HI TECH PHARMACAL CO INC - FORM 10-Q

HI TECH PHARMACAL CO INC - FORM 10-Q - December 10, 2010

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EX-32 - CERTIFICATION OF OFFICERS PURSUANT TO 18 U.S.C. SECTION 1350 - HI TECH PHARMACAL CO INC	dex32.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - HI TECH PHARMACAL CO INC	dex312.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - HI TECH PHARMACAL CO INC	dex311.htm

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 October 31, 2010

¨	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 ¨ 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):

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— 12,595,000 shares outstanding as December 6, 2010

INDEX

HI-TECH PHARMACAL CO., INC.


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements		3

	Condensed consolidated balance sheets—October 31, 2010 (unaudited) and April 30, 2010		3

	Condensed consolidated statements of operations—Three months and six months ended October 31, 2010 and 2009 (unaudited)		4

	Condensed consolidated statements of cash flows—Six months ended October 31, 2010 and 2009 (unaudited)		5

	Notes to condensed consolidated financial statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18

Item 4.	Controls and Procedures		18

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		19

Item 1A.	Risk Factors		19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19

Item 3.	Defaults Upon Senior Securities		19

Item 4.	(Removed and Reserved)		19

Item 5.	Other Information		19

Item 6.	Exhibits		19

	Signatures		20

	Certifications

PART I.

ITEM 1.

HI-TECH PHARMACAL CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	October 31, 2010			April 30, 2010
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	45,193,000		$	36,018,000
Accounts receivable, less allowance for doubtful accounts		43,473,000			40,452,000
Inventory		26,353,000			20,355,000
Deferred income taxes		5,652,000			4,219,000
Other current assets		3,050,000			3,129,000

TOTAL CURRENT ASSETS	$	123,721,000		$	104,173,000
Property and equipment—net		22,162,000			20,427,000
Intangible assets—net		24,300,000			24,322,000
Deferred income taxes		1,182,000			883,000
Other assets		507,000			479,000

TOTAL ASSETS	$	171,872,000		$	150,284,000


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,107,000		$	5,484,000
Accrued expenses		10,989,000			8,924,000
Current portion of long-term debt		135,000			193,000
Income taxes payable		95,000			880,000

TOTAL CURRENT LIABILITIES	$	16,326,000		$	15,481,000
Long-term debt		621,000			37,000

TOTAL LIABILITIES	$	16,947,000		$	15,518,000

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 15,048,000 at October 31, 2010 and 15,017,000 at April 30, 2010, respectively		150,000			150,000
Additional paid-in capital		76,842,000			75,345,000
Retained earnings		101,076,000			82,425,000
Accumulated other comprehensive loss, net of tax		(143,000	)		(154,000	)
Treasury stock, 2,456,000 shares of common stock, at cost on October 31, 2010 and April 30, 2010		(23,000,000	)		(23,000,000	)

TOTAL STOCKHOLDERS’ EQUITY	$	154,925,000		$	134,766,000

LIABILITIES AND STOCKHOLDERS’ EQUITY	$	171,872,000		$	150,284,000

See notes to condensed consolidated financial statements

HI-TECH PHARMACAL CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three months ended October 31,						Six months ended October 31,
	2010			2009			2010			2009
NET SALES	$	44,890,000		$	40,875,000		$	85,290,000		$	84,352,000
Cost of goods sold		19,891,000			18,477,000			37,094,000			35,404,000

GROSS PROFIT		24,999,000			22,398,000			48,196,000			48,948,000

Selling, general and administrative expenses		9,093,000			10,163,000			18,604,000			22,862,000
Research and product development costs		2,485,000			2,081,000			4,465,000			3,466,000
Royalty income		(1,177,000	)		(556,000	)		(2,221,000	)		(943,000	)
Contract research (income)		(429,000	)		(313,000	)		(617,000	)		(313,000	)
Interest expense		12,000			7,000			22,000			15,000
Interest income and other		(181,000	)		(276,000	)		(316,000	)		(1,285,000	)

TOTAL	$	9,803,000		$	11,106,000		$	19,937,000		$	23,802,000

Income before income tax expense		15,196,000			11,292,000			28,259,000			25,146,000
Income tax expense		5,220,000			3,894,000			9,608,000			9,074,000

