XNAS:HITK Quarterly Report 10-Q Filing - 1/31/2012

Effective Date 1/31/2012

Table of Contents

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended January 31, 2012

OR

 

¨ 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 0-20424

 

 

Hi-Tech Pharmacal Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   11-2638720

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

369 Bayview Avenue, Amityville, New York 11701

(Address of principal executive offices) (zip code)

631 789-8228

(Registrant’s telephone number including area code)

Not applicable

(Former name, former address and former fiscal year, 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 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 Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common Stock, $.01 Par Value—13,041,000 shares outstanding as of March 6, 2012

 

 

 


Table of Contents

INDEX

HI-TECH PHARMACAL CO., INC.

 

         Page  

PART I. FINANCIAL INFORMATION

  
Item 1.  

Financial Statements

     3   
 

Condensed consolidated balance sheets—January 31, 2012 (unaudited) and April 30, 2011

     3   
 

Condensed consolidated statements of operations—Three months and nine months ended January 31, 2012 and 2011 (unaudited)

     4   
 

Condensed consolidated statements of cash flows—Nine months ended January 31, 2012 and 2011 (unaudited)

     5   
 

Notes to condensed consolidated financial statements (unaudited)

     6   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     21   
Item 4.  

Controls and Procedures

     22   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     22   
Item 1A.  

Risk Factors

     22   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     22   
Item 3.  

Defaults Upon Senior Securities

     22   
Item 4.  

Mine Safety Disclosures

     22   
Item 5.  

Other Information

     22   
Item 6.  

Exhibits

     22   
 

Signatures

     23   
 

Certifications

  


Table of Contents

PART I. ITEM 1.

HI-TECH PHARMACAL CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     January 31,
2012
    April 30,
2011
 
     (unaudited)        
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 74,344,000      $ 62,304,000   

Accounts receivable, less allowances

     55,731,000        57,632,000   

Inventory

     40,150,000        23,784,000   

Deferred income taxes

     7,153,000        5,546,000   

Prepaid income taxes

     5,350,000        661,000   

Other current assets

     3,423,000        3,041,000   

Current assets of discontinued operations

     —          774,000   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

   $ 186,151,000      $ 153,742,000   

Property and equipment—net

     29,194,000        25,866,000   

Intangible assets—net

     45,488,000        21,231,000   

Deferred income taxes

     1,688,000        1,084,000   

Other assets

     464,000        300,000   

Non-current assets of discontinued operations

     —          1,017,000   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 262,985,000      $ 203,240,000   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 12,541,000      $ 7,806,000   

Accrued expenses

     11,052,000        13,658,000   

Current portion of long-term debt

     355,000        37,000   

Current portion of contingent payment liability

     2,875,000        —     

Current liabilities of discontinued operations

     —          106,000   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

   $ 26,823,000      $ 21,607,000   

Contingent payment liability, net of current portion

     7,804,000        —     

Long-term debt, net of current portion

     1,332,000        621,000   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 35,959,000      $ 22,228,000   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 13)

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, par value $.01 per share; authorized 3,000,000 shares, none issued

    

Common stock, par value $.01 per share; authorized 50,000,000 shares, issued 15,489,000 at January 31, 2012 and 15,163,000 at April 30, 2011, respectively

     155,000        152,000   

Additional paid-in capital

     87,630,000        79,981,000   

Retained earnings

     162,241,000        123,879,000   

Treasury stock, 2,456,000 shares of common stock, at cost on January 31, 2012 and April 30, 2011

     (23,000,000     (23,000,000
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

   $ 227,026,000      $ 181,012,000   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 262,985,000      $ 203,240,000   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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HI-TECH PHARMACAL CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

     Three months ended
January 31,
    Nine months ended
January 31,
 
     2012     2011     2012     2011  

NET SALES

   $ 55,625,000      $ 49,700,000      $ 168,711,000      $ 133,665,000   

Cost of goods sold

     24,889,000        21,067,000        71,343,000        57,359,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     30,736,000        28,633,000        97,368,000        76,306,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

COST AND EXPENSES:

        

Selling, general and administrative expenses

     13,260,000        10,701,000        34,690,000        28,348,000   

Research and product development costs

     3,017,000        2,672,000        8,884,000        7,020,000   

Royalty income

     (898,000     (1,557,000     (2,293,000     (3,778,000

Contract research income

     (198,000     (50,000     (226,000     (667,000

Interest expense

     201,000        12,000        247,000        34,000   

Interest income and other

     (390,000     229,000        (696,000     13,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

     14,992,000        12,007,000        40,606,000        30,970,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

     15,744,000        16,626,000        56,762,000        45,336,000   

Income tax expense

     4,938,000        5,830,000        18,400,000        15,592,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     10,806,000        10,796,000        38,362,000        29,744,000   

(Loss) from discontinued operations, net of tax

     —          (658,000     —          (955,000
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 10,806,000      $ 10,138,000      $ 38,362,000      $ 28,789,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC INCOME (LOSS) PER SHARE:

        

Continuing operations

     0.83        0.85        2.99        2.36   

Discontinued operations

     0.00        (0.05     0.00        (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC INCOME PER SHARE

   $ 0.83      $ 0.80      $ 2.99      $ 2.29   
  

 

 

   

 

 

   

 

 

   

 

 

 

DILUTED INCOME (LOSS) PER SHARE:

        

Continuing operations

     0.79        0.84        2.87        2.29   

Discontinued operations

     0.00        (0.05     0.00        (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

DILUTED INCOME PER SHARE

   $ 0.79      $ 0.79      $ 2.87      $ 2.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic

     12,986,000        12,632,000        12,824,000        12,595,000   

Effect of potential common shares

     697,000        242,000        554,000        399,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

     13,683,000        12,874,000        13,378,000        12,994,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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HI-TECH PHARMACAL CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Nine months ended
January 31,
 
     2012     2011  

NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS

   $ 27,378,000      $ 27,471,000   
  

 

 

   

 

 

 

NET CASH FLOWS USED IN OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS

     —          (879,000
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property, plant and equipment

     (5,827,000     (4,662,000

Proceeds from the sale of intangible assets

     1,683,000        156,000   

Purchase of intangible assets

     (16,434,000     (36,000

Payment of contingent liability

     (719,000     —     

Purchase of ECR Pharmaceuticals assets

     (498,000     (1,021,000
  

 

 

   

 

 

 

NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS

     (21,795,000     (5,563,000
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Issuance of common stock on exercise of options

     2,807,000        1,197,000   

Tax benefits of stock incentives

     2,621,000        299,000   

Borrowings from long-term debt

     1,155,000        621,000   

Payment on long-term debt

     (126,000     (143,000
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS

     6,457,000        1,974,000   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     12,040,000        23,003,000   

Cash and cash equivalents at beginning of the period

     62,304,000        36,018,000   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 74,344,000      $ 59,021,000   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 247,000      $ 34,000   

Income taxes paid

   $ 22,664,000      $ 18,015,000   

Supplemental disclosures of non-cash investing transactions:

    

Obligation related to purchase of intangible assets included in accrued expenses

   $ 355,000      $ —     

Contingent payment liability related to purchase of intangible assets

   $ 11,189,000      $ 918,000   

See notes to condensed consolidated financial statements

 

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HI-TECH PHARMACAL CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

January 31, 2012

1. BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with 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 US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The preparation of the Company’s financial statements in conformity with US GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and assumptions. Operating results for the three and nine month periods ended January 31, 2012 are not necessarily indicative of the results that may be expected for the year ending April 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2011 in the Company’s Annual Report on Form 10-K.

2. BUSINESS:

Hi-Tech Pharmacal Co., Inc. (“Hi-Tech” or the “Company”, which may be referred to as “we”, “us” or “our”), a Delaware corporation, incorporated in April 1982, is a specialty pharmaceutical company developing, manufacturing and marketing generic and branded prescription and OTC products. The Company specializes in the manufacture of liquid and semi-solid dosage forms and produces a range of sterile ophthalmic, otic and inhalation products. The Company’s Health Care Products Division is a developer and marketer of branded prescription and OTC products for the diabetes marketplace. Hi-Tech’s ECR Pharmaceuticals subsidiary markets branded prescription products.

