VERU INC. - Quarter Report: 2012 March (Form 10-Q)

f10q_050112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-13602

The Female Health Company

(Name of registrant as specified in its charter)


Wisconsin		39-1144397
(State of Incorporation)		(I.R.S. Employer Identification No.)

515 N. State Street, Suite 2225 Chicago, IL		60654
(Address of principal executive offices)		(Zip Code)

312-595-9123

(Registrant’s telephone number, including area code)

N/A

(Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x

Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as determined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 30, 2012, the registrant had 27,920,839 shares of $0.01 par value common stock outstanding.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

INDEX

	PAGE

PART I. FINANCIAL INFORMATION

Cautionary Statement Regarding Forward Looking Statements	3

Item 1. Financial Statements	4

Unaudited Condensed Consolidated Balance Sheets -
March 31, 2012 and September 30, 2011	4

Unaudited Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2012 and March 31, 2011	5
Six Months Ended March 31, 2012 and March 31, 2011	6

Unaudited Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 31, 2012 and March 31, 2011	7

Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3. Quantitative and Qualitative Disclosures About Market Risk	30

Item 4. Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1A. Risk Factors	31

Item 6. Exhibits	32

CAUTIONARY STATEMENT REGARDING

FORWARD LOOKING STATEMENTS

Certain statements included in this quarterly report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "intend," "may," "opportunity," "plan," "predict," "potential," "estimate," "will," "would" or the negative of these terms or other words of similar meaning. The Company cautions readers that forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: the Company's inability to secure adequate capital to fund working capital requirements and advertising and promotional expenditures; factors related to increased competition from existing and new competitors including new product introduction, price reduction and increased spending on marketing; limitations on the Company's opportunities to enter into and/or renew agreements with international partners, the failure of the Company or its partners to successfully market, sell and deliver its product in international markets, and risks inherent in doing business on an international level, such as laws governing medical devices that differ from those in the U.S., unexpected changes in the regulatory requirements, political risks, export restrictions, tariffs and other trade barriers and fluctuations in currency exchange rates; the disruption of production at the Company's manufacturing facilities due to raw material shortages, labor shortages and/or physical damage to the Company's facilities; the Company's inability to manage its growth and to adapt its administrative, operational and financial control systems to the needs of the expanded entity and the failure of management to anticipate, respond to and manage changing business conditions; the loss of the services of executive officers and other key employees and the Company's continued ability to attract and retain highly-skilled and qualified personnel; the costs and other effects of litigation, governmental investigations, legal and administrative cases and proceedings, settlements and investigations; payment of dividends is in the discretion of the Board of Directors and the Company may not have sufficient cash flows to continue to pay dividends; and developments or assertions by or against the Company relating to intellectual property rights. Such uncertainties and other risks that may affect the Company's performance are discussed further in Part I, Item 1A, "Risk Factors," in the Company's Form 10-K for the year ended September 30, 2011. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report.

Item 1. Financial Statements

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS	March 31, 2012			September 30, 2011
Current Assets:
Cash	$	6,271,701		$	4,249,324
Restricted cash		4,631			4,526
Certificate of deposit		-			63,875
Accounts receivable, net		4,466,394			2,305,473
Inventories, net		1,117,708			2,026,528
Prepaid expenses and other current assets		322,801			297,267
Deferred income taxes		800,000			800,000
TOTAL CURRENT ASSETS		12,983,235			9,746,993

Other Assets		121,957			116,360

EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures		4,039,761			3,766,924
Less accumulated depreciation and amortization		(2,011,682	)		(1,787,486	)
Property, plant and equipment, net		2,028,079			1,979,438

Deferred Income Taxes		7,600,000			7,600,000

TOTAL ASSETS	$	22,733,271		$	19,442,791

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	748,848		$	1,076,994
Dividend payable		1,695,355			20,600
Accrued expenses and other current liabilities		1,056,239			825,991
Accrued compensation		1,497,648			369,825
TOTAL CURRENT LIABILITIES		4,998,090			2,293,410

Deferred rent		101,863			101,133
Deferred grant income		95,065			107,481
Deferred income taxes		195,593			188,177
TOTAL LIABILITIES		5,390,611			2,690,201

Commitments and Contingencies

STOCKHOLDERS’ EQUITY:
Convertible preferred stock, Class A, Series 1		-			-
Convertible preferred stock, Class A, Series 3		-			-
Convertible preferred stock, Class B		-			-
Common stock		298,367			296,490
Additional paid-in-capital		68,626,657			68,117,382
Accumulated other comprehensive loss		(581,519	)		(581,519	)
Accumulated deficit		(44,613,523	)		(44,697,131	)
Treasury stock, at cost		(6,387,322	)		(6,382,632	)
TOTAL STOCKHOLDERS’ EQUITY		17,342,660			16,752,590
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	22,733,271		$	19,442,791

See notes to unaudited condensed consolidated financial statements.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended March 31,
	2012			2011

Product sales	$	7,810,364		$	4,257,245
Royalty income		21,000			30,000
Net revenues		7,831,364			4,287,245

Cost of sales		3,270,395			2,480,011

Gross profit		4,560,969			1,807,234

Operating expenses		2,397,738			1,705,949

Operating income		2,163,231			101,285

Non-operating income (expense):
Interest, net and other income (expense)		257			(3,094	)
Foreign currency transaction loss		(32,223	)		(25,323	)
Total non-operating expense		(31,966	)		(28,417	)

Income before income taxes		2,131,265			72,868

Income tax expense (benefit)		226,836			(8,130	)

Net income	$	1,904,429		$	80,998

Basic earnings per common share outstanding	$	0.07		$	0.00

Basic weighted average common shares outstanding		27,557,587			27,301,422

Diluted earnings per common share outstanding	$	0.07		$	0.00

Diluted weighted average common shares outstanding		29,047,011			28,992,322

See notes to unaudited condensed consolidated financial statements.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Six Months Ended March 31,
	2012			2011

Product sales	$	16,444,085		$	7,897,363
Royalty income		21,721			41,250
Net revenues		16,465,806			7,938,613

Cost of sales		6,888,693			4,114,462

Gross profit		9,577,113			3,824,151

Operating expenses		4,630,602			3,288,880

Operating income		4,946,511			535,271

Non-operating income (expense):
Interest, net and other income (expense)		612			(2,376	)
Foreign currency transaction loss		(84,529	)		(56,229	)
Total non-operating expense		(83,917	)		(58,605	)

Income before income taxes		4,862,594			476,666

Income tax expense		298,221			9,000

Net income	$	4,564,373		$	467,666

Basic earnings per common share outstanding	$	0.17		$	0.02

Basic weighted average common shares outstanding		27,518,587			27,273,184

Diluted earnings per common share outstanding	$	0.16		$	0.02

Diluted weighted average common shares outstanding		28,972,689			28,996,232

See notes to unaudited condensed consolidated financial statements.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended March 31,
	2012			2011
OPERATING ACTIVITIES
Net income	$	4,564,373		$	467,666
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization		225,440			233,655
Amortization of deferred income from grant		(12,416	)		(12,416	)
Interest added to certificate of deposit		(252	)		(1,709	)
Share-based compensation		451,996			347,537
Deferred income taxes		7,416			-
Loss on disposal of fixed assets		888			-
Changes in operating assets and liabilities		(184,952	)		1,505,444
Net cash provided by operating activities		5,052,493			2,540,177

INVESTING ACTIVITIES
Increase in restricted cash		(105	)		(65	)
Proceeds from certificate of deposit		64,127			-
Capital expenditures		(274,969	)		(28,150	)
Net cash used in investing activities		(210,947	)		(28,215	)

FINANCING ACTIVITIES
Purchases of common stock for treasury shares		(4,690	)		(33,063	)
Dividends paid on common stock		(2,806,010	)		(2,771,167	)
Payments on capital lease obligations		(8,469	)		(14,903	)
Net cash used in financing activities		(2,819,169	)		(2,819,133	)

Net increase (decrease) in cash		2,022,377			(307,171	)
Cash at beginning of period		4,249,324			2,918,776

CASH AT END OF PERIOD	$	6,271,701		$	2,611,605

Supplemental Disclosure of Cash Flow Information: Cash payments for income taxes paid	$	313,221		$	15,617

Schedule of noncash financing and investing activities:
Reduction of accrued expense upon issuance of shares	$	179,723		$	231,270
Dividends payable		1,674,755			1,500

See notes to unaudited condensed consolidated financial statements.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flow for the periods presented in conformity with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

Operating results for the three and six months ended March 31, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2011.