NET INCOME	$	9,976,000		$	7,398,000		$	18,651,000		$	16,072,000

BASIC INCOME PER SHARE	$	0.79		$	0.63		$	1.48		$	1.40

DILUTED INCOME PER SHARE	$	0.76		$	0. 60		$	1.43		$	1.33

Weighted average common shares outstanding—basic		12,585,000			11,673,000			12,577,000			11,509,000
Effect of potential common shares		459,000			589,000			477,000			543,000

Weighted average common shares outstanding—diluted		13,044,000			12,262,000			13,054,000			12,052,000

See notes to condensed consolidated financial statements

HI-TECH PHARMACAL CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Six months ended October 31,
	2010			2009
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	$	11,228,000		$	14,802,000

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(3,139,000	)		(1,580,000	)
Proceeds from the sale of intangible assets		—			2,031,000
Purchase of intangible assets		(36,000	)		(4,180,000	)
Purchase of ECR Pharmaceuticals assets		—			(4,138,000	)
Proceeds from sale of intangible asset		156,000			—

NET CASH (USED IN) INVESTING ACTIVITIES	$	(3,019,000	)	$	(7,867,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of options		295,000			7,651,000
Payment under capital lease obligation		—			(89,000	)
Tax benefit of stock incentives		145,000			2,792,000
Borrowings under long term debt		621,000			—
Payment of borrowings		(95,000	)		—

NET CASH PROVIDED BY FINANCING ACTIVITIES	$	966,000		$	10,354,000

NET INCREASE IN CASH AND CASH EQUIVALENTS		9,175,000			17,289,000
Cash and cash equivalents at beginning of the period		36,018,000			17,891,000

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	45,193,000		$	35,180,000

Supplemental and non cash disclosures of cash flow information:
Interest paid	$	22,000		$	15,000
Income taxes paid	$	11,985,000		$	6,540,000
Other receivable from the sale of marketing rights	$	—		$	468,000
ECR Pharmaceuticals contingent consideration accrual	$	1,428,000		$	720,000

See notes to condensed consolidated financial statements

HI-TECH PHARMACAL CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

October 31, 2010

1. BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 generally accepted accounting principles 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 expense during the reporting periods. Actual results could differ from these estimates and assumptions. Operating results for the three and six month period ended October 31, 2010 are not necessarily indicative of the results that may be expected for the year ending April 30, 2011. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2010 in the Company’s Annual Report on Form 10-K.

2. BUSINESS:

Hi-Tech 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. Hi-Tech’s Midlothian Laboratories division sources and markets generic prescription products.

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


	Six months ended October 31, 2010		Six months ended October 31, 2009
Hi-Tech Generics	$	68,846,000	$	68,697,000
Health Care Products		6,880,000		5,703,000
Midlothian Laboratories		1,325,000		2,140,000
ECR Pharmaceuticals		8,239,000		7,812,000

Total	$	85,290,000	$	84,352,000

3. REVENUE RECOGNITION:

Revenue is recognized for product sales upon shipment and passing of risk 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 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.

4. NET INCOME PER SHARE:

Basic income 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 per share. The weighted average number of shares outstanding used in the computation of diluted net earnings 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 288,000 and 287,000 shares at October 31, 2010 and October 31, 2009, respectively.

5. INVENTORY:

The components of inventory consist of the following:


	October 31, 2010		April 30, 2010
Finished products	$	10,753,000	$	8,057,000
Work in process		1,177,000		740,000
Raw materials		14,423,000		11,558,000

TOTAL INVENTORY	$	26,353,000	$	20,355,000

6. PROPERTY AND EQUIPMENT:

The components of property and equipment consist of the following:


	October 31, 2010		April 30, 2010
Land and building and improvements	$	16,807,000	$	15,741,000
Machinery and equipment		23,019,000		21,331,000
Transportation equipment		37,000		37,000
Computer equipment and systems		5,302,000		4,982,000
Furniture and fixtures		1,122,000		1,057,000

	$	46,287,000	$	43,148,000
Accumulated depreciation and amortization		24,125,000		22,721,000

TOTAL PROPERTY AND EQUIPMENT	$	22,162,000	$	20,427,000

The Company incurred depreciation expense of $1,404,000 and $1,365,000 for the six months ended October 31, 2010 and October 31, 2009, respectively. Depreciation expense for the three months ended October 31, 2010 and October 31, 2009 was $713,000 and $687,000, respectively. No depreciation is taken on land with a carrying value of $1,754,000 at October 31, 2010 and October 31, 2009.

