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 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, 2014, 2013 and 2012, was taxed by the following jurisdictions.

 

 

 

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 years ended September 30, 2014, 2013 and 2012 is as follows:

 

 

 

As of September 30, 2014, the Company had federal and state net operating loss carryforwards of approximately $17,269,000 and $17,020,000, 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 $62,870,000 as of September 30, 2014, 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 year 2012, the Pioneer Status exempted approximately $932,000 of the entity’s income from tax, resulting in a tax savings of nearly $233,000. The impact on net income per basic and fully diluted common share outstanding resulting from the tax savings is an increase of $.01 in fiscal year 2012.  The Pioneer Status tax exemption expired at September 30, 2012.

 

The federal and state income tax expense (benefit) for the years ended September 30, 2014, 2013 and 2012 is summarized below:

 

 

 

Significant components of the Company's deferred tax assets and liabilities are as follows at September 30, 2014 and 2013:

 

 

 

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

 

 

 

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

 

 

 

The valuation allowance increased by $444,000 and decreased by $10,453,000 and $9,445,000 for the years ended September 30, 2014, 2013 and 2012, 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, 2014, 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:

 

 

 

 

The fiscal year 2014 tax returns for each jurisdiction has not been filed as of the date of this filing.  As of September 30, 2014 and 2013, 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, 2014, 2013 and 2012.