The Company completes a detailed analysis of its deferred income tax valuation allowances on an annual basis or more frequently if information comes to its 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, forecasts of future taxable income, and the potential Section 382 limitation on the NOL carryforwards due to a change in control. 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. The Company had a cumulative pretax loss in the U.S. for fiscal 2022 and the two preceding fiscal years. Forming a conclusion that a valuation allowance is not needed is difficult when there is significant negative evidence such as cumulative losses in recent years. Management has projected future pretax losses in the U.S. driven by the investment in research and development and based on our analysis, concluded that a full valuation allowance should be recorded related to federal and state NOL carryforwards as of September 30, 2022. The valuation allowance against U.S. deferred tax assets was increased by $25.8 million during the year ended September 30, 2022. As of September 30, 2022 and 2021 respectively, the Company has recorded a valuation allowance of $42.2 million and $16.4 million against U.S. deferred tax assets. In addition, the Company’s U.K. holding company for the non-U.S. operating companies, The Female Health Company Limited, continues to have a full valuation allowance of $3.2 million as of September 30, 2022 and 2021. The operating U.K. subsidiary, The Female Health Company (UK) plc does not have a valuation allowance due to projections of future taxable income. Veru Biopharma UK Limited has a full valuation allowance of $49,000.

As of September 30, 2022, the Company had U.S. federal and state NOL carryforwards of approximately $112.5 million and $50.9 million, respectively, for income tax purposes with $29.7 million and $28.4 million, respectively, expiring in fiscal years 2023 to 2042 and $82.8 million and $22.5 million, respectively, which can be carried forward indefinitely. The Company also has U.S. federal research and development tax credit carryforwards of $8.5 million, expiring in fiscal years 2038 to 2042. The Company’s U.K. subsidiary and Veru Biopharma UK Limited have U.K. NOL carryforwards of approximately $63.1 million as of September 30, 2022, which can be carried forward indefinitely to be used to offset future U.K. taxable income.

(Loss) income before income taxes was taxed by the following jurisdictions for the years ended September 30, 2022 and 2021:

A reconciliation between the effective tax rate and the U.S. statutory rate and the related income tax expense (benefit) is as follows:

On June 10, 2021, the U.K. Finance Act 2021 was enacted increasing the U.K. tax rate from 19% to 25% effective April 1, 2023. The increase in the tax rate increased the value of the deferred tax assets in the U.K. by $3.7 million with a corresponding valuation allowance of $0.7 million, which resulted in a net income tax benefit of $3.0 million during the year ended September 30, 2021.

The federal and state income tax expense (benefit) for the years ended September 30, 2022 and 2021 is summarized below:

Significant components of the Company’s deferred tax assets and liabilities are as follows:

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

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 state tax returns. The following summarizes open tax years in the relevant jurisdictions:

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 2019 through 2021, which expire in years 2023 through 2025, respectively.

For Malaysia, a tax return may be audited any time within 5 years from filing date (7 months after the fiscal year end). The Malaysia open tax years are for 2017 through 2021, which expire on December 31, 2022 through 2026.