7. INTANGIBLE ASSETS:

The components of net intangible assets are as follows:


	October 31, 2010		April 30, 2010		Amortization Period
ECR intangible assets	$	6,086,000	$	4,937,000		9-10 years
Blaine intangible assets		3,827,000		4,032,000		10 years
Clobetasol intangible assets		3,800,000		4,000,000		10 years
Midlothian intangible asset		3,253,000		3,490,000		3-10 years
Zolpimist^® intangible assets		3,000,000		3,000,000		10 years
Zostrix^® intangible assets		2,836,000		3,069,000		3-11.5 years
Vosol^® and Vosol^® HC intangible assets		508,000		543,000		10 years
Other license agreements		990,000		1,251,000		5-10 years

TOTAL INTANGIBLE ASSETS	$	24,300,000	$	24,322,000

Intangible assets are stated at cost and amortized using the straight line method over the expected useful lives of the product rights. Amortization expense of the intangible assets for the six months ended October 31, 2010 and October 31, 2009 was $1,264,000 and $724,000, respectively. Amortization expense for the three months ended October 31, 2010 and October 31, 2009 was $628,000 and $362,000, respectively. Amortization is included in selling, general and administrative expenses for all periods presented. The Company amortizes intangible assets when the related products begin to sell. The Company tests for impairment of intangible assets when events or circumstances indicate that the carrying value of the assets may not be recoverable. During the six months ended October 31, 2010, the Company determined that the value of Tanafed^®, which is included in other license agreements, was impaired. The Company wrote down the value of the intangible asset by $221,000.

Included in ECR intangible assets is an earn-out of $3,490,000 in connection with the acquisition of the assets of ECR Pharmaceuticals, of which $1,428,000 was earned in the six months ended October 31, 2010. The Company has a contingent liability of up to an additional $510,000 if certain sales and gross margin levels are achieved by ECR Pharmaceuticals over a three year period.

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 October 31, 2010, 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 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. The Company anticipates drawing down an additional $1,379,000 to finance the remaining payments for the equipment. The effective interest rate was 1.84% for the six months ended October 31, 2010.

9. FREIGHT EXPENSE:

Outgoing freight costs are included in selling, general, and administrative expense. Incoming freight is included in cost of goods sold.

10. STOCK-BASED COMPENSATION:

The Company follows the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation” (“ASC 718”). ASC 718 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 ASC 718 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 FASB ASC Topic 505-50 “Equity Based Payments to Non- Employees”.

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.

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 deferred tax 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 Statement of Operations:


	Six months ended October 31, 2010		Six months ended October 31, 2009
Cost of sales	$	126,000	$	206,000
Selling, general and administrative expenses		801,000		875,000
Research and product development costs		130,000		72,000

Stock-based compensation expense	$	1,057,000	$	1,153,000

Stock-based compensation expense, net of income taxes, resulted in a decrease of $0.06 in basic and diluted net income per share for the six months ended October 31, 2010 and a decrease of $0.10 in basic and diluted net income per share for the six months ended October 31, 2009.


	Three months ended October 31, 2010		Three months ended October 31, 2009
Cost of sales	$	36,000	$	102,000
Selling, general and administrative expenses		425,000		470,000
Research and product development costs		73,000		36,000

Stock-based compensation expense	$	534,000	$	608,000

Stock-based compensation expense, net of income taxes, resulted in a decrease of $0.03 in basic and diluted net income per share for the three months ended October 31, 2010 and a decrease of $0.05 in basic and diluted net income per share for the three months ended October 31, 2009.

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 October 31, 2010 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 ASC Topic 718, 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 October 31, 2010, the weighted average forfeiture rate was 9% and the effect of forfeiture adjustments for the three and six months ended October 31, 2010 was insignificant. There were no options granted during the six months ended October 31, 2010. On November 12, 2010 the Company granted 464,000 options to directors and employees for an exercise price of $22.25.

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 $383,000 and $7,937,000 for the six month periods ended October 31, 2010 and October 31, 2009, respectively. As of October 31, 2010, $3,991,000 of total unrecognized compensation cost related to stock options for the three plans is expected to be recognized over a weighted average period of 2.7 years.