The following table presents the net sales data for the Company by division:

 

     Nine months
ended
January 31, 2012
     Nine months
ended
January 31, 2011
 

Hi-Tech Generics

   $ 145,178,000       $ 109,392,000   

Health Care Products

     11,969,000         10,553,000   

ECR Pharmaceuticals

     11,564,000         13,720,000   
  

 

 

    

 

 

 

Total

   $ 168,711,000       $ 133,665,000   
  

 

 

    

 

 

 

3. REVENUE RECOGNITION:

Revenue is recognized for product sales upon shipment and passing of title and risk of loss to the customer and when estimates of discounts, rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable, collection is reasonably assured and the Company has no further performance obligations. These estimates are presented in the financial statements as reductions to net revenues and accounts receivable. Contract research income is recognized as work is completed and as billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones. Advance payments may be received to fund certain development costs.

Royalty income is related to sales of divested products which are sold by third parties. For those agreements, the Company recognizes revenue based on royalties reported by those third parties and earned during the applicable period.

4. NET INCOME PER SHARE:

Basic income from continuing operations per common share is computed based on the weighted average number of common shares outstanding and on the weighted average number of common shares and share equivalents (stock options) outstanding for diluted earnings from continuing operations per share. The weighted average number of shares outstanding used in the computation of diluted net earnings from continuing operations per share does not include the effect of potentially outstanding common stock whose effect would have been antidilutive. Such outstanding potential shares consisted of options totaling 0 shares for the three months and nine months ended January 31, 2012 and 226,000 shares for the three and nine months ended January 31, 2011.

 

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5. INVENTORY:

The components of inventory consist of the following:

 

     January 31,
2012
     April 30,
2011
 

Finished products

   $ 16,224,000       $ 8,124,000   

Work in process

     1,078,000         935,000   

Raw materials

     22,848,000         14,725,000   
  

 

 

    

 

 

 

Total inventory

   $ 40,150,000       $ 23,784,000   
  

 

 

    

 

 

 

6. PROPERTY AND EQUIPMENT:

The components of property and equipment consist of the following:

 

     January 31,
2012
     April 30,
2011
 

Land and building and improvements

   $ 19,723,000       $ 17,453,000   

Machinery and equipment

     30,128,000         26,916,000   

Transportation equipment

     55,000         55,000   

Computer equipment and systems

     5,957,000         5,679,000   

Furniture and fixtures

     1,212,000         1,145,000   
  

 

 

    

 

 

 
   $ 57,075,000       $ 51,248,000   

Accumulated depreciation and amortization

     27,881,000         25,382,000   
  

 

 

    

 

 

 

Total property and equipment

   $ 29,194,000       $ 25,866,000   
  

 

 

    

 

 

 

The Company incurred depreciation expense of $2,499,000 and $2,077,000 for the nine months ended January 31, 2012 and 2011, respectively. Depreciation expense for the three months ended January 31, 2012 and 2011 was $854,000 and $673,000, respectively. No depreciation is taken on land with a carrying value of $1,860,000 at January 31, 2012 and $1,754,000 at April 30, 2011.

In December 2011, the Company purchased land and a building located in Copiague, NY for $1,042,000. The Company plans to use the building for research and development activities.

7. INTANGIBLE ASSETS:

The components of net intangible assets are as follows:

 

     January 31,
2012
     April 30,
2011
     Amortization Period  

TussiCaps® intangible asset

   $ 20,881,000       $ —           3-10 years   

ECR intangible assets

     5,688,000         6,232,000         9-10 years   

MagOx® intangible assets

     3,314,000         3,622,000         10 years   

Clobetasol intangible asset

     3,300,000         3,600,000         10 years   

Atley Pharma intangible asset

     3,056,000         —           3-10 years   

Zolpimist® intangible assets

     2,625,000         2,906,000         10 years   

Zostrix® intangible assets

     2,285,000         2,616,000         3-11.5 years   

KVK License intangible assets

     2,000,000         —           10 years   

Midlothian intangible assets

     699,000         787,000         3-10 years   

Partnered ANDA intangible asset

     375,000         —           10 years   

Vosol® and Vosol® HC intangible assets

     420,000         473,000         10 years   

Other intangible assets

     845,000         995,000         2-10 years   
  

 

 

    

 

 

    

Total intangible assets

   $ 45,488,000       $ 21,231,000      
  

 

 

    

 

 

    

Intangible assets are stated at cost, net of amortization using the straight line method over the expected useful lives of the product rights, once the related products begin to sell. Amortization expense of the intangible assets for the nine months ended January 31, 2012 and 2011 was $3,723,000 and $1,940,000, respectively. Amortization expense for the three months ended January 31, 2012 and 2011 was $1,548,000 and $676,000, respectively. Amortization is included in selling, general and administrative expenses for all periods presented. The Company tests for impairment of intangible assets annually and when events or circumstances indicate that the

 

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carrying value of the assets may not be recoverable. During the nine months ended January 31, 2011, the Company determined that the value of Tanafed®, which is included in other intangible assets, was impaired. The Company wrote down the value of the intangible asset by $221,000. As of January 31, 2012 the Tanafed® intangible asset was fully amortized.

On June 28, 2011, the Company acquired marketing and distribution rights to several unique branded products for the treatment of pain from Atley Pharmaceuticals. Some products are approved and some are pending approval with the Food and Drug Administration (“FDA”). The Company paid $3,220,000 in cash for rights to the products and inventory. Inventory acquired was valued at $248,000. The Company agreed to pay an additional $355,000 within 180 days, less any amount which has been offset by certain claims. The Company will pay royalties for certain of these products under a license agreement it has assumed. In July 2011, the Company exercised its option to buy out one of the royalty streams related to one of the products for the amount of $500,000, which was paid in August 2011. Such amount has been presented as prepaid royalties.

On July 29, 2011, the Company acquired marketing and distribution rights to an ANDA filing from KVK-Tech, Inc. for dexbrompheniramine maleate 6mg/pseudoephedrine sulfate 120 mg extended release tablets for $2,000,000. Upon approval from the FDA, the product will be marketed by ECR Pharmaceuticals, the Company’s branded sales and marketing subsidiary, under the Lodrane® brand name.

On August 19, 2011, the Company acquired Tussicaps® extended-release capsules and some inventory from Mallinckrodt LLC (“Mallinckrodt”). The Company paid $11,600,000 in cash and may make additional payments of up to $11,781,000 over the next four years depending on the competitive landscape and sales performance. On the acquisition date, the Company had recorded a preliminary contingent liability of $11,993,000, which was adjusted to $11,189,000 during the third quarter of fiscal 2012, with the reduction of the contingent liability being offset by a reduction of the related intangible. The fair value of the contingent payment was estimated using the present value of management’s projection of the expected payments pursuant to the term of the agreement. As of January 31, 2012, the contingent payment liability amounted to $10,679,000, of which $2,875,000 is classified as a current liability. The decrease in the carrying amount was the result of payment made, offset by the accrual of interest on the outstanding balance. Inventory acquired was valued at $664,000. Tussicaps® is covered by a patent which will expire in September 2024. The Company and Mallinckrodt entered into a manufacturing agreement pursuant to which Mallinckrodt will manufacture and supply the Tussicaps® products to the Company for at least seven years.

On November 28, 2011, the Company entered into an asset purchase agreement to acquire an ANDA for a product and all product intellectual property. The purchase price of the ANDA and interest in the intellectual property is up to $3,000,000, under certain conditions and is payable in installments over twenty four months. In connection with this asset purchase, the Company has entered into a collaboration agreement and profit sharing agreement with another party. The Company and the other party will each own 50% of the product and will each pay equal amounts in satisfaction of the purchase price obligation. The other party will also pay 50% of the development costs and share in 50% of the net profits. The Company made an initial payment of $375,000 on November 29, 2011. The Company has the right to terminate this agreement at any time and not pay subsequent installments. Upon termination by the Company, all interests in the assets acquired will be transferred back to the seller.