Principles of Consolidation and Nature of Operations

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, The Female Health Company – UK, and its wholly owned subsidiaries, The Female Health Company - UK, plc and The Female Health Company (M) SDN.BHD. All significant intercompany transactions and accounts have been eliminated in consolidation. The Female Health Company ("FHC" or the "Company") is currently engaged in the marketing, manufacture and distribution of a consumer health care product, the FC2 female condom ("FC2"). The Female Health Company - UK, is the holding company of The Female Health Company - UK, plc, which is located in a 6,400 sq. ft. leased office facility located in London, England. The Female Health Company (M) SDN.BHD leases a 16,000 sq. ft. manufacturing facility located in Selangor D.E., Malaysia.

The FC2 female condom is currently sold or available in either or both commercial (private sector) and public health sector markets in 130 countries as compared to 120 countries at September 30, 2011. The product is marketed directly to consumers in 16 countries by various country-specific commercial partners.

The Company also derives revenue from licensing its intellectual property under an agreement with its exclusive distributor in India, Hindustan Lifecare Limited (“HLL”). HLL is authorized to manufacture FC2 at HLL's facility in Kochi, India for sale in India. HLL is the Company's exclusive distributor in India and the Company receives a royalty based on the number of units sold by HLL in India. Such revenue appears as royalty income on the Consolidated Statements of Income for the three and six months ended March 31, 2012 and 2011, and is recognized in the period in which the sale is made by HLL.

The Company's standard credit terms vary from 30 to 90 days, depending on the class of trade and customary terms within a territory, so accounts receivable is affected by the mix of purchasers within the quarter. As is typical in the Company's business, extended credit terms may occasionally be offered as a sales promotion. For the past twelve months, the Company's average days’ sales outstanding has averaged approximately 44 days. Over the past five years, the Company’s bad debt expense has been less than .04% of product sales. The balance in the allowance for doubtful accounts was approximately $10,000 at March 31, 2012 and at September 30, 2011.

Restricted cash

Restricted cash relates to security provided to one of the Company’s U.K. banks for performance bonds issued in favor of customers. Such security has been extended infrequently and only on occasions where it has been a contract term expressly stipulated as an absolute requirement by the funds’ provider. The expiration of the bond is defined by the completion of the event such as, but not limited to, delivery of goods or at a period of time after product has been distributed.

Foreign Currency and Change in Functional Currency

Prior to October 1, 2009 the functional currency of the Company’s subsidiaries was the local currency, in accordance with Accounting Standards Codification (ASC) Topic 830, Foreign Currency Matters. Effective October 1, 2009, the Company determined that there were significant changes in facts and circumstances and the Company's subsidiaries adopted the U.S. dollar as their functional currency. The Company recognized a foreign currency transaction loss of $32,223 and $84,529 for the three and six months ended March 31, 2012, respectively, compared to a loss of $25,323 and $56,229 for the three and six months ended March 31, 2011, respectively. The consistent use of the U.S. dollar as functional currency across the Company reduces its foreign currency risk and stabilizes its operating results. As a result of the U.S. dollar being the functional currency of the Company and all of its subsidiaries, comprehensive income is equivalent to the reported net income.

Reclassifications

Certain items in the March 31, 2011 and September 30, 2011 consolidated financial statements have been reclassified to conform to the March 31, 2012 presentation.

NOTE 2 – Earnings per Share

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period after giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and unvested shares granted to employees and directors.

	Three Months Ended March 31,				Six Months Ended March 31,
	2012		2011		2012		2011
Denominator:
Weighted average common shares outstanding – basic		27,557,587		27,301,422		27,518,587		27,273,184
Net effect of dilutive securities
Options		1,133,790		1,252,622		1,099,817		1,283,677
Warrants		59,884		59,528		58,535		60,621
Unvested restricted shares		295,750		378,750		295,750		378,750
Total net effect of dilutive securities		1,489,424		1,690,900		1,454,102		1,723,048
Weighted average common shares outstanding - diluted		29,047,011		28,992,322		28,972,689		28,996,232
Income per common share – basic	$	0.07	$	0.00	$	0.17	$	0.02
Income per common share – diluted	$	0.07	$	0.00	$	0.16	$	0.02

All the outstanding warrants and stock options were included in the computation of diluted net income per share during the three months and six months ended March 31, 2012 and 2011.

NOTE 3 - Inventories

The components of inventory consist of the following at March 31, 2012 and September 30, 2011:

	March 31, 2012			September 30, 2011
Raw material	$	479,728		$	435,947
Work in process		34,284			64,149
Finished goods		676,554			1,602,384
Inventory, gross		1,190,566			2,102,480
Less: inventory reserves		(72,858	)		(75,952	)
Inventory, net	$	1,117,708		$	2,026,528

NOTE 4 – Line of Credit

On August 1, 2011, the Company entered into a Second Amended and Restated Loan Agreement (the “Loan Agreement”) with Heartland Bank (the “Bank”). The Loan Agreement provides for maximum revolving credit borrowings of $2,000,000 with the Bank, with borrowings limited to a borrowing base determined based on 70% or 80% of eligible accounts receivable plus 50% of eligible inventory. Significant restrictive covenants in the Loan Agreement include prohibitions on any merger, consolidation or sale of all or a substantial portion of the Company’s assets and limits on the payment of dividends or the repurchase of shares. The Loan Agreement does not contain any financial covenants that require compliance with ratios or amounts. Dividends and share repurchases are permitted as long as after giving effect to the dividend or share repurchase the Company has a ratio of total liabilities to total stockholders’ equity of no more than 1:1. The revolving note with the Bank will expire August 1, 2012. Borrowings on the revolving note bear interest at a rate of the base rate (4.50% at March 31, 2012) plus 0.5%. The note is collateralized by substantially all of the assets of the Company. No amounts were outstanding under the Loan Agreement at March 31, 2012 or September 30, 2011.

NOTE 5 – Share-Based Payments

In March 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan which will be utilized to provide equity opportunities and performance–based incentives to attract, retain and motivate those persons who make (or are expected to make) important contributions to the Company. A total of 2,000,000 shares are available for issuance under this plan. As of March 31, 2012, 764,432 had been granted under the plan, of which 150,000 shares were in the form of stock options and the remainder were in the form of restricted stock or other share grants.

Stock Options

Under the Company’s previous share based long-term incentive compensation plan, the 1997 Stock Option Plan, the Company granted non-qualified stock options to employees. There are no shares available for grant under this plan which expired on December 31, 2006. Options issued under this plan expire 10 years after the date of grant and generally vested 1/36 per month, with full vesting after three years. Under the Company’s 2008 Stock Incentive Plan, options issued expire 10 years after the date of grant and vest 1/36 per month, with full vesting after three years. The Company did not grant any options during the three or six months ended March 31, 2012 or 2011.

Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on historical experience and future expectations. Stock compensation expense related to options for the three and six months ended March 31, 2012, was approximately $22,000 and $45,000, respectively, and $23,000 and $45,000 for the three and six months ended March 31, 2011, respectively.

During the six months ended March 31, 2012, 193,750 stock options were exercised using the cashless exercise option available under the plan which entitled the holder to 116,915 shares of common stock. The intrinsic value of the options exercised was $510,000. There was no realized tax benefit from options exercised for the three and six months ended March 31, 2012, based on the “with and without” approach. No stock options were exercised during the three and six months ended March 31, 2011.