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 Midlothian Laboratories, in exchange for a series of payments totaling $1,000,000 over the course of one year. In addition, the Company will receive a royalty on the sales of these products, not to exceed $1,500,000 per year for three years. These products contributed approximately $600,000 and $1,600,000 in sales for the Midlothian Laboratories division for the years ended April 30, 2010 and April 30, 2009, respectively. These products contributed $0 and $600,000 in sales for the six months ended October 31, 2010 and October 31, 2009, respectively. The Company recognized a gain of $1,000,000 from this agreement in the first quarter of fiscal 2010, recorded in interest income and other on the Condensed Consolidated Statement of Operations. Royalty income earned under this agreement amounted to $855,000 for the six months ended October 31, 2010.

12. INCOME TAXES:

The Company estimated its effective tax rate to be approximately 34% for the year ending April 30, 2011. 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 October 31, 2010 and April 30, 2010, the Company had recorded a $32,000 and $163,000 liability, respectively, for uncertain tax positions related to research and development credits taken by the Company.

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. The Company is no longer subject to U.S. federal, state or local income tax examination for years ended prior to April 30, 2005. The Company is currently under examination by the Internal Revenue Service for the taxable years ending April 30, 2006, 2007, 2008 and 2009.

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 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 has responded to those observations and is awaiting feedback from FDA. Until the FDA determines that all issues have been resolved satisfactorily, the FDA may not approve any pending marketing applications for new products manufactured by the Company. The Company suspended sales of certain products until the issue is resolved. Sales of these products totaled approximately $5,000,000 in fiscal year 2010. The Company incurred an expense of $534,000 to write off the value of the inventory used in the manufacturing of these products during the three months ended July 31, 2010. Other than the suspended products, the Company does not anticipate any interruption in sales of its other products.

On July 7, 2009, the Company received a subpoena duces tecum demanding production of its business records in connection with an investigation by the Office of the Attorney General of the State of California, Department of Justice, relating to drugs not approved by the FDA and the potential filing of false claims with California’s Medicaid (Medi-Cal) program. The Company has responded 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.

[2] Legal Proceedings:

On March 19, 2010 the Midlothian Laboratories Division of the Company (“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 Marking Statute. A private plaintiff, San Francisco Technology Inc., is filing 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 alleges these actions violate the federal civil False Marking Statute. The Company was served with the Complaint on March 22, 2010. On July 19, 2010, the judge ordered that the Company be severed from the action and transferred to the Eastern District of New York. On November 15, 2010, the Company moved to dismiss or stay the action and on December 6, 2010, the plaintiff filed a motion in opposition to dismiss or stay the action. The Company intends to defend against such allegations and believes it has meritorious defenses. The Company has no estimate at this time of its potential exposure and cannot, at this time, predict the outcome of such action.

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. The Notice stated that the relator has filed a Motion for Voluntary Dismissal of 55 of the 68 named defendants. To our knowledge, the relator’s Motion for Voluntary Dismissal remains under seal. The government’s declination Notice also stated that it had not yet made an election decision as to “certain other defendants.”

On July 23, 2010, the relator, Constance A. Conrad, further amended the Complaint, which, as amended, includes the addition of the Company, including a subsidiary or affiliate of the Company, as a defendant. To our knowledge, at this time, there have been no changes to the government’s Notice of Declination. Should this Qui Tam action proceed, the Company intends to vigorously defend against the allegations in the 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 believes the complaint is without merit. On July 25, 2009, the Company filed a motion to dismiss the action based on lack of personal jurisdiction and improper venue. Allergan responded on September 8, 2009 opposing Hi-Tech’s motion to dismiss. The Company withdrew its motion to dismiss on November 19, 2009, and on November 20, 2009, Allergan filed an amended complaint adding a claim for infringement of U.S. Patent No. 7,323,463. The Company answered the amended complaint on December 10, 2009, asserting counterclaims of non-infringement and invalidity as to all asserted patents. Allergan replied to the Company’s counterclaims on January 4, 2010. Discovery has commenced. On March 17, 2010, Allergan filed a second complaint adding allegations of infringement of U.S. Patent No. 7,642,258. The Company answered on March 19, 2010 denying infringement of any valid claims.

[3] Commitments and Contingencies:

The Company’s Midlothian division signed a lease for a 12,000 square foot facility in Montgomery, AL commencing on December 1, 2008 and terminating on November 30, 2013.

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 fiscal 2008, the Company entered into two software lease obligations to partially finance a new computer system.