8. LONG-TERM DEBT:

The Company entered into a Revolving Credit Agreement, effective as of June 1, 2010, with JPMorgan Chase (the “Revolving Credit Agreement”). The Revolving Credit Agreement permits the Company to borrow up to $10,000,000 pursuant to a revolving credit note (“Revolving Credit Note”) for, among other things within certain sublimits, general corporate purposes, acquisitions, research and development projects and future stock repurchase programs. Loans shall bear interest at a rate equal to, at the Company’s option, in the case of a CB Floating Rate Loan, as defined in the Revolving Credit Agreement, the Prime Rate, as defined in the Revolving Credit Agreement; provided that, the CB Floating Rate shall never be less than the Adjusted One Month LIBOR, or for a LIBOR Loan, at a rate equal to the Adjusted LIBOR plus the Applicable Margin, as such terms are defined in the Revolving Credit Agreement. The Revolving Credit Agreement contains covenants customary for agreements of this type, including covenants relating to a liquidity ratio, a debt service coverage ratio and a minimum consolidated net income. Borrowings under the Revolving Credit Agreement mature on May 27, 2013.

If an event of default under the Revolving Credit Agreement shall occur and be continuing, the commitments under the Revolving Credit Agreement may be terminated and the principal amount outstanding under the Revolving Credit Agreement, together with all accrued unpaid interest and other amounts owing under the Revolving Credit Agreement and related loan documents, may be declared immediately due and payable.

As of January 31, 2012, there were no borrowings under the Revolving Credit Agreement.

The Company entered into a $5,000,000 equipment financing agreement with JPMorgan Chase on June 1, 2010. Loans bear interest at a rate equal to, at the Company’s option, in the case of a CB Floating Rate Loan, as defined in the agreement, the Prime Rate, as defined in the agreement; provided that, the CB Floating Rate shall never be less than the Adjusted One Month LIBOR, or for a LIBOR Loan, at a rate equal to the Adjusted LIBOR plus the Applicable Margin, as such terms are defined in the agreement. On

 

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June 15, 2010 the Company drew down $621,000 of the equipment financing line to fund a down payment for new filling and packaging equipment. On October 13, 2011, the Company borrowed an additional $1,155,000 to finance the remaining payments for the equipment. Total borrowings under the equipment financing agreement amount to $1,687,000 as of January 31, 2012. Borrowings under the equipment financing agreement mature on October 6, 2016 and require repayments in the amount of approximately $30,000 per month. In connection with this agreement, the Company has classified $355,000 as current portion of long-term debt.

9. FREIGHT EXPENSE:

Outgoing freight costs amounted to $3,399,000 and $2,552,000 for the nine months ended January 31, 2012 and 2011 and are included in selling, general, and administrative expense. Outgoing freight costs amounted to $1,357,000 and $914,000 for the three months ended January 31, 2012 and 2011, respectively. Incoming freight is included in cost of goods sold.

10. STOCK-BASED COMPENSATION:

GAAP requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee directors, and consultants, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of GAAP is recognized as an expense over the requisite service period.

For stock options granted as consideration for services rendered by non-employees, the Company recognizes compensation expense in accordance with the requirements of the applicable accounting guidance.

Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period of the underlying stock options. At the end of each financial reporting period prior to vesting, the value of these options, as calculated using the Black-Scholes option-pricing model, is re-measured using the fair value of the Company’s common stock and the non-cash compensation recognized during the period is adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense includes fair value re-measurements until the stock options are fully vested. During the nine months ended January 31, 2012 and 2011, there was no non-employee options outstanding.

The Company’s employee stock options are considered incentive stock options unless they do not meet the requirements for incentive stock options under the Internal Revenue Code. With incentive stock options, there is no tax deferred benefit associated with recording the stock-based compensation.

The Company recognized stock-based compensation for awards issued under the Company’s Stock Option Plans and Employee Stock Purchase Plan in the following line items in the condensed consolidated statements of operations:

 

     Three months
ended
January 31,
2012
     Three months
ended
January 31,
2011
     Nine months
ended
January 31,
2012
     Nine months
ended
January 31,
2011
 

Cost of goods sold

   $ 92,000       $ 104,000       $ 266,000       $ 230,000   

Selling, general and administrative expenses

     570,000         578,000         1,707,000         1,369,000   

Research and product development costs

     85,000         90,000         251,000         220,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense

   $ 747,000       $ 772,000       $ 2,224,000       $ 1,819,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rate. The expected volatility is based on the historical volatility of the Company’s common stock. The interest rates for periods within the contractual life of the award are based on the U.S. Treasury yield on the date of each option grant.

All options granted through January 31, 2012 had exercise prices equal to the fair market value of the stock on the date of grant, a contractual term of ten years and generally a vesting period of four years. In accordance with GAAP the Company adjusts share-based compensation on a quarterly basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after May 1, 2006 is recognized in the period the forfeiture estimate is changed. As of January 31, 2012, the weighted average forfeiture rate was 9% and the effect of forfeiture adjustments for the three and nine months ended January 31, 2012 and 2011 was insignificant. The Company did not grant any options during the nine months ended January 31, 2012 and 2011.

The intrinsic value of options exercised for the Amended and Restated Stock Option Plan, the 2009 Stock Option Plan and the 1994 Directors Stock Option Plan, as amended was $8,381,000 and $1,368,000 for the nine month periods ended January 31, 2012 and 2011, respectively. As of January 31, 2012, $5,690,000 of total unrecognized compensation cost related to stock options for both plans is expected to be recognized over a weighted average period of 2.5 years.

 

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11. PRODUCT DIVESTITURES:

On July 3, 2009 the Company entered into an agreement whereby the Company has granted the marketing rights to certain nutritional products previously marketed by our division, Midlothian Laboratories (“Midlothian”), in exchange for a series of payments totaling $1,000,000 over the course of one year. In addition, the Company receives a royalty on the sales of these products, not to exceed $1,500,000 per year for three years ending June 30, 2012. Royalty income earned under this agreement amounted to $1,237,000 and $1,372,000 for the nine months ended January 31, 2012 and 2011, respectively. The Company retained this royalty stream when it divested its Midlothian business.

Effective May 1, 2011, the Company divested Midlothian in exchange for a cash payment of $1,700,000. No gain or loss was recognized on the divesture as the Company had recorded an impairment charge of approximately $1,300,000 at April 30, 2011. The Company retained marketing and distribution rights to generic buprenorphine sublingual tablets, an ANDA that is filed with the FDA, an ANDA that is in development and a royalty stream from products previously divested, as discussed above. Metrics, Inc. acquired Midlothian from the Company.

The operations of Midlothian have been segregated from continuing operations and are reflected as discontinued operations in the condensed consolidated statements of operations as follows:

 

     Three months  ended
January 31, 2011
    Nine months ended
January  31, 2011
 

Sales

   $ 332,000      $ 1,657,000   

Loss from discontinued operations, net of tax

   $ (658,000   $ (955,000

Diluted loss per common share from discontinued operations

   $ (0.05   $ (0.07

12. INCOME TAXES:

The Company estimated its effective tax rate to be approximately 32% for the year ending April 30, 2012. The decline in the effective tax rate compared to the prior period is due to higher benefit from the domestic production activities tax credit and the exercise of stock options in the current period. On May 1, 2008, the Company adopted the provisions of ASC Topic 740-10, “Income Taxes” relating to recognition thresholds and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest expense. At January 31, 2012 and April 30, 2011, the Company did not have any amount recorded for uncertain tax positions.

In July 2010, the Company paid approximately $160,000 to settle liabilities relating to the examination of the years ended April 30, 2004 and 2005. Such liabilities were accrued as of April 30, 2009. The Company is no longer subject to U.S. federal, state or local income tax examination for years ended prior to April 30, 2008.

13. CONTINGENCIES AND OTHER MATTERS:

[1] Government regulation:

The Company’s products and facilities are subject to regulation by a number of Federal and State governmental agencies. The Food and Drug Administration (“FDA”), in particular, maintains oversight of the formulation, manufacture, distribution, packaging and labeling of all of the Company’s products. The Drug Enforcement Administration (“DEA”) maintains oversight over the Company’s products that are considered controlled substances.