The following table summarizes the stock options outstanding and exercisable at March 31, 2012:

	Number Outstanding At 3/31/2012	Wghted. Avg. Remaining Life	Wghted. Avg. Exercise Price	Aggregate Intrinsic Value	Number Exercisable At 3/31/2012	Wghted Avg. Remaining Life	Wghted. Avg. Exercise Price	Aggregate Intrinsic Value
Total	1,640,250	1.79	$1.60	$6,272,000	1,633,236	1.76	$1.59	$6,261,000

The aggregate intrinsic value in the table above is before income taxes, based on the closing price of the Company’s common stock of $5.42 per share as of the last business day of the period ended March 31, 2012. As of March 31, 2012, the Company had unrecognized compensation expense of approximately $15,000 related to unvested stock options. These expenses will be recognized over approximately 2 months. The deferred tax asset and realized benefit from stock options exercised and other share-based payments for the periods ended March 31, 2012 and 2011, was not recognized, based on the Company’s election of the “with and without” approach.

Restricted Stock

The Company issues restricted stock to employees, directors and consultants. Such issuances may have vesting periods that range from one to three years or the issuances may be contingent on continued employment for periods that range from one to three years. In addition, the Company has issued stock awards to certain employees that contain vesting provisions or provide for future issuance contingent on continued employment.

The Company granted a total of 54,750 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the six months ended March 31, 2012. The fair value of the awards granted was approximately $227,000. All such shares of restricted stock vest and all such shares must be issued pursuant to promises to issue common stock in September 2012 through September 2014, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting or issuance date. There were no restricted stock forfeitures during the three and six months ended March 31, 2012.

The Company granted a total of 288,750 shares of restricted stock or shares issuable pursuant to promise to issue shares of common stock during the six months ended March 31, 2011. The fair value of the awards granted was approximately $1,657,000. All such shares of restricted stock vest and all such shares must be issued pursuant to promise to issue stock between September 2011 and December 2013, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting or issuance date. 2,500 shares of restricted stock were forfeited during the three and six months ended March 31, 2011.

The Company recognized share-based compensation expense for restricted stock or promises to issue shares of common stock of approximately $201,000 and $407,000 for the three and six months ended March 31, 2012, respectively, $121,000 of which was included in accrued expenses at March 31, 2012, since the related shares have not been issued. Share-based compensation expense for restricted stock or promises to issue shares of common stock for the three and six months ended March 31, 2011 was approximately $188,000 and $303,000, respectively, of which $99,000 was included in accrued expenses at March 31, 2011. This expense is included in selling, general and administrative expenses for those respective periods. As of March 31, 2012, there was approximately $919,000, representing approximately 169,000 unvested shares, of unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted under the incentive plans. This unrecognized cost will be recognized over the weighted average period of the next 1.40 years.

Common Stock Purchase Warrants

At March 31, 2012, 80,000 warrants issued in connection with investor relations were outstanding and exercisable. The warrants have an exercise price of $1.30 per share, remaining life of 4.29 years and aggregate intrinsic value of approximately $330,000. The aggregate intrinsic value is before taxes, based on the closing price of the Company’s common stock of $5.42 per share on the last business day of the period ended March 31, 2012.

No warrants were issued in the six months ended March 31, 2012 or 2011.

There were no warrant exercises in the six months ended March 31, 2012 or 2011. There is no unrecognized compensation cost related to warrants as of March 31, 2012.

NOTE 6 - Stock Repurchase Program

On January 17, 2007, the Company announced a Stock Repurchase Program under the terms of which up to a million shares of its common stock could be purchased during the subsequent twelve months. In March 2008, the repurchase program was expanded up to a total of 2,000,000 shares to be acquired through December 31, 2009. In February 2009, the Board further expanded the repurchase program to a maximum of 3,000,000 shares to be acquired through December 31, 2010. On March 25, 2010, the Board extended the period of the Stock Repurchase Program through December 31, 2011. In December 2011, the Board further extended the period of the Stock Repurchase Program through December 31, 2012. From the program’s onset through March 31, 2012, the total number of shares repurchased by the Company is 1,915,829. The Stock Repurchase Program authorizes purchases in privately negotiated transactions as well as in the open market. In October 2008, the Company's board of directors authorized repurchases in private transactions under the Stock Repurchase Program of shares issued under the Company's equity compensation plans to directors, employees and other service providers at the market price on the effective date of the repurchase request. Total repurchases under this amendment are limited to an aggregate of 250,000 shares per calendar year and to a maximum of 25,000 shares annually per individual. Purchases under this amendment for the six months ended March 31, 2012 and 2011 were 1,000 and 5,750 shares, respectively.

Issuer Purchases of Equity Securities:	Details of Treasury Stock Purchases to Date through March 31, 2012
Period:	Total Number of Shares Purchased		Average Price Paid Per Share		Aggregate Number of Shares Purchased As Part of Publicly Announced Program		Maximum Number of Shares that May Yet be Purchased Under the Program
Period:
January 1, 2007 – December 31, 2011		1,915,829	$	3.33		1,915,829		1,084,171
January 1, 2012 – January 31, 2012		-		-		1,915,829		1,084,171
February 1, 2012 – February 29, 2012		-		-		1,915,829		1,084,171
March 1, 2012 – March 31, 2012		-		-		1,915,829		1,084,171
Quarterly Subtotal		-		-		-
Total		1,915,829	$	3.33		1,915,829		1,084,171

NOTE 7 - Industry Segments and Financial Information About Foreign and Domestic Operations

The Company currently operates primarily in one industry segment which includes the development, manufacture and marketing of consumer health care products.

The Company operates in foreign and domestic regions. Information about the Company's operations by geographic area is as follows (in thousands):

		Net Revenues to External Customers For
		For The Six Months Ended						Long-Lived Assets As of
		March 31,						March 31,	September 30,
		2012			2011			2012			2011
South Africa	$	3,116	(1)	$	1,126	(1)	$	-		$	-
Brazil		2,240	(1)		511	(1)		-			-
United States		1,291			1,153			181			132
Kenya		988			*
Zimbabwe		*			966	(1)		-			-
Mozambique		*			570
Cameroon		*			564
Nigeria		*			545
India		*			*			77			88
United Kingdom		*			*			189			193
Malaysia		*			*			1,703			1,683
Other		8,821			2,504			-			-
	$	16,466		$	7,939		$	2,150		$	2,096

* Less than 5 percent of total net revenues.

(1) Comprised of a single customer considered to be a major customer (exceeds 10 percent of net revenues).

NOTE 8 – Contingent Liabilities

The testing, manufacturing and marketing of consumer products by the Company entail an inherent risk that product liability claims will be asserted against the Company. The Company maintains product liability insurance coverage for claims arising from the use of its products. The coverage amount is currently $5,000,000 for FHC's consumer health care product.

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 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 five years for each tax jurisdiction.

As of March 31, 2012, the Company had federal and state net operating loss carryforwards of approximately $29,741,000 and $15,012,000, respectively, for income tax purposes expiring in years 2012 to 2027. The Company’s U.K. subsidiary, The Female Health Company-UK, plc has U.K. net operating loss carryforwards of approximately $68,476,000 as of March 31, 2012, which can be carried forward indefinitely to be used to offset future U.K. taxable income. The Company’s Malaysian subsidiary, The Female Health Company (M) SDN.BHD, has no net operating loss carryforwards as of March 31, 2012. With the increasing demand for and profitability of the FC2 female condom, 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 fifteen 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.