In April 2010, the Company entered into a purchase commitment for bottling, labeling and packaging equipment for approximately $1,087,000.

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 acquisition of the assets of ECR Pharmaceuticals, the Company has recorded $3,490,000 included in intangible assets, for an earn-out of which $1,428,000 was earned in the six months ended October 31, 2010 and is included in accrued expenses. The Company has a contingent liability of up to an additional $510,000 if certain sales and gross margin levels are achieved by ECR over a three year period.

14. RECENT ACCOUNTING PRONOUNCEMENTS:

In June 2009, the FASB amended Topic 810 “Consolidation”, which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. It requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. It also requires

additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The guidance is effective for fiscal years beginning after November 15, 2009 and is effective for the Company on May 1, 2010. The adoption of the guidance did not have any material impact on the Company’s financial condition, results of operations, and disclosures.

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, is 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.


	Six months ended October 31,
	2010			2009
Net income	$	18,651,000		$	16,072,000
Other comprehensive loss, net of tax		(11,000	)		(79,000	)

Comprehensive income	$	18,640,000		$	15,993,000

16. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:

For the six months ended October 31, 2010, three customers, AmerisourceBergen, McKesson and Cardinal Health, accounted for net sales of approximately 16%, 12% and 11%, respectively. These customers represented approximately 52% of accounts receivable at October 31, 2010. For the six months ended October 31, 2009, McKesson, Cardinal Health and AmerisourceBergen accounted for net sales of approximately 25%, 17% and 14%, respectively. These customers represented approximately 59% of accounts receivable at October 31, 2009.

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

17. FAIR VALUE MEASUREMENTS

The carrying value of certain financial instruments such as cash and cash equivalents, accounts receivable, investments, notes payable and accounts payable approximate their fair values due to their short-term nature or their underlying terms.

The fair value of long-term debt is deemed to be the carrying value due to the variable interest rate on such borrowings which is aligned with market fluctuation of interest rates.

The Company’s investment in Neuro-Hitech is valued at the unadjusted quoted price in the active market as of October 31, and April 30, 2010.

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 OCTOBER 31, 2010 AND 2009

Revenue


	October 31, 2010		October 31, 2009		Change			% Change
Hi-Tech Generics	$	36,561,000	$	31,997,000	$	4,564,000			14	%
Health Care Products		3,350,000		3,611,000		(261,000	)		(7	)%
Midlothian Laboratories		234,000		708,000		(474,000	)		(67	)%


	October 31, 2010		October 31, 2009		Change		% Change
ECR Pharmaceuticals		4,745,000		4,559,000		186,000		4	%

Total	$	44,890,000	$	40,875,000	$	4,015,000		10	%

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 Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution increased to approximately $8,100,000 from approximately $7,500,000 in the comparable quarter as the Company sold more units but at lower average prices. Strong unit sales combined with a price increase helped increase sales of Fluticasone Propionate nasal spray to approximately $17,300,000 in the quarter versus approximately $2,500,000 in the comparable quarter. The Company is expanding its capacity to meet demand for Fluticase Propionate. The Company temporarily halted sales of several unapproved products in late June 2010, which resulted in lower sales of these products.

The Health Care Products division, which markets the Company’s branded OTC products, experienced lower sales of products in its diabetic product line which were partially offset by sales of the Mag-Ox^® line of magnesium supplements the Company acquired from Blaine Pharmaceuticals in March 2010.

Midlothian Laboratories’ sales declined due to lower pricing on certain products.

ECR Pharmaceuticals, which sells branded prescription products, saw increased sales of the Lodrane^® line of antihistamines, which were partially offset by lower sales of the Dexpak^® line of corticosteroids.

Cost of Sales


	October 31, 2010					October 31, 2009
	$		% of sales			$		% of sales
Cost of Sales		19,891,000		44	%		18,477,000		45	%

Increased sales of Fluticasone Propionate nasal spray at higher average prices led to the decrease in cost of sales as a percentage of net sales as did sales of the Mag-Ox^® line of magnesium supplements, which sell at margins above the Company’s average. Significant pricing declines for Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution offset this trend.