On June 30, 2010, the Company received a warning letter from the FDA. The warning letter primarily dealt with the marketing of several products that the FDA states require FDA approval and manufacturing practices related to those products. The Company suspended sales of these products as a result of the warning letter. Sales of these products totaled approximately $5,000,000 in fiscal year 2010. In addition, the Company incurred an expense of $534,000 and $865,000 to write off the value of the inventory used in the manufacturing of these products in fiscal year 2011 and fiscal year 2010, respectively. The Company responded to the warning letter and has met with FDA officials to determine how best to resolve these issues. In November, 2010, the Company was the subject of an FDA inspection. The inspection was a follow up to the warning letter received June 30, 2010 as well as a general GMP inspection. The Company received a Form 483, an FDA form on which deficiencies are noted after an FDA inspection, with inspector observations. The Company responded to those observations and believes that its response to these observations was adequate.

On March 2, 2011, the FDA indicated in its MedWatch publication that the FDA removed approximately 500 currently marketed cough/cold and allergy related products including Lodrane® products. Three of these were marketed by ECR Pharmaceuticals under the brand name Lodrane®. ECR Pharmaceuticals stopped shipping these products as of August 31, 2011. Sales of Lodrane® products amounted to approximately $2,800,000 and $11,800,000 for the nine months ended January 31, 2012 and 2011, respectively.

 

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On October 3, 2011 through October 19, 2011, the Company was subject to an inspection by the FDA. The inspection resulted in seven observations on Form 483, an FDA form on which deficiencies are noted after an FDA inspection, with inspector observations. The Company responded to those observations on November 7, 2011 and believes that its response to these observations was adequate.

[2] Legal Proceedings:

On March 19, 2010, Midlothian received a subpoena duces tecum demanding production of Midlothian business records in connection with an investigation by the Office of Inspector General of the United States Department of Health & Human Services relating to Medicare or Medicaid reimbursement for certain drugs. The Company has produced documents in response to the subpoena. No claims for damages have been made. The Company has no estimate at this time of its potential exposure and cannot, at this time, predict the outcome of this matter.

On March 5, 2010 in the United States District Court for the Northern District of California, a complaint was filed naming the Company and several pharmaceutical and other companies as defendants under the qui tam provisions of the federal civil False Marketing Statute. A private plaintiff, San Francisco Technology Inc., filed the civil action under the Statute on behalf of the federal government. The complaint alleges that the Company falsely marked the packaging of a product with regard to patents that had expired. The product was marketed by the Company’s Health Care Products Division under the Zostrix® Neuropathy brand. The complaint alleged these actions violated the federal civil False Marketing Statute. The Company settled for an immaterial amount and the case was dismissed with prejudice on July 21, 2011.

On February 9, 2010, in the United States District Court for the District of Massachusetts (the “Federal District Court”), a “Partial Unsealing Order” was issued and unsealed in a civil case naming several pharmaceutical companies as defendants under the qui tam provisions of the federal civil False Claims Act (the “Qui Tam Complaint”). The qui tam provisions permit a private person, known as a “relator” (sometimes referred to as a “whistleblower”), to file civil actions under this statute on behalf of the federal and state governments. Pursuant to the Order, a Revised Corrected Seventh Amended Complaint was filed by the relator and unsealed on February 10, 2010. The relator in the Complaint is Constance A. Conrad. The Complaint alleges that several pharmaceutical companies submitted false records or statements to the United States through the Center for Medicare and Medicaid Services (“CMS”) and thereby caused false claims for payments to be made through state Medicaid Reimbursement programs for unapproved or ineffective drugs or for products that are not drugs at all. The Complaint alleges that the drugs were “New Drugs” that the FDA had not approved and that are expressly excluded from the definition of “Covered Outpatient Drugs”, which would have rendered them eligible for Medicaid reimbursement. The Complaint alleges these actions violate the federal civil False Claims Act. The Revised Corrected Seventh Amended Complaint did not name the Company as a defendant.

On February 9, 2010, the Court also unsealed the “United States’ Notice of Partial Declination” in which the government determined not to intervene against 68 named defendants, including the Company. On July 23, 2010, the relator further amended the Complaint, which, as amended, named the Company, including a subsidiary of the Company, as a defendant. On January 6, 2011, the Court issued an order unsealing the government’s notice of election to intervene as to a previously unnamed defendant. On July 25, 2011, the Court issued an order stating, among other things, that all parties agreed that the only defendant against whom the United States has elected to intervene is the previously unnamed defendant. On July 26, 2011, the relator filed its Tenth Amended Complaint, which removed the allegations against the Company’s subsidiary, but not the Company, realleging them against another party. The Company intends to vigorously defend against the remaining allegations in the relator’s Complaint. The Company cannot predict the outcome of the action.

On June 5, 2009, Allergan, Inc. (“Allergan”) filed a complaint against the Company in the United States District Court for the Eastern District of Texas, Civil Action No. 2:09-cv-182, in response to the Company’s Paragraph IV certifications in ANDA No. 91-086 (the “ANDA”) alleging noninfringement or invalidity of the United States patents identified in the Orange Book on Allergan’s product, Combigan®. In counts one and two of the complaint, Allergan alleges that the Company’s submission of the ANDA to the FDA under Section 505(j) of the Food, Drug & Cosmetic Act (“FDCA”) to obtain approval to engage in the commercial manufacture, use or sale of the Company’s generic Brimonidine Tartrate/Timolol Maleate Ophthalmic Solution 0.2%/0.5% product infringes U.S. Patents No. 7,030,149 and 7,320,976. The Company settled with Allergan on May 20, 2011 without incurring a liability payment and the case was dismissed with prejudice on May 31, 2011.

On August 17, 2011, Allergan and Duke University filed a complaint against the Company in the United States District Court for the Middle District of North Carolina in response to the Company’s Paragraph IV certifications in its ANDA for Bimatoprost Topical Solution 0.03%, alleging infringement of U.S Patents Nos. 7,351,404; 7,388,029; and 6,403,649 for Allergan’s product, Latisse. On October 7, 2011, the Company answered the complaint asserting counterclaims. The plaintiffs responded to the counterclaims on October 31, 2011. The Company believes the complaint is without merit and intends to vigorously defend against the allegations in the complaint. The Company cannot predict the outcome of the action.

 

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On January 27, 2012, Allergan sued the Company in the U.S. District Court for the Eastern District of Texas for infringement of U.S. Patent No. 7,851,504 (“Enhanced Bimatoprost Ophthalmic Solution,” issued December 14, 2010) following a Paragraph IV certification as part of the Company’s filing of an ANDA to manufacture a generic version of Allergan’s Lumigan® 0.01%. On February 23, 2012, the Company answered the complaint. The Company believes the complaint is without merit and intends to vigorously defend against the allegations in the complaint. The Company cannot predict the outcome of the action.

On October 11, 2011 Senju Pharmaceutical Co.; Kyorin Pharmaceutical Co.; and Allergan filed a complaint in the District Court of Delaware, Civil Action No. 1:11-cv-00926; in response to the Company’s Paragraph IV certification as part of its filing of an ANDA to manufacture a generic version of Allergan’s Zymaxid® (gatifloxacin ophthalmic solution, 0.5%). The complaint alleges infringement of U.S. Patent Nos. 6,333,045 (“Aqueous Liquid Pharmaceutical Composition Comprised of Gatifloxacin,” issued December 25, 2001) and 5,880,283 (“8-Alkoxyquinolonecarboxylic Acid Hydrate With Excellent Stability and Process for Producing the Same,” issued March 9, 1999), licensed to Allergan. On December 16, 2011, the Company answered the complaint. The Company believes the complaint is without merit and intends to vigorously defend against the allegations in the complaint. The Company cannot predict the outcome of the action.

