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, 2013
Income Tax Disclosure [Text Block]  
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 our 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.

As of June 30, 2013, the Company had U.S. 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 June 30, 2013, which can be carried forward indefinitely to be used to offset future U.K. taxable income. With the increasing demand for and profitability of FC2, 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 twenty 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 Company’s Malaysia subsidiary had no net operating loss carryforwards as of June 30, 2013.

A reconciliation of income tax expense 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, 2013 and 2012, is as follows:

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Income tax expense at statutory rates
  $ 359,000     $ 960,000     $ 2,796,000     $ 2,613,000  
State income tax, net of federal benefits
    67,000       177,000       516,000       482,000  
Effect of AMT expense
    10,000       39,000       26,000       84,000  
Non-deductible expenses
    1,000       2,000       8,000       5,000  
Effect of lower income tax rates on foreign income
    (45,631 )     (188,971 )     (812,772 )     (639,657 )
Utilization of NOL carryforwards
    (549,542 )     (784,219 )     (1,803,834 )     (2,138,683 )
Increase (decrease) in valuation allowance
    487,111       69,029       (258,410 )     166,400  
Income tax expense
  $ 328,938     $ 273,839     $ 470,984     $ 572,060