Expense (Income) Items


	October 31, 2010			October 31, 2009			Change			% Change
Selling, general and administrative expense	$	9,093,000		$	10,163,000		$	(1,070,000	)		(11	)%
Research and product development costs	$	2,485,000		$	2,081,000		$	404,000			19	%
Royalty income	$	(1,177,000	)	$	(556,000	)	$	(621,000	)		112	%
Contract research (income)	$	(429,000	)	$	(313,000	)	$	(116,000	)		37	%
Interest expense	$	12,000		$	7,000		$	5,000			71	%
Interest (income) and other	$	(181,000	)	$	(276,000	)	$	95,000			(34	)%
Provision for income tax expense	$	5,220,000		$	3,894,000		$	1,326,000			34	%

Selling, general and administrative expenses for the ECR Pharmaceuticals subsidiary rose as the sales force increased.

The increase in Research and Development expenditures is due to increased spending on internal projects for the generic division and expenditures at the Company’s ECR Pharmaceuticals subsidiary.

Royalty income includes royalties relating to Brometane, a cough and cold product which the Company divested in July 2008, a royalty on sales of certain Naprelan^® strengths and on nutritional products divested by the Company’s Midlothian division.

The effective tax rate remained flat at 34% in the three months ended October 31, 2010 and October 31, 2009.

Income Analysis


	October 31, 2010		October 31, 2009		Change		% Change
Net Income	$	9,976,000	$	7,398,000	$	2,578,000		35	%
Basic Earnings Per Share	$	0.79	$	0.63	$	0.16		25	%
Diluted Earnings Per Share	$	0.76	$	0.60	$	0.16		27	%
Weighted Average Common Shares Outstanding, Basic		12,585,000		11,673,000		912,000		8	%


	October 31, 2010		October 31, 2009		Change			% Change
Effect of Potential Common Shares		459,000		589,000		(130,000	)		(22	)%
Weighted Average Common Shares Outstanding, Diluted		13,044,000		12,262,000		782,000			6	%

The increased share count in period to period shares outstanding reflects option exercises and new option grants.

RESULTS OF OPERATIONS FOR SIX MONTHS ENDED OCTOBER 31, 2010 AND 2009

Revenue


	October 31, 2010		October 31, 2009		Change			% Change
Hi-Tech Generics	$	68,846,000	$	68,697,000	$	149,000			0	%
Health Care Products		6,880,000		5,703,000		1,177,000			21	%
Midlothian		1,325,000		2,140,000		(815,000	)		(38	)%
ECR Pharmaceuticals		8,239,000		7,812,000		427,000			5	%

Total	$	85,290,000	$	84,352,000	$	938,000			1	%

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 and a decrease in sales of Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution. Sales of Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution dropped to approximately $16,000,000 from approximately $18,700,000 in the comparable period as the Company sold more units but at lower average prices. Strong unit sales combined with a price increase helped increase sales of Fluticasone Propionate nasal spray to $29,000,000 in the period versus $4,700,000 in the comparable period. Sales of cold and flu items declined in the current period, compared to a period of unusually strong demand last summer. The Company temporarily halted sales of several unapproved products in late June 2010, which resulted in lower sales of these products.

The Health Care Products division, which markets the Company’s branded OTC products, experienced higher sales due to the Company’s acquisition of the Mag-Ox^® line of magnesium supplements from Blaine Pharmaceuticals in March 2010.

Midlothian Laboratories’ sales declined due to the divestiture of certain nutritional products in July 2009, for which the Company is now receiving royalty income through July 31, 2012 and due to lower pricing on other products.

Cost of Sales


	October 31, 2010					October 31, 2009
	$		% of sales			$		% of sales
Cost of Sales		37,094,000		43	%		35,404,000		42	%

The increase in cost of sales as a percentage of net sales is primarily due to significant pricing declines for Dorzolamide with Timolol ophthalmic solution and Dorzolamide ophthalmic solution. Increased sales of Fluticasone Propionate nasal spray at higher average prices partially offset this effect as did sales of the Mag-Ox^® line of magnesium supplements, which sell at margins above the Company’s average.