On October 31, 2011 Senju Pharmaceutical Co.; Kyorin Pharmaceutical Co.; and Allergan filed a complaint in the District Court of Delaware, Civil Action No. 1:11-cv-01059, in response to the Company’s Paragraph IV certification as part of its filing of an ANDA to manufacture a generic version of Allergan’s Zymar® (gatifloxacin ophthalmic solution, 0.3%). The complaint alleges infringement of U.S. Patent Nos. 6,333,045 (“Aqueous Liquid Pharmaceutical Composition Comprised of Gatifloxacin,” issued on December 25, 2001) and 5,880,283 (“8-Alkoxyquinolonecarboxylic Acid Hydrate With Excellent Stability And Process For Producing The Same,” issued March 9, 1999), licensed to Allergan. On December 16, 2011, the Company answered the complaint. The Company believes the complaint is without merit and intends to vigorously defend against the allegations in the complaint. The Company cannot predict the outcome of the action.

[3] Commitments and Contingencies:

The Company’s ECR Pharmaceuticals subsidiary currently leases approximately 12,000 square feet in Richmond, VA. This lease ends August 31, 2014.

In June 2010, the Company entered into an agreement to lease a parking lot in Amityville, NY. The Company will pay $90,000 over a five year period.

In the course of its business, the Company enters into agreements which require the Company to make royalty payments which are generally based on net sales or gross profits of certain products.

In connection with the Tussicaps® acquisition, the Company entered into a manufacturing agreement which requires the Company to make a minimum purchase of $500,000 in the first year and $1,000,000 per year over the next four years.

14. RECENT ACCOUNTING PRONOUNCEMENTS:

In May 2011, the FASB updated the accounting guidance relating to fair value measurements and disclosure. The updated guidance clarifies the application of existing fair value measurement guidance to achieve a consistent definition of fair value between generally accepted accounting principles in the United States of America and International Financial Reporting Standards. The guidance also

 

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expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The updated guidance is effective for the Company on January 1, 2012. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB updated the disclosure requirements for comprehensive income. The updated guidance requires companies to disclose the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2013. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amended its guidance on the testing of goodwill impairment to allow an entity the option to first assess qualitative factors to determine whether performing the current two-step process is necessary. Under the new option, the calculation of the reporting unit’s fair value is not required unless as a result of the qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than the unit’s carrying amount. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted. The adoption of this standard will not have an impact on the Company’s financial statements.

In December 2011, the FASB updated the accounting guidance relating to offsetting assets and liabilities in financial statements. The updated guidance requires companies to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The updated guidance is effective for the Company beginning in the third quarter of fiscal year 2013. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

15. COMPREHENSIVE INCOME:

In accordance with FASB ASC Topic 220-10, “Comprehensive Income,” the Company is required to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available for sale.

The Company’s investment in Neuro-Hitech, Inc., a marketable security, was classified as available for sale and measured at fair value with the adjustment to fair value and changes therein recorded in accumulated other comprehensive income. The Company wrote off the investment in Neuro-Hitech, Inc. during the year ended April 30, 2011 based on the decline in the stock price and the limited trading activity.

 

     Nine months ended
January 31,
 
     2012      2011  

Net income

   $ 38,362,000       $ 28,789,000   

Other comprehensive (loss) income, net

     —           —     
  

 

 

    

 

 

 

Comprehensive income

   $ 38,362,000       $ 28,789,000   
  

 

 

    

 

 

 

16. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:

For the nine months ended January 31, 2012, three customers, McKesson, AmerisourceBergen and Cardinal Health, accounted for net sales of approximately 14%, 9% and 9%, respectively. These customers represented approximately 53% of accounts receivable at January 31, 2012. For the nine months ended January 31, 2011, two customers, AmerisourceBergen and McKesson, accounted for net sales of approximately 12% and 11%, respectively. These customers represented approximately 44% of accounts receivable at January 31, 2011.

The Company maintains cash and cash equivalents primarily with major financial institutions. Such amounts exceed FDIC limits.

17. FAIR VALUE MEASUREMENTS:

The accounting guidance under ASC “Fair Value Measurements and Disclosures” (“ASC 820-10”) utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those levels is as follows:

 

   

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

   

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly

 

   

Level 3: Significant unobservable inputs.

 

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The Company’s financial liabilities subject to fair value measurements as of January 31, 2012 was as follows:

 

Fair Value Measurements Using Fair Value Hierarchy

 
     Fair Value      Level 3  

Contingent payment liability

   $ 10,679,000       $ 10,679,000   
  

 

 

    

 

 

 

The fair value of the contingent payment liability was estimated using the present value of management’s projection of the expected payments pursuant to the term of the Tussicaps® agreement (see Note 7). The present value of the contingent liability was computed using a discount rate of 5.2%.

The carrying value of certain financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short-term nature of their underlying terms. The carrying value of the long-term debt approximate its fair value based upon its variable market interest rates, which approximates current market interest.

18. SUBSEQUENT EVENTS:

On March 7, 2012, the Company acquired several homeopathic branded nasal spray products including Sinus Buster® and Allergy Buster® from Dynova Laboratories, Inc. for $1.25 million in cash and an additional $1.25 million deposited in an escrow account to pay for potential expenses. Hi-Tech will also pay a royalty on net sales for 3 1/2 years, or $1.75 million, whichever is reached first. The product line had net sales of $3.3 million in 2011. The brands will be sold through the Company’s Health Care Products OTC division.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements which are not historical facts made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not promises or guarantees and investors are cautioned that all forward-looking statements involve risks and uncertainties, including but not limited to the impact of competitive products and pricing, product demand and market acceptance, new product development, the regulatory environment, including without limitation, reliance on key strategic alliances, availability of raw materials, fluctuations in operating results and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These statements are based on management’s current expectations and are naturally subject to uncertainty and changes in circumstances. We caution you not to place undue reliance upon any such forward-looking statements which speak only as of the date made. Hi-Tech is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JANUARY 31, 2012 AND 2011

Revenue

 

     January 31, 2012      January 31, 2011      Change     % Change  

Hi-Tech Generics

   $ 47,541,000       $ 40,546,000       $ 6,995,000        17

Health Care Products

     3,737,000         3,673,000         64,000        2

ECR Pharmaceuticals

     4,347,000         5,481,000         (1,134,000     (21 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 55,625,000       $ 49,700,000       $ 5,925,000        12
  

 

 

    

 

 

    

 

 

   

 

 

 

Net sales of Hi-Tech generic pharmaceutical products, which include some private label contract manufacturing, increased due to an increase in sales of Fluticasone Propionate nasal spray. Sales of these products increased to $21,800,000 from $17,900,000 in the comparable quarter as the Company sold more units, but at a lower average price. In January 2012, a fourth participant entered the generic Fluticasone Propionate nasal spray market, increasing the likelihood of future price reductions for the product. Sales of Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution dropped to $3,300,000 in the quarter versus $5,200,000 in the comparable quarter due to lower pricing for the products. The Company also benefited from the recent launch of Gabapentin oral solution, launched in February 2011, Ranitidine oral solution, launched in May 2011, Levofloxacin oral solution, launched in June 2011 and Lidocaine sterile jelly, launched in September 2011. Increased sales of the Company’s Clobetasol line of topical products and Buprenorphine also contributed to the results.

Net sales of the Health Care Products division, which markets the Company’s branded OTC products, increased slightly.

Net sales of ECR Pharmaceuticals, which sells branded prescription products, declined due to the discontinuation of Lodrane® extended release antihistamines. On March 2, 2011, the FDA indicated in its MedWatch publication that the FDA removed approximately 500 currently marketed cough/cold and allergy related products. Three of these were marketed by ECR Pharmaceuticals under the brand name Lodrane®. ECR Pharmaceuticals stopped shipping these products as of August 31, 2011. Sales of Lodrane® products amounted to approximately $0 and $4,900,000 for the three months ended January 31, 2012 and January 31, 2011, respectively. Increased sales of Bupap® and Dexpak® and sales from newly acquired Tussicaps®, Orbivan® and Zolvit® partially offset the decrease in sales for the quarter.

 

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The weak start to the cough and flu season affected all three businesses. Tussicaps® and Diabetic Tussin® are the largest selling products in ECR Pharmaceuticals and Health Care Products respectively. Sales of these products as well as several generic products were adversely affected by the season.

Effective May 1, 2011, the Company sold various assets of its Midlothian Laboratories division, and the sales from this business are included in discontinued operations.