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 three and six months ended March 31, 2012 and 2011, is as follows:

	Three Months Ended March 31,						Six Months Ended March 31,
	2012			2011			2012			2011
Income tax expense at statutory rates	$	724,000		$	25,000		$	1,653,000		$	162,000
State income tax, net of federal benefits		134,000			5,000			305,000			30,000
Effect of AMT expense		38,000			-			45,000			-
Non-deductible expenses		1,000			1,000			3,000			1,000
Effect of foreign income tax		(151,993	)		(57,100	)		(450,686	)		(146,000	)
Utilization of NOL carryforwards		(775,155	)		(123,924	)		(1,354,464	)		(297,304	)
Increase in valuation allowance		256,984			141,894			97,371			259,304
Income tax expense (benefit)	$	226,836		$	(8,130	)	$	298,221		$	9,000

Note 10 – Dividends

On January 5, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The Company paid, from its cash on hand, approximately $1.4 million pursuant to the dividend on February 9, 2012 to stockholders of record as of February 1, 2012. The Company paid cash dividends of $2.8 million during each of the six months ended March 31, 2012 and 2011.

On March 22, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.06 per share, a 20% increase over the previous quarterly dividend rate. The Company will pay, from its cash on hand, approximately $1.7 million pursuant to the dividend on May 9, 2012 to stockholders of record as of May 2, 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Female Health Company manufactures, markets and sells the FC2 female condom. FC2 is the only currently available product under a woman's control, approved by the U.S. Food and Drug Administration (FDA) and cleared by the World Health Organization (WHO) for purchase by U.N. agencies that provides dual protection against unintended pregnancy and sexually transmitted infections ("STIs"), including HIV/AIDS. The Company’s first generation product was the FC1 female condom, a Class III medical device approved by FDA in 1993. In October 2009, production of FC1 ceased. Although no longer produced, the Company retains its ownership of certain world-wide rights to FC1, as well as various patents, regulatory approvals and other intellectual property related to FC1. The Company’s second generation product, FC2, has been available internationally since 2007 and in the U.S. since 2009 after it was approved by the FDA as a Class III medical device. To date, FHC has manufactured and sold approximately 317 million FC1 and FC2 female condoms.

Products

Currently, there are only two FDA approved and marketed products that prevent the transmission of HIV/AIDS through sexual intercourse: the male condom and the FC2 female condom. The FC2 female condom is currently the only FDA approved and marketed product controlled by women that prevents STI's, including HIV/AIDS. Used consistently and correctly, it provides women dual protection against STI’s (including HIV/AIDS) and unintended pregnancy. The FC2 female condom does not compete with the male condom, but is an alternative to either unprotected sex or male condom usage.

A new economic analysis of the cost effectiveness of an FC2 HIV/AIDS prevention program conducted by Dr. David Holtgrave, the chairman of the Department of Health Behavior and Society at the Johns Hopkins Bloomberg School of Public Health was featured in the current issue of AIDS and Behavior. The study showed that the Washington, D.C. FC2 prevention program, a public-private partnership to provide and promote FC2 female condoms prevented enough HIV infections in the first year alone to save over $8 million in future medical care costs (over and above the cost of approximately $445,000 for the program). This means that for every dollar spent on the program, there was a cost savings of nearly $20. In the article Dr. Holtgrave concluded, “These results clearly indicate that delivery of, and education about, Female Condoms is an effective HIV prevention intervention and an outstanding public health investment.” The district began its program two years ago to fight a disease that is at epidemic levels. At least 3% of Washington residents have HIV or AIDS, a prevalence rate that is the highest of any U.S. city.

Numerous clinical and behavioral studies have been conducted regarding use of the female condom. Studies show that in many cultures, the female condom is found acceptable by women and their partners. Importantly, studies also show that when the female condom is made available as an option with male condoms there is a significant increase in protected sex acts with a concurrent decrease in STI’s. The increase in protected sex acts varies by country and averages between 10% and 35%.

FC2, the Company’s second generation female condom, has basically the same physical design, specifications, safety and efficacy profile as FC1. Manufactured from a nitrile polymer formulation that is exclusive to the Company, FC2 can be produced more economically than the first generation product, FC1, which was made from a more costly raw material (polyurethane). FC2 consists of a soft, loose fitting sheath and two rings: an external ring of rolled nitrile and a loose internal ring, made of flexible polyurethane, FC2’s soft sheath lines the vagina, preventing skin-to-skin contact during intercourse. Its external ring remains outside the vagina, partially covering the external genitalia. The internal ring is used for insertion and helps keep the device in place during use.

FC2’s primary raw material (a nitrile polymer) offers a number of benefits over natural rubber latex, the raw material most commonly used in male condoms. FC2’s nitrile polymer is stronger than latex, reducing the probability that the female condom sheath will tear during use. Unlike latex, FC2’s nitrile polymer quickly transfers heat. FC2 warms to body temperature immediately upon insertion which may enhance the user’s sensation and pleasure. Unlike the male condom, FC2 may be inserted in advance of arousal, eliminating disruption during sexual intimacy. FC2 does not require immediate withdrawal and is not tight or restricting. The FC2 female condom can be used with both oil and water-based lubricants, unlike natural rubber latex male condoms which can be used with water-based lubricants only. FC2 is also an alternative to latex sensitive users (7% to 20% of the population) who are unable to use male condoms without irritation. To the Company's knowledge, there is no reported allergy to the nitrile polymer. FC2 is pre-lubricated, disposable and recommended for use during a single sex act. FC2 is not reusable.

FC2 received FDA approval as a Class III medical device on March 10, 2009, and has been available in the United States since August 2009. In addition to FDA approval, the FC2 female condom has been approved by other regulatory agencies, including in the European Union, India and Brazil. Based on a rigorous scientific review, WHO agreed that FC2 performs in the same manner as FC1 and cleared FC2 for purchase by U.N. agencies in 2006.

Raw Materials

The principal raw material used to produce FC2 is a nitrile polymer. While general nitrile formulations are available from a number of suppliers, the Company has chosen to work closely with the technical market leader in synthetic polymers to develop a grade ideally suited to the bio-compatibility and functional needs of a female condom. The supplier has agreed that the Company is the sole and exclusive owner of the unique polymer formulation that was developed for FC2.

Global Market Potential

The first clinical evidence of AIDS was noted more than thirty years ago. Since then, HIV/AIDS has become the most devastating pandemic facing humankind in recorded history. In November 2009, WHO released statistics indicating that on a world-wide basis, HIV/AIDS is now the leading cause of death in women 15 to 44 years of age. More than 50% of all new adult cases of HIV/AIDS are now women. According to a May 2010 article in Clinical Infectious Diseases, heterosexual sex accounts for more than 80% of all new HIV infections in women.

For sexually active couples, male condoms and the FC2 female condom are the only barrier methods approved by FDA and cleared by WHO for preventing sexual transmission of HIV/AIDS. In recent years, scientists have sought to develop alternative means of preventing HIV/AIDS. Based on the complexities of such research, a viable prevention alternative is unlikely to be available in the foreseeable future. To date, it is clear that condoms, male and female, continue to play a key role in the prevention of STI’s, including HIV/AIDS. The Company’s FC2 female condom is the only product that, when used consistently and correctly, gives a woman control over her sexual health by providing dual protection against STI’s (including HIV/AIDS) and unintended pregnancy.

In the United States, the Centers for Disease Control and Prevention (CDC) continue to report that the HIV/AIDS epidemic is taking an increasing toll on women and girls. Women of color, particularly black women, have been especially hard hit. They comprise both the majority of new HIV and AIDS cases among women, and the majority of women living with the disease in the U.S.

The rate of new HIV infection for black women was approximately 15 times the rate for white women, while the new infection rate among Hispanic women was more than three times that of white women. In 2007, the AIDS diagnoses rate for black women in the United States was 22 times the rate for white women. In the United States, it is estimated that one in 32 black women will be diagnosed with HIV, compared to the one in 526 incidence rate amongst white women.

In March 2008, the CDC announced that a study indicated that 26% of female adolescents in the United States have at least one of the most common sexually transmitted infections (STI’s). Led by the CDC’s Sara Forhan, the study is the first to examine the combined national prevalence of common STI’s among adolescent women in the United States.

