Veru Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 6 - Income Taxes

Note 6 - Income Taxes

12 Months Ended

Sep. 30, 2013

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 allowance 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 ten 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, 2013, 2012, and 2011, was taxed by the following jurisdictions.

	2013		2012		2011
Domestic	$	7,461,329	$	6,290,684	$	1,638,572
Foreign		2,472,525		4,501,339		1,593,403
Total	$	9,933,854	$	10,792,023	$	3,231,975

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, 2013, 2012 and 2011 is as follows:

	2013			2012			2011
Income tax expense at statutory rates	$	3,378,000		$	3,669,000		$	1,099,000
State income tax, net of federal benefits		623,000			677,000			192,000
Non-deductible expenses		129,000			5,000			(12,000	)
Effect of AMT expense		116,644			41,000			28,178
Effect of lower foreign income tax rates		(395,441	)		(688,093	)		(221,501	)
Effect of change in U.K. tax rate		(159,000	)		(72,000	)		—
Effect of pioneer tax status - Malaysia		—			(233,000	)		(134,000	)
Effect of reinvestment allowance - Malaysia		(75,000	)		—			—
Effect of stock option exercises		(110,000	)		(2,263,000	)		—
Utilization of NOL carryforwards		(2,070,947	)		(1,637,205	)		(973,753	)
Decrease in valuation allowance		(5,845,000	)		(4,006,000	)		(2,145,000	)
Income tax benefit	$	(4,408,744	)	$	(4,507,298	)	$	(2,167,076	)

As of September 30, 2013, the Company had federal and state net operating loss carryforwards of approximately $19,165,000 and $17,220,000, 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 $63,264,000 as of September 30, 2013, which can be carried forward indefinitely to be used to offset future U.K. taxable income.

The Female Health Company (M) SDN BHD, had 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 tax exemption expired at September 30, 2012.

The federal and state income tax provision (benefit) for the years ended September 30, 2013, 2012 and 2011 is summarized below:

	2013			2012			2011
Deferred – U.S.	$	(12,000	)	$	(1,399,000	)	$	(3,442,000	)
Deferred – U.K.		(5,288,000	)		(3,501,000	)		942,000
Deferred – Malaysia		40,935			6,067			35,950
Subtotal		(5,259,065	)		(4,893,933	)		(2,464,050	)
Current – U.S.		625,606			293,123			226,178
Current – Malaysia		221,625			93,512			70,796
Current - U.K.		3,090			—			—
Subtotal		850,321			386,635			296,974
Income tax benefit	$	(4,408,744	)	$	(4,507,298	)	$	(2,167,076	)

Significant components of the Company's deferred tax assets and liabilities are as follows at September 30, 2013 and 2012:

Deferred Tax Assets	2013			2012
Federal net operating loss carryforwards	$	6,516,000		$	8,378,000
State net operating loss carryforwards		1,636,000			1,636,000
AMT credit carryforward		269,000			152,000
Foreign net operating loss carryforwards – U.K.		12,653,000			14,780,000
Foreign capital allowance – U.K.		95,000			177,000
Accrued expenses		90,000			748,000
Other, net - Malaysia		23,018			—
Other, net - U.S.		44,000			29,000
Gross deferred tax assets		21,326,018			25,900,000
Valuation allowance for deferred tax assets		(2,703,000	)		(12,600,000	)
Net deferred tax assets		18,623,018			13,300,000
Deferred Tax Liabilities:
Foreign capital allowance – Malaysia		(258,197	)		(194,244	)
Net deferred tax assets	$	18,364,821		$	13,105,756

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

	2013			2012
Current assets – U.S.	$	2,074,000		$	1,802,000
Current assets – U.K.		478,000			350,000
Total current assets		2,552,000			2,152,000
Long-term assets – U.S.		5,937,000			6,197,000
Long-term assets – U.K		10,111,000			4,951,000
Total long-term assets		16,048,000			11,148,000
Long-term liability – Malaysia		(235,179	)		(194,244	)
	$	18,364,821		$	13,105,756

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

	Balance at		Charged to Costs							Balance at
Year	October 1		and Expenses			Deductions/Other				September 30
2011	$	26,741,000	$	(2,500,000	)		$	(2,196,000	)	$	22,045,000
2012	$	22,045,000	$	(4,900,000	)		$	(4,545,000	)	$	12,600,000
2013	$	12,600,000	$	(5,300,000	)		$	(4,597,000	)	$	2,703,000

The valuation allowance decreased by $9,897,000, $9,445,000 and $4,696,000 for the years ended September 30, 2013, 2012 and 2011, 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, 2013, 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 2010 through 2012, which expire in years 2014 through 2016, 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 2012, which expire in years 2015 through 2019.

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 2012, which expires in 2014.

The fiscal year 2013 tax returns for each jurisdiction has not been filed as of the date of this filing. As of September 30, 2013 and 2012, 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, 2013, 2012 and 2011.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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