Cost of Goods Sold

 

     January 31, 2012     January 31, 2011  
     $      % of sales     $      % of sales  

Cost of goods sold

     24,889,000         45     21,067,000         42

The increase in cost of goods sold as a percentage of net sales is primarily due to lower sales in the high margin ECR subsidiary as well as pricing declines for both Fluticasone Propionate nasal spray and Dorzolamide ophthalmic products.

Expense Items

 

     January 31, 2012     January 31, 2011     Change     % Change  

Selling, general and administrative expense

   $ 13,260,000      $ 10,701,000      $ 2,559,000        24

Research and product development costs

   $ 3,017,000      $ 2,672,000      $ 345,000        13

Royalty income

   $ (898,000   $ (1,557,000   $ 659,000        (42 )% 

Contract research income

   $ (198,000   $ (50,000   $ (148,000     296

Interest expense

   $ 201,000      $ 12,000      $ 189,000        1,575

Interest income and other

   $ (390,000   $ 229,000      $ (619,000     (270 )% 

Provision for income tax expense

   $ 4,938,000      $ 5,830,000      $ (892,000     (15 )% 

The increase in selling, general and administrative expenses was primarily due to increased amortization associated with the acquisition of marketing and distribution rights to Tussicaps® extended-release capsules from Mallinckrodt and several branded products for the treatment of pain from Atley Pharmaceuticals. The ECR subsidiary also added 30 contract sales representatives to expand its sales force to new areas of the country. Additionally, the Company experienced increases in legal expenses and advertising in the HCP division.

The increase in Research and Development expenditures is due to increased spending on internal projects for the generic division, including an increase in the internal R&D staff. Additionally, the Company increased expenditures on three generic projects requiring clinical trials which it has undertaken with partners.

Royalty income decreased because royalties relating to Brometane, a cough and cold product which the Company divested in July 2008, ended in December 2010.

In the current period, interest income and other included money received for a New York state grant and recovery on certain receivables that were written off in a prior period.

The effective tax rate declined to approximately 31% from 35% as the Company recorded a higher benefit from the exercise of stock options in the current period.

Income Analysis

 

     January 31, 2012      January 31, 2011     Change     % Change  

Income from continuing operations

   $ 10,806,000       $ 10,796,000      $ 10,000        0

Loss from discontinued operations, net of tax

     —           (658,000     658,000        (100 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 10,806,000       $ 10,138,000      $ 668,000        7
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share:

         

Continuing operations

     0.83         0.85        (0.02     (2 )% 

Discontinued operations

     0.00         (0.05     0.05        (100 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.83       $ 0.80      $ 0.03        4
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

         

Continuing operations

     0.79         0.84        (0.05     (6 )% 

Discontinued operations

     0.00         (0.05     0.05        (100 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.79       $ 0.79      $ 0.00        0
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic

     12,986,000         12,632,000        354,000        3

Effect of potential common shares

     697,000         242,000        455,000        188

Weighted average common shares outstanding, diluted

     13,683,000         12,874,000        809,000        6

 

15


Table of Contents

Shares outstanding increased due to the exercise of options.

RESULTS OF OPERATIONS FOR NINE MONTHS ENDED JANUARY 31, 2012 AND 2011

Revenue

 

     January 31, 2012      January 31, 2011      Change     % Change  

Hi-Tech Generics

   $ 145,178,000       $ 109,392,000       $ 35,786,000        33

Health Care Products

     11,969,000         10,553,000         1,416,000        13

ECR Pharmaceuticals

     11,564,000         13,720,000         (2,156,000     (16 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 168,711,000       $ 133,665,000       $ 35,046,000        26
  

 

 

    

 

 

    

 

 

   

 

 

 

Net sales of Hi-Tech generic pharmaceutical products, which include some private label contract manufacturing, increased due to an increase in sales of Fluticasone Propionate nasal spray. Sales of these products increased to $71,000,000 from $46,900,000 in the comparable period as the Company sold more units. In January 2012, a fourth participant entered the generic Fluticasone Propionate nasal spray market, increasing the likelihood of future price reductions for the product. Sales of Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution dropped to $14,300,000 in the period versus $21,200,000 in the comparable period due to lower pricing for the products and lower unit volume. The Company halted sales of several unapproved products in late June 2010, so the nine months ended January 31, 2012 did not include any sales of these products. The Company also benefited from the recent launch of Gabapentin oral solution, launched in February 2011, Ranitidine oral solution, launched in May 2011, Levofloxacin oral solution, launched in June 2011 and Lidocaine sterile jelly, launched in September 2011. Increased sales of the Company’s Clobetasol line of topical products and Buprenorphine also contributed to the results.

Net sales of the Health Care Products division, which markets the Company’s branded OTC products, increased due to an increase in sales of Diabetiderm® and Muilt-betic® products as well as sales of the relaunched Nasal Ease® brand.

Net Sales of ECR Pharmaceuticals, which sells branded prescription products, declined due to the discontinuation of Lodrane® extended release antihistamines. On March 2, 2011, the FDA indicated in its MedWatch publication that the FDA removed approximately 500 currently marketed cough/cold and allergy related products. Three of these were marketed by ECR Pharmaceuticals under the brand name Lodrane®. ECR Pharmaceuticals stopped shipping these products as of August 31, 2011. Sales of Lodrane® products amounted to approximately $2,800,000 and $11,800,000 for the nine months ended January 31, 2012 and January 31, 2011, respectively. Increased sales of Bupap® and Dexpak® and sales from newly acquired Tussicaps®, Orbivan® and Zolvit® partially offset the decrease in sales for the period.

The weak start to the cough and flu season affected all three businesses. Tussicaps® and Diabetic Tussin® are the largest selling products in ECR Pharmaceuticals and Health Care Products respectively. Sales of these products as well as several generic products were adversely affected by the season.

Effective May 1, 2011, the Company sold various assets of its Midlothian Laboratories division, and the sales from this business are included in discontinued operations.

Cost of Goods Sold

 

     January 31, 2012     January 31, 2011  
     $      % of sales     $      % of sales  

Cost of goods sold

     71,343,000         42     57,359,000         43

The decrease in cost of goods sold as a percentage of sales is primarily due to the launches of generic products with higher than average margins including Gabapentin oral solution, Levofloxacin oral solution and Lidocaine sterile jelly and partially offset by pricing declines for both Fluticasone Propionate nasal spray and Dorzolamide ophthalmic products.

 

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Expense Items

 

     January 31, 2012     January 31, 2011     Change     % Change  

Selling, general and administrative expense

   $ 34,690,000      $ 28,348,000      $ 6,342,000        22

Research and product development costs

   $ 8,884,000      $ 7,020,000      $ 1,864,000        27

Royalty income

   $ (2,293,000   $ (3,778,000   $ 1,485,000        (39 )% 

Contract research (income)

   $ (226,000   $ (667,000   $ 441,000        (66 )% 

Interest expense

   $ 247,000      $ 34,000      $ 213,000        626

Interest (income) and other

   $ (696,000   $ 13,000      $ (709,000     (5,454 )% 

Provision for income tax expense

   $ 18,400,000      $ 15,592,000      $ 2,808,000        18

The increase in selling, general and administrative expenses was primarily due to increased amortization associated with the acquisition of marketing and distribution rights to Tussicaps® extended-release capsules from Mallinckrodt and several branded products for the treatment of pain from Atley Pharmaceuticals. The ECR subsidiary also added 30 contract sales representatives to expand its sales force to new areas of the country. Additionally, the Company experienced increases in legal expenses and advertising in the HCP division.

The increase in Research and Development expenditures is due to increased spending on internal projects for the generic division, including an increase in the internal R&D staff. Additionally, the Company increased expenditures on three generic projects requiring clinical trials which it has undertaken with partners.

Royalty income decreased because royalties relating to Brometane, a cough and cold product which the Company divested in July 2008, ended in December 2010.

In the current period, interest income and other included money received for a New York state grant and recovery on certain receivables that were written off in a prior period.

The effective tax rate declined to 32% from 34% as the Company recorded a higher benefit from the domestic production activities tax credit and the exercise of stock options in the current period.