In addition to overall STI prevalence, the study found that by race, African American teenage girls had the highest prevalence, with an overall prevalence of 48 percent compared to 20 percent among both whites and Mexican Americans. Overall, approximately half of all the teens in the study reported ever having sex. Among these girls, the STI prevalence was 40 percent.

In July 2010, President Barack Obama launched a new comprehensive strategy, with an emphasis on prevention, to curb the spread of HIV/AIDS in the United States. His policy builds on previous efforts and seeks to bind state, federal and private efforts. It aims, by 2015, to reduce the number of new infections by 25 percent, decrease the number of people living with HIV by 30% and increase the number of people aware of their positive status from 79% to 90%. Currently, the only products approved by the FDA and available to help achieve the prevention goal of reducing new infections by 25% are male and female condoms. “Reducing new HIV infections, improving care for people living with HIV/AIDS, narrowing health disparities - these are the central goals of our national strategy,” Obama said. The President also called for more private-public partnerships like the one between Washington, D.C., and the MAC AIDS fund to distribute free female condoms around the city.

The Condom Market

The global male condom market (public and private sector) is estimated to be $3 billion annually. The global public health sector market for male condoms is estimated to be greater than 10 billion units annually. Given the rapid spread of HIV/AIDS in India and China, UNAIDS estimates that the annual public health sector demand for condoms, both male and female, will reach 19 billion units by 2015.

The FC Female Condom and the Male Condom

Currently, there are only two FDA approved and marketed products that prevent the transmission of HIV/AIDS through sexual intercourse: the male condom and the FC2 female condom. The FC2 female condom is currently the only FDA approved, marketed product controlled by women that prevents STI’s including HIV/AIDS. Used consistently and correctly, it provides women dual protection against STI’s (including HIV/AIDS) and unintended pregnancy. The FC2 female condom does not compete with the male condom, but is an alternative to either unprotected sex or to male condom usage.

Strategy

The Company’s strategy is to fully develop the global market for the FC2 female condom. Since the introduction of its first generation product, FC1, the Company has developed contacts and relationships with global public health sector organizations such as WHO, UNFPA, USAID, United Nations Joint Programme on HIV/AIDS (UNAIDS), country-specific health ministries and non-governmental organizations (NGOs), and commercial partners in various countries. To assist with its customers’ prevention programs and provide technical product support, the Company has placed representatives strategically around the world: Asia, Africa, Europe and North America. The Company’s first generation product, FC1, was produced from a costly raw material (polyurethane), in a labor intensive manufacturing process in a suburb of London, England. To expand women’s access to the female condom, increase sales volume, reduce costs, and significantly increase gross margin, the Company developed its second generation product, FC2. The new product is made from a less costly raw material, nitrile polymer. FC2’s production process is more efficient and less labor intensive than that of FC1, making it less costly to produce. Its price is approximately 30% less than that of FC1. FC2 is currently being produced at the Company’s facility in Selangor D.E., Malaysia and in Kochi, India, in conjunction with FHC’s exclusive distributor in India, Hindustan Lifecare Limited (“HLL”). The Company made its first substantial sales of FC2 in the second quarter of fiscal 2007. Since October 2009, all of the Company’s unit sales have been FC2. Production in London was discontinued with the final shipment of FC1 in October 2009. As a result of the successful development of FC2, the Company was able to reduce the price to the public health sector by approximately 30% and significantly increase its gross margin.

With the product’s primary market currently being the public health sector, the Company incurs minimal sales and marketing expense. Thus, as the demand for the female condom continues to grow in the public health sector, the Company’s operating expenses are likely to grow at a much lower rate than its sales volume.

Commercial Markets - Direct to Consumers

The Company has distribution agreements and other arrangements with commercial partners which market directly to consumers in 16 countries, including the United States, Brazil, Spain, France and India. These agreements are generally exclusive for a single country. Under these agreements, the Company sells the FC2 female condom to the distributor partners, who market and distribute the product to consumers in the established territory.

Relationships and Agreements with Public Health Sector Organizations

The Company’s customers are primarily large global agencies, non-government organizations, ministries of health and other government agencies which purchase and distribute the FC2 female condom for use in HIV/AIDS prevention programs. The Company offers uniform, volume-based pricing to such agencies, rather than entering into long-term supply agreements. In the United States, FC2 is sold to city and state public health clinics as well as not-for-profit organizations such as Planned Parenthood. FC2 is being distributed as part of New York City’s Female Condom Education and Distribution Project being conducted by the Bureau of HIV/AIDS Prevention and Control. In New York City, FC2 is currently available in 805 locations, as compared to 609 at September 30, 2011, including both community based organizations and the N.Y.C. Department of Health and Mental Hygiene units.

Other U.S. cities where city-specific launch programs are being conducted to encourage the use of FC2 include Washington, D.C., Chicago, San Francisco and Houston. Plans for additional FC2 city specific programs include Atlanta, Philadelphia, Baton Rouge and Los Angeles.

In March 2012, the Company launched an English language and interactive FC2 on-line training course. The course is designed to equip health-care providers with the information and tools necessary to educate their clients regarding the usage and benefits of the FC2 Female Condom. The Company has future plans to make the on-line training available in languages other than English to facilitate global use.

Manufacturing Facilities

The Company leases 16,000 sq. ft. of production space in Selangor D.E., Malaysia for the production of FC2. Production capacity is approximately 75-80 million units annually. The Company plans to expand the manufacturing capacity at its Malaysian facility to an annualized rate of approximately 100 million units by the end of the calendar year 2012.

The Company’s India-based FC2 end-stage production capacity for supply to the Indian market is located at a facility owned by its exclusive distributor, Hindustan Lifecare Limited (HLL) in the Cochin Special Export Zone. Production began at that facility in December 2007 with an initial capacity of 7.5 million units per year.

Government Regulation

Female condoms as a group were classified by the FDA as Class III medical devices in 1989. Class III medical devices are deemed by the FDA to carry potential risks with use, so must be tested prior to FDA approval, referred to as Premarket Approval (PMA), for sale in the U.S. As a Class III medical device, prior to selling FC2 in the U.S., the Company was required to submit a PMA application containing technical information on the use of FC2 such as pre-clinical and clinical safety and efficacy studies which were gathered together in a required format and content. The FC2 PMA was approved by the FDA as a Class III medical device in March 2009.

FC2 received the CE Mark which allows it to be marketed throughout the European Union. FC2 has also been approved by regulatory authorities in Brazil, India and other jurisdictions.

The Company believes that FC2’s PMA and FDA classification as Class III medical devices create a significant barrier to entry in the U.S. market. The Company estimates that it would take a minimum of four to six years to implement, execute and receive FDA approval of a PMA to market another type of female condom.

In the U.S., FC2 is regulated by the FDA. Pursuant to section 515(a)(3) of the Safe Medical Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend approval and initiate withdrawal of the PMA if the FDA finds that FC2 is unsafe or ineffective, or on the basis of new information with respect to the device, which, when evaluated together with information available at the time of approval, indicates a lack of reasonable assurance that the device is safe or effective under the conditions of use prescribed, recommended or suggested in the labeling. Failure to comply with the conditions of FDA approval invalidates the approval order. Commercial distribution of a device that is not in compliance with these conditions is a violation of the SMA Act. As an FDA approved medical device, the facilities in which FC2 is produced and tested are subject to periodic FDA inspection to ensure compliance with current Good Manufacturing Processes. The Company’s most recent FDA inspection was completed in September 2010.

The FDA’s approval order for FC2 includes conditions that relate to product labeling, including information on the package itself and instructions for use called a “package insert” which accompanies each product. The Company believes it is in compliance with the FDA approval order.

The Company believes there are no material issues or material costs associated with the Company’s compliance with environmental laws related to the manufacture and distribution of FC2.

