231,975     $ 4,224,132  

A reconciliation of income tax benefit and the amount computed by applying the statutory Federal income tax rate to income before income taxes for the years ended September 30, 2012, 2011 and 2010 is as follows:

   
2012
   
2011
   
2010
 
Income tax expense at statutory rates
  $ 3,669,000     $ 1,099,000     $ 1,436,000  
State income tax, net of federal benefits
    677,000       192,000       223,000  
Non-deductible expenses
    5,000       (12,000 )     305,000  
Effect of AMT expense
    41,000       28,178       6,000  
Effect of foreign income tax
    (688,093 )     (221,501 )     (206,773 )
Effect of pioneer tax status - Malaysia
    (233,000 )     (134,000 )     -  
Effect of change in UK tax rate
    (72,000 )     -       -  
Effect of stock option exercises
    (2,263,000 )     -       (704,000 )
Utilization of NOL carryforwards
    (1,637,205 )     (973,753 )     (1,087,173 )
Decrease in valuation allowance
    (4,006,000 )     (2,145,000 )     (2,485,000 )
Income tax benefit
  $ (4,507,298 )   $ (2,167,076 )   $ (2,512,946 )

As of September 30, 2012, the Company had federal and state net operating loss carryforwards of approximately $24,641,000 and $12,363,000, respectively, for income tax purposes expiring in years 2018 to 2027.  The Company's U.K. subsidiary, The Female Health Company - UK, plc has U.K. net operating loss carryforwards of approximately $64,260,000 as of September 30, 2012, which can be carried forward indefinitely to be used to offset future U.K. taxable income.

The Female Health Company (M) SDN BHD, has been granted Pioneer Status in Malaysia. The Pioneer Status is a tax incentive program that permanently exempts a portion of the entity’s income from tax.  In fiscal years 2012 and 2011, the Pioneer Status exempted approximately $932,000 and $536,000, respectively, of the entity’s income from tax, resulting in a tax savings of nearly $233,000 and $134,000 in fiscal years 2012 and 2011, respectively. The impact on net income per basic and fully diluted common share outstanding resulting from the tax savings is an increase of $.01 and $.00 in fiscal years 2012 and 2011, respectively.  The Pioneer Status, which the Company elected in fiscal year 2011, is valid through fiscal year 2012.

The federal and state income tax provision (benefit) for the years ended September 30, 2012, 2011 and 2010 is summarized below:

   
2012
   
2011
   
2010
 
Deferred – U.S.
  $ (1,399,000 )   $ (3,442,000 )   $ (1,210,000 )
Deferred – U.K.
    (3,501,000 )     942,000       (1,480,851 )
Deferred – Malaysia
    6,067       35,950       152,227  
Current – U.S.
    293,123       226,178       25,678  
Current – Malaysia
    93,512       70,796       -  
Income tax benefit
  $ (4,507,298 )   $ (2,167,076 )   $ (2,512,946 )

Significant components of the Company's deferred tax assets and liabilities are as follows at September 30, 2012 and 2011:

Deferred Tax Assets
 
2012
   
2011
 
Federal net operating loss carryforwards
  $ 8,378,000     $ 10,112,000  
State net operating loss carryforwards
    1,175,000       1,426,000  
AMT credit carryforward
    152,000       111,000  
Foreign net operating loss carryforwards – U.K.
    14,780,000       18,489,000  
Foreign capital allowance – U.K.
    177,000       247,000  
Accrued expenses
    748,000       -  
Other, net
    29,000       60,000  
Gross deferred tax assets
    25,439,000       30,445,000  
Valuation allowance for deferred tax asset
    (12,139,000 )     (22,045,000 )
Net deferred tax assets
    13,300,000       8,400,000  
Deferred Tax Liabilities:
               
Foreign capital allowance – Malaysia
    (194,244 )     (188,177 )
Net deferred tax asset
  $ 13,105,756     $ 8,211,823  

The deferred tax amounts have been classified in the accompanying consolidated balance sheets as follows:

   
2012
   
2011
 
Current assets – U.S.
  $ 1,802,000     $ 662,000  
Current assets – U.K.
    350,000       138,000  
Long-term assets – U.S.
    6,197,000       5,938,000  
Long-term assets – U.K
    4,951,000       1,662,000  
Long-term liability – Malaysia
    (194,244 )     (188,177 )
    $ 13,105,756     $ 8,211,823  

The change in the valuation allowance for deferred tax assets for the years ended September 30 is as follows:

Year
Balance at
October 1
Charged to Costs
and Expenses
Deductions/Other
Balance at
September 30
2010
$ 32,340,000
$ (2,800,000)
$ (2,799,000)
$ 26,741,000
2011
$ 26,741,000
$ (2,500,000)
$ (2,196,000)
$22,045,000
2012
$ 22,045,000
$ (4,900,000)
$ (5,006,000)
$12,139,000

The valuation allowance decreased by $9,906,000, $4,696,000 and $5,599,000 for the years ended September 30, 2012, 2011 and 2010, respectively. Under the Internal Revenue Code, certain ownership changes, including the prior issuance of preferred stock, the public offering of common stock and the exercise of common stock warrants and options may subject the Company to annual limitations on the utilization of its net operating loss carryforward.   Under the Inland Revenue statutes, certain triggering events may subject the Company to limitations on the utilization of its net operating loss carryforward in the U.K. As of September 30, 2012, management does not believe any limitations have occurred.

ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 developed a two-step process to evaluate a tax position and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.  The Company files tax returns in all appropriate jurisdictions, including foreign, U.S. Federal and Illinois and Virginia State tax returns:

·  
For the U.S., a tax return may be audited any time within 3 years from filing date.  The U.S. open tax years are for fiscal years 2009 through 2011, which expire in years 2013 through 2015, respectively.

·  
For Malaysia, a tax return may be audited any time within 6 years from filing date.  The Malaysia open tax years are for 2007 through 2011, which expire in years 2015 through 2018.

·  
For the U.K., a tax return may be audited within 1 year from the later of: the filing date or the filing deadline (1 year after the end of the accounting period).   The U.K. open tax year is for 2011, which expires in 2013.

The fiscal year 2012 tax returns for each jurisdiction has not been filed as of the date of this filing.  As of September 30, 2012 and 2011, the Company has no recorded liability for unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions as income tax expense as incurred.  No expense for interest and penalties was recognized for the years ended September 30, 2012, 2011 and 2010.