Income Analysis

 

     January 31, 2012      January 31, 2011     Change      % Change  

Income from continuing operations

   $ 38,362,000       $ 29,744,000      $ 8,618,000         29

Loss from discontinued operations, net of tax

     —           (955,000     955,000         (100 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 38,362,000       $ 28,789,000      $ 9,573,000         33
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share:

          

Continuing operations

     2.99         2.36        0.63         27

Discontinued operations

     0.00         (0.07     0.07         (100 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share

   $ 2.99       $ 2.29      $ 0.70         31
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share:

          

Continuing operations

     2.87         2.29        0.58         25

Discontinued operations

     0.00         (0.07     0.07         (100 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share

   $ 2.87       $ 2.22      $ 0.65         29
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     12,824,000         12,595,000        229,000         2

Effect of potential common shares

     554,000         399,000        155,000         39

Weighted average common shares outstanding, diluted

     13,378,000         12,994,000        384,000         3

Shares outstanding increased due to the exercise of options.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s operations are historically financed principally by cash flow from operations. At January 31, 2012 and April 30, 2011, working capital was approximately $159,328,000 and $132,135,000, respectively, an increase of $27,193,000 during the nine months ended January 31, 2012.

Cash flows provided by operating activities were approximately $27,378,000 which is primarily due to net income in the period and a decrease in accounts receivable. The decrease in accounts receivable was primarily due to timing of sales at the end of the April 30, 2011 quarter. This trend was partially offset by an increase in inventory. A significant portion of the increase in inventory is due to a buildup of Fluticasone Propionate nasal spray in anticipation of the spring allergy season.

 

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Table of Contents

Cash flows used in investing activities were $21,975,000 and were mostly for acquisition of marketing and distribution rights of new branded products and for capital expenditures primarily related to capacity expansion at the Company’s Amityville facilities. Additionally, the Company paid $1,042,000 for land and a building which the Company intends to use as a new research and development facility.

Cash flows provided by financing activities of $6,457,000 related to the proceeds from exercise of stock options and the related tax benefits and borrowings from the equipment financing agreement.

The Company believes that its financial resources consisting of current working capital and anticipated future operating revenue will be sufficient to enable it to meet its working capital requirements for at least the next 12 months. Additionally, the Company has a $10,000,000 revolving line of credit with JPMorgan Chase which remains undrawn, and an additional $3,313,000 of the equipment financing line from JPMorgan Chase. The revolving line of credit agreement expires May 27, 2013, while borrowings under the equipment line mature October 6, 2016.

Subsequent to July 31, 2011, in connection with the TussiCaps® acquisition, the Company failed to comply with certain covenants limiting the dollar amount of acquisitions, contained in one of its financing agreements with JPMorgan Chase. Hi-Tech’s breach of those covenants resulted in the Company being in technical default of both financing agreements, which gave the lender rights to call all outstanding debts under the financing agreements due and payable and to terminate its credit commitment. The lender granted waivers for the breach of these covenants.

REVOLVING CREDIT FACILITY

The Company entered into a Revolving Credit Agreement, effective as of June 1, 2010, with JPMorgan Chase (the “Revolving Credit Agreement”). The Revolving Credit Agreement permits the Company to borrow up to $10,000,000 pursuant to a revolving credit note (“Revolving Credit Note”) for, among other things within certain sublimits, general corporate purposes, acquisitions, research and development projects and future stock repurchase programs. Loans shall bear interest at a rate equal to, at the Company’s option, in the case of a CB Floating Rate Loan, as defined in the Revolving Credit Agreement, the Prime Rate, as defined in the Revolving Credit Agreement; provided that, the CB Floating Rate shall never be less than the Adjusted One Month LIBOR, or for a LIBOR Loan, at a rate equal to the Adjusted LIBOR plus the Applicable Margin, as such terms are defined in the Revolving Credit Agreement. The Revolving Credit Agreement contains covenants customary for agreements of this type, including covenants relating to a liquidity ratio, a debt service coverage ratio and a minimum consolidated net income. Borrowings under the Revolving Credit Agreement mature on May 27, 2013.

If an event of default under the Revolving Credit Agreement shall occur and be continuing, the commitments under the Revolving Credit Agreement may be terminated and the principal amount outstanding under the Revolving Credit Agreement, together with all accrued unpaid interest and other amounts owing under the Revolving Credit Agreement and related loan documents, may be declared immediately due and payable.

The Company also entered into a $5,000,000 equipment financing agreement with JPMorgan Chase on June 1, 2010. This agreement has similar interest rates. On June 15, 2010 the Company drew down $621,000 of the equipment financing line to fund a down payment for new filling and packaging equipment. On October 13, 2011, the Company borrowed an additional $1,155,000 to finance the remaining payments for the equipment. Total borrowings under the equipment financing agreement amount to $1,687,000 as of January 31, 2012. Borrowings under the equipment financing agreement are payable in monthly installments of $30,000 through October 6, 2016.

The Company may not declare or pay dividends or distributions, other than dividends payable solely in capital stock, so long as the Revolving Credit Note remains unpaid.

RECENT ACCOUNTING PRONOUNCEMENTS:

In May 2011, the FASB updated the accounting guidance relating to fair value measurements and disclosure. The updated guidance clarifies the application of existing fair value measurement guidance to achieve a consistent definition of fair value between generally accepted accounting principles in the United States of America and International Financial Reporting Standards. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The updated guidance is effective for the Company on January 1, 2012. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

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In June 2011, the FASB updated the disclosure requirements for comprehensive income. The updated guidance requires companies to disclose the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2013. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amended its guidance on the testing of goodwill impairment to allow an entity the option to first assess qualitative factors to determine whether performing the current two-step process is necessary. Under the new option, the calculation of the reporting unit’s fair value is not required unless as a result of the qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than the unit’s carrying amount. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted. The adoption of this standard will not have an impact on the Company’s financial statements.

In December 2011, the FASB updated the accounting guidance relating to offsetting assets and liabilities in financial statements. The updated guidance requires companies to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The updated guidance is effective for the Company beginning in the third quarter of fiscal year 2013. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

SEASONALITY

The Company’s largest selling product is Fluticasone Propionate nasal spray, an allergy medication. Sales of Fluticasone Propionate vary from quarter to quarter due to the stronger demand for the product during the spring and fall allergy seasons. The Company also sells cough, cold and flu products which have historically experienced stronger net sales in September through March. The cough, cold and flu season in the late 2011 and early 2012 period was particularly mild. Allergy seasons and cough, cold and flu seasons vary from year to year and because of these changes in product mix and product seasonality, period-to-period comparisons within the same fiscal year are not necessarily meaningful and should not be relied on as indicative of future results.

CRITICAL ACCOUNTING POLICIES

In preparing financial statements in conformity with generally accepted accounting principles in the United States of America, we are required to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the reporting period covered thereby. As a result, these estimates are subject to an inherent degree of uncertainty. We base our estimates and judgments on our historical experience, the terms of existing contracts, our observance of trends in the industry, information that we obtain from our customers and outside sources, and on various assumptions that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments which impact our reported operating results and the carrying values of assets and liabilities. These assumptions include but are not limited to the percentage of new products which may have chargebacks and the percentage of items which will be subject to price decreases. Actual results may differ from these estimates.

Revenue recognition and accounts receivable, adjustments for returns and price adjustments, allowance for doubtful accounts and carrying value of inventory represent significant estimates made by management.

Revenue Recognition and Accounts Receivable: Revenue is recognized for product sales upon shipment and when title and risk of loss is passed to the customer and when estimates of discounts, rebates, promotional adjustments, price adjustments, returns, chargebacks,

 

19


Table of Contents

and other potential adjustments are reasonably determinable, collection is reasonably assured and the Company has no further performance obligations. These estimates are presented in the financial statements as reductions to net revenues and accounts receivable. Estimated sales returns, allowances and discounts are provided for in determining net sales. Contract research income is recognized as work is completed and billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones.

Royalty income is related to the sale or use of our products under license agreements with third parties. For those agreements where royalties are reasonably estimable, the Company recognizes revenue based on estimates of royalties earned during the applicable period.