Competition

The Company's FC2 female condom participates in the same market as the male condoms but is not seen as directly competing with male condoms. Rather, studies show that providing FC2 in additive in terms of prevention and choice. Male condoms cost less and have brand names that are more widely recognized than FC2. In addition, male condoms are generally manufactured and marketed by companies with significantly greater financial resources than the Company.

Other parties have developed and marketed female condoms. None of these female condoms marketed or under development by other parties have secured FDA approval or clearance by WHO for purchase by UN agencies. It is possible that another female condom may receive FDA approval or WHO clearance or may otherwise compete with the Company's FC2 female condom.

Patents and Trademarks

FC2 patents have been issued by the United States, the European Union, Canada, Australia, South Africa, The People’s Republic of China, Greece, Turkey, Spain, Mexico, Japan and the African Regional Intellectual Property Organization (ARIPO), which includes Botswana, The Gambia, Ghana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Sierra Leone, Somalia, Sudan, Swaziland, Uganda, United Republic of Tanzania, Zambia and Zimbabwe. Patent applications for FC2 are pending in various other countries around the world through the Patent Cooperation Treaty. The patents cover the key aspects of FC2, including its overall design and manufacturing process. There can be no assurance that pending patents provide the Company with protection against copycat products entering markets during the pendency of the patents.

The Company has the registered trademark “FC2 Female Condom” in the United States. The Company has also secured, or applied for, 12 trademarks in 22 countries to protect the various names and symbols used in marketing the product around the world. These include "femidom" and "femy," “Reality” and others. In addition, the experience that has been gained through years of manufacturing the FC female condoms (FC1 and FC2) has allowed the Company to develop trade secrets and know-how, including certain proprietary production technologies that further protect its competitive position.

Overview

The Female Health Company manufactures, markets and sells the FC2 female condom. FC2 is the only currently available product under a woman's control and approved by the U.S. Food and Drug Administration (FDA) and cleared by the World Health Organization (WHO) for purchase by U.N. agencies that provides dual protection against unintended pregnancy and sexually transmitted infections ("STIs"), including HIV/AIDS. FC2, the Company’s second generation product, has been available internationally since 2007, and in the U.S. since 2009, after it was approved by the FDA as a Class III medical device.

In 2005, the Company completed development of a second generation female condom, FC2, which was intended to:

1.	Expand access to female-initiated prevention by offering a more affordable product

2.	Increase HIV/AIDS prevention

3.	Lower health care costs

4.	Increase gross margins

In August 2006, after a stringent technical review, the World Health Organization (WHO) cleared FC2 for purchase by U.N. agencies. The first substantial sales of FC2 occurred in fiscal 2007. FC2 received FDA approval as a Class III medical device on March 10, 2009 and became available in the United States in August 2009. In addition to FDA approval, the FC2 female condom has been approved by other regulatory agencies, including in the European Union, India, and Brazil.

From its introduction in March 2007 through March 31, 2012, approximately 138 million FC2 female condoms have been distributed in 130 countries. Since the last shipments of FC1 were produced and sold in October 2009, all units sold have been FC2.

The FC2 female condom provides women dual protection against STI’s (including HIV/AIDS) and unintended pregnancy. Because FC2’s primary usage is that of disease prevention, the public health sector is the Company’s main market. Within the public health sector, various organizations supply critical products such as FC2, at no cost or low cost, to those who need but cannot afford to buy such products for themselves.

FC2 is currently available in 130 countries. A significant number of countries with the highest demand potential are in the developing world. The incidence of HIV/AIDS, other STI’s and unwanted pregnancy in these countries represents a remarkable potential for significant sales of a product that benefits some of the world’s most underprivileged people. However, conditions in these countries can be volatile and result in unpredictable delays in program development, tender applications and processing orders.

The Company has a relatively small customer base, with a limited number of customers who generally purchase in large quantities. Over the past few years, major customers have included large global agencies, such as the United Nations Population Fund (UNFPA) and the United States Agency for International Development (USAID), through its facilitator, John Snow, Inc. Other customers include ministries of health or other governmental agencies, which either purchase directly or via in-country distributors, and non-governmental organizations.

Purchasing patterns vary significantly from one customer to another, and may reflect factors other than simple demand. For example, some governmental agencies purchase through a formal procurement process in which a tender (request for bid) is issued for either a specific or a maximum unit quantity. Tenders also define the other elements required for a qualified bid submission (such as product specifications, regulatory approvals, clearance by WHO, unit pricing and delivery timetable). Bidders have a limited period of time in which to submit bids. Bids are subjected to an evaluation process which is intended to conclude with a tender award to the successful bidder. The entire tender process, from publication to award, may take many months to complete. Administrative issues, politics, bureaucracy, process errors, changes in leadership, funding priorities and/or other pressures may delay or derail the process and affect the purchasing patterns of public sector customers. As a result, the Company may experience significant quarter to quarter sales variations due to the timing and shipment of large orders.

In the past couple years, the Company’s business model, which includes high gross margins, modest capital expenditures and low expense requirements compared to production volumes, has permitted the Company to sustain profitable operations without debt and maintain dividend payments during periods of delayed orders. Continuation of these accomplishments in the future periods will be contingent on a number of factors, including the degree and period of sales volatility and on the strength of global demand for the Company’s product.

In fiscal 2011, the Company announced that delays in two significant orders (the Republic of South Africa and Brazil) would negatively impact fiscal 2011 results and could positively impact fiscal 2012 results. Both orders were received in the first quarter of fiscal 2012. In November 2011, the Company received an order from the Republic of South Africa for 5 million units of FC2. Shipments against that order began immediately and were completed in the second quarter. In February 2012, FHC received an additional order for 1 million units from RSA, which were shipped during the second quarter. In December 2011, the Company received an order from UNFPA for 20 million units of FC2 for Brazil. The shipments against that order began late in the second quarter of fiscal 2012 and will be completed by the end of fiscal year 2012.

Revenues. Most of the Company's revenues have been derived from sales of the FC female condoms (FC1 and FC2), and are recognized upon shipment of the product to its customers. Since fiscal 2008, revenue is also being derived from licensing its intellectual property to its exclusive distributor in India, Hindustan Lifecare Limited ("HLL"). HLL is authorized to manufacture FC2 at HLL's facility in Kochi, India for sale in India. HLL is the Company's exclusive distributor in India and the Company receives a royalty based on the number of units sold by HLL in India. Such revenue appears as royalties on the Unaudited Condensed Consolidated Statements of Income for the three and six months ended March 31, 2012 and 2011, and is recognized in the period in which the sale is made by HLL.

The Company's strategy is to further develop a global market and distribution network for its product by maintaining relationships with public health sector groups and completing partnership arrangements with companies with the necessary marketing and financial resources and local market expertise.

The Company’s most significant customers are either global public health sector agencies or those who facilitate their purchases and/or distribution of the FC2 female condom for use in HIV/AIDS prevention. The Company offers uniform, volume-based pricing to such agencies, rather than entering into long-term supply agreements. The Company's two largest customers currently are John Snow, Inc., facilitator of USAID I DELIVER project, and UNFPA. In the United States, FC2 is sold to city and state public health clinics as well and not-for-profit organizations such as Planned Parenthood.

Expenses. The Company manufactures FC2 at its facility located in Selangor D.E., Malaysia. The Company's cost of sales consists primarily of direct material costs, direct labor costs and indirect production and distribution costs. Direct material costs include raw materials used to make the female condoms, principally nitrile polymer. Indirect product costs include logistics, quality control and maintenance expenses, as well as costs for electricity and other utilities. All of the key components for the manufacture of the FC2 female condom are essentially available from multiple sources.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011

Unit sales for the second quarter of fiscal 2012 were the second highest in the Company’s history; the highest quarterly unit sales were recorded in the first quarter of fiscal 2012.

The Company had net revenues of $7,831,364 and net income of $1,904,429, or $0.07 per diluted share, for the three months ended March 31, 2012 compared to net revenues of $4,287,245 and net income of $80,998, or $ 0.00 per diluted share, for the three months ended March 31, 2011.

Net revenues increased $3,544,119, or 83%, on a 57% increase in unit volume for the three months ended March 31, 2012, compared with the same period last year. The FC2 average sales price per unit increased 4% compared with the same period last year due to purchaser mix, not price changes.

Gross profit increased $2,753,734, or 152%, to $4,560,968 for the three months ended March 31, 2012 from $1,807,234 for the three months ended March 31, 2011. Gross profit for the three months ended March 31, 2012 was 58% of net revenues versus 42% for the same period last year, primarily due to improved absorption of manufacturing overhead resulting from increased production volume in the second quarter of fiscal 2012.

Significant quarter to quarter variations result from time to time due to the timing and shipment of large orders and production scheduling rather than from any fundamental changes in the business.

Cost of sales increased $790,384, or 32%, to $3,270,395 on a 57% increase in unit volume in the three months ended March 31, 2012 from $2,480,011 for the same period last year.

Operating expenses increased $691,789, or 41%, to $2,397,738 for the three months ended March 31, 2012 from $1,705,949 for the three months ended March 31, 2011. The increase is primarily due to accrual for fiscal year-end incentive payments based on expected achievement of performance goals relating to the Company’s unit sales and operating income, as well as increased travel, legal and consulting fees. Because the likelihood of meeting fiscal 2011 performance targets was uncertain at March 31, 2011, the second quarter fiscal 2011 bonus accrual was minimal.

Operating income for the three months ended March 31, 2012, was $2,163,230 versus operating income of $101,285 in the same period last year, an increase of $2,061,945, or 2,036%. The increase is due to the higher gross profit partially offset by higher operating expenses.

Interest, net and other income for the three months ended March 31, 2012 was $257, an increase of $3,351 from the same period in fiscal year 2011, when interest, net and other expense was $3,094. The impact of foreign currency transactions for the second quarter of fiscal 2012 was a loss of $32,223 compared to a loss of $25,323 for the same period last year. Beginning October 1, 2009, both the Company’s U.K. and Malaysia subsidiaries adopted the U.S. dollar as their functional currency and began to report their financial results in U.S. dollars. The subsidiaries' adoption of the U.S. dollar as their functional currency reduces the Company’s exposure to foreign currency risk.

The Company's net income increased $1,823,431, or 2,251%, to $1,904,429 in the three months ended March 31, 2012 from net income of $80,998 in the same period of the prior year, as a result of the factors discussed above. Net income was 24% and 2% of net revenues for the three months ended March 31, 2012 and 2011, respectively.

SIX MONTHS ENDED MARCH 31, 2012 COMPARED TO SIX MONTHS ENDED MARCH 31, 2011

The Company had net revenues of $16,465,806 and net income of $4,564,373, or $0.16 per diluted share, for the six months ended March 31, 2012 compared to net revenues of $7,938,613 and net income of $467,666, or $ 0.02 per diluted share, for the six months ended March 31, 2011.

Net revenues increased $8,527,193, or 107%, on a 94% increase in unit volume for the six months ended March 31, 2012, compared with the same period last year. The FC2 average sales price per unit decreased 1% compared with the same period last year due to purchaser mix.

Gross profit increased $5,752,962, or 150%, to $9,577,113 for the six months ended March 31, 2012 from $3,824,151 for the six months ended March 31, 2011. Gross profit for the six months ended March 31, 2012 was 58% of net revenues versus 48% for the same period last year as a result of the improved absorption of manufacturing overhead resulting from increased production volume in the six months ended March 31, 2012.

Significant quarter to quarter variations result from time to time due to the timing and shipment of large orders and production scheduling rather than from any fundamental changes in the business.

Cost of sales increased $2,774,231, or 67%, to $6,888,693 on a 94% increase in unit volume in the six months ended March 31, 2012 from $4,114,462 for the same period last year.

Operating expenses increased $1,341,722, or 41%, to $4,630,602 for the six months ended March 31, 2012 from $3,288,880 for the six months ended March 31, 2011. The increase results primarily from an accrual for fiscal year-end incentive payments based on achievement of company targets, increased wages and benefits, higher stock compensation costs and greater legal and consulting expenses. Because the likelihood of meeting fiscal 2011 performance targets was uncertain at March 31, 2011, the bonus accrual for the six months ended March 31, 2011 was minimal.

Operating income for the six months ended March 31, 2012, was $4,946,511 versus operating income of $535,271 in the same period last year, an increase of $4,411,240, or 824%. The increase is due to the higher gross profit generated in fiscal 2012 partially offset by higher operating expenses.

Interest, net and other income for the six months ended March 31, 2012 was $612, an increase of $2,988 from the same period in fiscal year 2011, when interest, net and other expense was $2,376. The impact of foreign currency transactions for the six months ended March 31, 2012 was a loss of $84,529 compared to a loss of $56,229 for the same period last year. Beginning October 1, 2009, both the Company’s U.K. and Malaysia subsidiaries adopted the U.S. dollar as their functional currency and began to report their financial results in U.S. dollars. The subsidiaries' adoption of the U.S. dollar as their functional currency reduces the Company’s exposure to foreign currency risk. Assets located outside the United States totaled approximately $10.4 million and $7.7 million at March 31, 2012 and 2011, respectively.

Under the guidance of ASC Topic 740, Accounting for Income Taxes, an entity is able to recognize a tax benefit for current or past losses when it can demonstrate that the tax loss carryforward will be utilized before expiration. During the six months ended March 31, 2012, the Company recorded tax expense of approximately $298,000, primarily consisting of expense for Illinois state income tax as the state has suspended net operating loss utilization and Malaysian tax expense where the Company has no remaining net operating loss carryforwards, compared to a tax expense of $9,000 for the six months ended March 31, 2011. Management believes that the Company's recent and projected future growth and profitability has made it more likely than not that the Company will utilize its net operating loss carryforwards in the future. As of March 31, 2011, the Company had federal and state net operating loss carryforwards of approximately $29,741,000 and $15,012,000, respectively, for income tax purposes expiring in years 2012 to 2027. The Company's U.K. subsidiary, The Female Health Company - UK, plc has U.K. net operating loss carryforwards of approximately $68,476,000 as of March 31, 2012, which can be carried forward indefinitely to be used to offset future U.K. taxable income. The Company will evaluate its net operating loss carryforwards at the end of each fiscal year or more frequently if information comes to our attention that would indicate that a revision to its estimates is necessary. If appropriate, a tax benefit will be recorded.

The Company's net income increased $4,096,707, or 876%, to $4,564,373 in the six months ended March 31, 2012 from net income of $467,666 in the same period of the prior year, as a result of the factors discussed above. Net income was 28% and 6% of net revenues for the six months ended March 31, 2012 and 2011, respectively.

Reliance on a Single Product

The Company expects to derive the vast majority, if not all, of its future revenues from the FC2 female condom, its sole current product. While management believes the global potential for the FC2 female condom is significant, the ultimate level of consumer demand around the world is not yet known.

Distribution Network

The Company's strategy is to develop a global distribution network for FC2 by entering into partnership arrangements with financially secure companies with appropriate marketing expertise. This strategy has resulted in distribution in 130 countries, including numerous in-country distributions in the public health sector, particularly in Africa, Latin America and India. The Company has also entered into several partnership agreements for the commercialization of the FC2 female condoms in consumer sector markets around the world. However, the Company is dependent on country governments, global donors, as well as U.S. municipal and state public health departments to continue AIDS/HIV/STI prevention programs that include FC2 as a component of such programs. The Company’s commercial market penetration is dependent on its ability to identify appropriate business partners who will effectively market and distribute FC2 within its contractual territory. Failure by the Company's partners to successfully market and distribute the FC2 female condom or failure of donors and/or country governments to establish and sustain HIV/AIDS prevention programs which include distribution of female condoms, the Company’s inability to secure additional agreements with global AIDS prevention organizations, or the Company’s inability to secure agreements in new markets, either in the public or private sectors, could adversely affect the Company’s financial condition and results of operations.