Adjustments for Returns and Price Adjustments: Our product revenues are typically subject to agreements with customers allowing chargebacks, rebates, rights of return, pricing adjustments and other allowances. Based on our agreements and contracts with our customers, we calculate adjustments for these items when we recognize revenue and we book the adjustments against accounts receivable and revenue. Chargebacks, primarily from wholesalers, are the most significant of these items. Chargebacks result from arrangements we have with retail customers establishing prices for products for which the end user independently selects a wholesaler from which to purchase. A chargeback represents the difference between our invoice price to the wholesaler, which is typically stated at wholesale acquisition cost, and the end customer’s contract price, which is lower. We credit the wholesaler for purchases by end customers at the lower price. Therefore, we record these chargebacks at the time we recognize revenue in connection with our sales to wholesalers.

The reserve for chargebacks is computed in the following manner. The Company obtains wholesaler inventory data for the wholesalers which represent approximately 95% of our chargeback activity. This inventory is multiplied by the historical percentage of units that are charged back and by the price adjustment per unit to arrive at the chargeback accrual. This calculation is performed by product for each customer.

The calculated amount of chargebacks could be affected by other factors such as:

 

   

A change in retail customer mix

 

   

A change in negotiated terms with retailers

 

   

Product sales mix at the wholesaler

 

   

Retail inventory levels

 

   

Changes in Wholesale Acquisition Cost (WAC)

The Company continually monitors the chargeback activity and adjusts the provisions for chargebacks when we believe that the actual chargebacks will differ from our original provisions.

Consistent with industry practice, the Company maintains a return policy that allows our customers to return product within a specified period. The Company’s estimate for returns is based upon its historical experience with actual returns. While such experience has allowed for reasonable estimation in the past, history may not always be an accurate indicator of future returns. The Company continually monitors its estimates for returns and makes adjustments when it believes that actual product returns may differ from the established accruals.

Included in the adjustment for sales allowances and returns is a reserve for credits taken by our customers for rebates, return authorizations and other.

Sales discounts are granted for prompt payment. The reserve for sales discounts is based on invoices outstanding and assumes that 100% of available discounts will be taken.

Price adjustments, including shelf stock adjustments, are credits issued from time to time to reflect decreases in the selling prices of our products which our customer has remaining in its inventory at the time of the price reduction. Decreases in our selling prices are discretionary decisions made by us to reflect market conditions. Amounts recorded for estimated price adjustments are based upon specified terms with direct customers, estimated launch dates of competing products, estimated declines in market price and inventory held by the customer. The Company analyzes this on a case by case basis and makes adjustments to reserves as necessary.

The Company adequately reserves for chargebacks, discounts, allowances and returns in the period in which the sales takes place. No material amounts included in the provision for chargebacks and the provision for sales discounts recorded in the current period relate to sales made in the prior periods. The current provision for sales allowances and returns includes reserves for items sold in the current period, while the ending balance includes reserves for items sold in the current and prior periods. The Company has substantially and consistently used the same estimating methods. We continue to refine the methods as new data becomes available. There have been no material differences between the estimates applied and actual results.

 

20


Table of Contents

The Company determines amounts that are material to the financial statements in consideration of all relevant circumstances including quantitative and qualitative factors. Among the items considered is the impact on individual financial statement classification, operating income and footnote disclosures and the degree of precision that is attainable in estimating judgmental items.

The following table presents the roll forward of each significant estimate as of January 31, 2012 and January 31, 2011 and for the nine months then ended, respectively.

 

For the nine months ended January 31, 2012

   Beginning
Balance
May 1
     Current
Provision
     Actual Credits
in Current
Period
    Ending
Balance
January 31
 

Chargebacks

   $ 8,588,000       $ 92,000,000       $ (91,674,000   $ 8,914,000   

Sales discounts

     2,353,000         6,492,000         (7,113,000     1,732,000   

Sales allowances & returns

     6,159,000         29,605,000         (27,855,000     7,909,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total adjustment for returns & price allowances

   $ 17,100,000       $ 128,097,000       $ (126,642,000   $ 18,555,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

For the nine months ended January 31, 2011

                          

Chargebacks

   $ 6,509,000       $ 82,799,000       $ (81,552,000   $ 7,756,000   

Sales discounts

     1,391,000         5,281,000         (5,116,000     1,556,000   

Sales allowances & returns

     6,470,000         24,509,000           (25,891,000     5,088,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total adjustment for returns & price allowances

   $ 14,370,000       $ 112,589,000       $ (112,559,000   $ 14,400,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Allowance for Doubtful Accounts: We have historically provided credit terms to customers in accordance with what management views as industry norms. Financial terms for credit-approved customers are generally on either a net 30 or 60 day basis, though most customers are entitled to a prompt payment discount. Management periodically and regularly reviews customer account activity in order to assess the adequacy of allowances for doubtful accounts, considering factors such as economic conditions and each customer’s payment history and creditworthiness. If the financial condition of our customers were to deteriorate, or if they were otherwise unable to make payments in accordance with management’s expectations, we would have to increase our allowance for doubtful accounts.

Inventories: We state inventories at the lower of average cost or market, with cost being determined based upon the average method. In evaluating whether inventory is to be stated at cost or market, management considers such factors as the amount of inventory on hand, estimated time required to sell existing inventory and expected market conditions, including levels of competition. We establish reserves for slow-moving and obsolete inventories based upon our historical experience, product expiration dates and management’s assessment of current product demand.

Intangible Assets: The Company’s intangible assets consist primarily of acquired product rights. Intangible assets are stated at cost and amortized using the straight line method over the expected useful lives of the product rights. We regularly review the appropriateness of the useful lives assigned to our product rights taking into consideration potential future changes in the markets for our products. The Company reviews each intangible asset with finite useful lives for impairment by comparing the undiscounted cash flows of each asset to the respective carrying value. The Company performs this impairment testing when events occur or circumstances change that would more likely than not reduce the undiscounted cash flows of the asset below its carrying value.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company’s contractual obligations and commitments are detailed in the Company’s Annual Report on Form 10-K for the year ended April 30, 2011. As of January 31, 2012, the Company’s remaining contractual obligations have not materially changed since April 30, 2011.

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of January 31, 2012 we are not involved in any material unconsolidated transactions.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company invests in U.S. treasury notes, government asset backed securities and corporate bonds, all of which are exposed to interest rate fluctuations. The interest earned on these investments may vary based on fluctuations in the market interest rate.

 

21


Table of Contents
ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The disclosure under Note 13, Contingencies and Other Matters, Legal Proceedings, included in Part I of this report, is incorporated in this Part II, Item 1 by reference.

 

ITEM 1A. RISK FACTORS

Not applicable

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Period

   Total Number of
Shares Purchased
     Average Price per
Share
     Total Number of Shares
Purchased as Part of Publicly
Announced  Plans
     Approximate Dollar
Value of Shares that
May Yet Be  Purchased
Under the Plans (1)
 

11/01/11 – 11/30/11

     0       $ 0         0       $ 0   

12/01/11 – 12/31/11

     0       $ 0         0       $ 0   

01/01/11 – 01/31/12

     0       $ 0         0       $ 0   

 

(1) The Company’s Board of Directors has authorized $23,000,000 to repurchase the Company’s common stock. To date the Company has purchased 2,456,000 shares for the full $23,000,000 authorization. There are no further repurchases planned at this time.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

 

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

  31.1   Rule 13A-14(a)/15D-14(a) Certification
  31.2   Rule 13A-14(a)/15D-14(a) Certification
  32   Certification of Officers Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document.

 

22


Table of Contents

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.

HI-TECH PHARMACAL CO., INC.

(Registrant)

Date: March 9, 2012

 

By:  

/S/    DAVID S. SELTZER        

 

David S. Seltzer

(President and Chief Executive Officer)

Date: March 9, 2012

 

By:  

/S/    WILLIAM PETERS        

 

William Peters

(Vice President and Chief Financial Officer)

 

23

XNAS:HITK Quarterly Report 10-Q Filling

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XNAS:HITK Quarterly Report 10-Q Filing - 1/31/2012
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