Global Market and Foreign Currency Risks

The Company manufactures FC2 in a leased facility located in Malaysia. Although a material portion of the Company's future sales are likely to be in foreign markets, FC2 sales are denominated in U.S. dollars only. Manufacturing costs are subject to normal currency risks associated with changes in the exchange rate of the Malaysian ringgit relative to the United States dollar.

Inventory and Supply

All of the key components for the manufacture of the FC2 female condom are essentially available from either multiple sources or multiple locations within a source.

Government Regulation

The FC2 female condoms are subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign regulatory agencies. Under the FDC Act, medical devices must receive FDA clearance before they can be sold. FDA regulations also require the Company to adhere to certain current "Good Manufacturing Practices," which include testing, quality control and documentation procedures. The Company's compliance with applicable regulatory requirements is monitored through periodic inspections by the FDA. The failure to comply with applicable regulations may result in fines, delays or suspensions of clearances, seizures or recalls of products, operating restrictions, withdrawal of FDA approval and criminal prosecutions. The Company's operating results and financial condition could be materially adversely affected in the event of a withdrawal of approval from the FDA.

Liquidity and Sources of Capital

The Company's operations generated positive cash flow of $5.1 million in the six months ended March 31, 2012, which included a negative impact of changes in operating assets and liabilities of $(0.2) million, compared with $2.5 million in the six months ended March 31, 2011, which included a positive impact of changes in operating assets and liabilities of $1.5 million.

Accounts receivable increased from $2.3 million at September 30, 2011 to $4.5 million at March 31, 2012. The increase is the result of significantly increased sales revenues. The Company’s credit terms vary from 30 to 90 days, depending on the class of trade and customary terms within a territory, so the accounts receivable balance is also impacted by the mix of purchasers within the quarter. As is typical in the Company's business, extended credit terms may occasionally be offered as a sales promotion. For the past twelve months, the Company's average days’ sales outstanding has been approximately 44 days. Over the past five years, the Company’s bad debt expense has been less than .04% of product sales.

During fiscal 2010, the Company commenced paying quarterly cash dividends. The Company’s Board of Directors has declared and paid nine consecutive quarterly cash dividends of $0.05 per share since January 2010. The Company paid cash dividends of $2.8 million during each of the six months ended March 31, 2012 and 2011. On March 22, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.06 per share, a 20% increase from the previous dividend rate. On May 9, 2012, the Company will pay, from its cash on hand, approximately $1.7 million pursuant to the dividend to stockholders of record as of May 2, 2012. Any future quarterly dividends and the record date for such dividends will be approved each quarter by the Company’s Board of Directors and announced by the Company. Payment of future dividends is in the discretion of the Board of Directors and the Company may not have sufficient cash flows to continue to pay dividends.

The Company plans to expand the manufacturing capacity at its Malaysian facility to an annualized rate of approximately 100 million units by the end of the calendar year 2012. The Company expects that the expansion will cost less than $1 million in total and will be funded entirely with cash on hand.

At March 31, 2012, the Company had working capital of $8.0 million and stockholders’ equity of $17.3 million compared to working capital of $8.3 million and stockholders’ equity of $14.2 million as of March 31, 2011.

The Company believes its current cash position is adequate to fund operations of the Company in the next 12 months, although no assurances can be made that such cash will be adequate. If the Company needs additional cash, it may sell equity securities to raise additional capital and may borrow funds under its Heartland Bank credit facility.

On August 1, 2011, the Company entered into a Second Amended and Restated Loan Agreement (the “Loan Agreement”) with Heartland Bank (the “Bank”). The Loan Agreement provides for maximum revolving credit borrowings of $2,000,000 with the Bank, with borrowings limited to a borrowing base determined based on 70% or 80% of eligible accounts receivable plus 50% of eligible inventory. Significant restrictive covenants in the Loan Agreement include prohibitions on any merger, consolidation or sale of all or a substantial portion of the Company’s assets and limits on the payment of dividends or the repurchase of shares. The Loan Agreement does not contain any financial covenants that require compliance with ratios or amounts. Dividends and share repurchases are permitted as long as after giving effect to the dividend or share repurchase the Company has a ratio of total liabilities to total stockholders’ equity of no more than 1:1. The revolving note with the Bank will expire August 1, 2012. Borrowings on the revolving note bear interest at a rate of the base rate plus 0.5%. The note is collateralized by substantially all of the assets of the Company. No amounts were outstanding under the Loan Agreement at March 31, 2012, and September 30, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company's exposure to market risk is limited to fluctuations in raw material commodity prices, particularly the nitrile polymer used to manufacture FC2, and foreign currency exchange rate risk associated with the Company's foreign operations. The Company does not utilize financial instruments for trading purposes or to hedge risk and holds no derivative financial instruments which would expose it to significant market risk. Effective October 1, 2009, the Company's U.K. subsidiary and Malaysia subsidiary each adopted the U.S. dollar as its functional currency. The consistent use of the U.S. dollar as the functional currency across the Company reduces its foreign currency risk and stabilizes its operating results. The Company currently has no significant exposure to interest rate risk. The Company has a line of credit with Heartland Bank, consisting of a revolving note for up to $2,000,000 with borrowings limited to a percentage of eligible accounts receivable and eligible inventory. Outstanding borrowings under the line of credit will incur interest at a rate equal to a base rate plus 0.5%. The Company has not had any outstanding borrowings in last five years. There is, therefore, currently no significant exposure to market risk for changes in interest rates. To the extent that the Company incurs future borrowings under its lines of credit, it would be subject to interest rate risk related to such borrowings.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at reaching that level of reasonable assurance.

There was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended) during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," of the Company's Form 10-K for the year ended September 30, 2011. Please refer to that section for disclosures regarding the risks and uncertainties relating to the Company's business.

Item 6. Exhibits

Exhibit

Number Description

3.1	Amended and Restated Articles of Incorporation. (1)

3.2	Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 27,000,000 shares. (2)

3.3	Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 35,500,000 shares. (3)

3.4	Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 38,500,000 shares. (4)

3.5	Amended and Restated By-Laws. (5)

4.1	Amended and Restated Articles of Incorporation (same as Exhibit 3.1).

4.2	Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company (same as Exhibit 3.2).

4.3	Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 35,500,000 shares (same as Exhibit 3.3).

4.4	Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company increasing the number of authorized shares of common stock to 38,500,000 shares (same as Exhibit 3.4).

4.5	Articles II, VII and XI of the Amended and Restated By-Laws (included in Exhibit 3.5).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). (6)

101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (1) the Unaudited Condensed Consolidated Balance Sheets, (2) the Unaudited Condensed Consolidated Statements of Income, (3) the Unaudited Condensed Consolidated Statements of Cash Flows and (4) the Notes to the Unaudited Condensed Consolidated Financial Statements.

____________________________

(1)	Incorporated herein by reference to the Company's Registration Statement on Form SB-2, filed with the Securities and Exchange Commission on October 19, 1999.

(2)	Incorporated by reference to the Company's Registration Statement on Form SB-2, filed with the Securities and Exchange Commission on September 21, 2000.

(3)	Incorporated by reference to the Company's Registration Statement on Form SB-2, filed with the Securities and Exchange Commission on September 6, 2002.

(4)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.

(5)	Incorporated herein by reference to the Company's Registration Statement on Form S-18, as filed with the securities and Exchange Commission on May 25, 1990.

(6)	This certification is not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE FEMALE HEALTH COMPANY

DATE: May 1, 2012

/s/ O.B. Parrish

O.B. Parrish, Chairman and

Chief Executive Officer

DATE: May 1, 2012

/s/ Donna Felch

Donna Felch, Vice President and Chief

Financial Officer