Expense (Income) Items


	October 31, 2010			October 31, 2009			Change			% Change
Selling, general and administrative expense	$	18,604,000		$	22,862,000		$	(4,258,000	)		(19	)%
Research and product development costs	$	4,465,000		$	3,466,000		$	999,000			29	%
Royalty income	$	(2,221,000	)	$	(943,000	)	$	(1,278,000	)		136	%
Contract research (income)	$	(617,000	)	$	(313,000	)	$	(304,000	)		97	%
Interest expense	$	22,000		$	15,000		$	7,000			47	%
Interest (income) and other	$	(316,000	)	$	(1,285,000	)	$	969,000			(75	)%
Provision for income tax expense	$	9,608,000		$	9,074,000		$	534,000			6	%

The decline in selling, general and administrative expenses was primarily due to absence of the royalty payment on profits of Dorzolamide with Timolol ophthalmic solution which was $4,100,000 in the prior period. The Company bought out its partner on the product in January 2010 and no longer incurs this expense. Additionally, the Company’s HCP division spent less on advertising in the six month period ended October 31, 2010 compared with the six months ended October 31, 2009.

Selling, general and administrative expenses for the ECR Pharmaceuticals subsidiary rose as the sales force increased.

The increase in Research and Development expenditures is due to increased spending on internal projects for the generic division and expenditures at the Company’s ECR Pharmaceuticals subsidiary.

Interest (income) and other includes the $1,000,000 gain on the sale of the related rights to certain nutritional products previously sold by Midlothian for the six months ended October 31, 2009.

The effective tax rate decreased to 34% in the six months ended October 31, 2010 from 36% in the six months ended October 31, 2009 due to a statutory rate increase in the domestic production activities tax credit.

Income Analysis


	October 31, 2010		October 31, 2009		Change			% Change
Net Income	$	18,651,000	$	16,072,000	$	2,579,000			16	%
Basic Earnings Per Share	$	1.48	$	1.40	$	0.08			6	%
Diluted Earnings Per Share	$	1.43	$	1.33	$	0.10			8	%
Weighted Average Common Shares Outstanding, Basic		12,577,000		11,509,000		1,068,000			9	%
Effect of Potential Common Shares		477,000		543,000		(66,000	)		(12	)%
Weighted Average Common Shares Outstanding, Diluted		13,054,000		12,052,000		1,002,000			8	%

The increased share count in period to period shares outstanding reflects option exercises and new option grants.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s operations are historically financed principally by cash flow from operations. At October 31, 2010 and April 30, 2010, working capital was approximately $107,395,000 and $88,692,000, respectively, an increase of $18,703,000 during the six months ended October 31, 2010.

Cash flows provided by operating activities were approximately $11,228,000 which is primarily due to net income in the period offset by the increase in accounts receivable and an increase in inventory. Part of the increase in inventory is due to a buildup of components for Fluticasone Propionate nasal spray and Zolpimist^® oral spray.

Cash flows used in investing activities were $3,019,000 and were mostly for capital expenditures which were primarily made for capacity expansion at the Company’s Amityville facilities.

Cash flows provided by financing activities of $966,000 include the draw down on an equipment financing line from JP Morgan Chase of $621,000.

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 JP Morgan Chase which remains undrawn, and an additional $4,379,000 of the equipment financing line from JP Morgan Chase. Both of these financing agreements have terms which expire no earlier than May 27, 2013.

REVOLVING CREDIT FACILITY

Credit Agreement; provided that, the CB Floating Rate shall never be less than the Adjusted One Month LIBOR rate, or for a LIBOR Loan, at a rate equal to the Adjusted LIBOR rate 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.

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, and anticipates drawing down an additional $1,379,000 to finance the remaining payments for the equipment.

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 January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which is effective for the Company on May 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective May 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures, the adoption of the provisions effective May 1, 2011 will not impact the Company’s financial position or results of operations. The implementation of this guidance, for the provisions effective May 1, 2010, did not have a material impact on the Company’s consolidated financial statements.

SEASONALITY

Historically, the months of September through March account for a greater portion of the Company’s sales than the other months of the fiscal year. However, this sales pattern is unlikely to continue as the Company sells fewer cough and cold products, more allergy products and more products without seasonal fluctuations. Even with these changes in product mix, 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 risk is passed 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. 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.

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 by utilizing historical sales data to calculate an average estimated chargeback percentage by product by customer. The percentage is applied to all wholesale invoices that have been billed to the customer within a reasonable time frame determined by the Company. The Company currently obtains wholesaler inventory data for the wholesalers which represent approximately 95% of our chargeback activity. This data is used to verify the information calculated in the chargeback accrual.

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 became available. There have been no material differences between the estimates applied and actual results.

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 October 31, 2010 and October 31, 2009 and for the six months then ended, respectively.


*For the six months ended October 31, 2010*	Beginning Balance May 1		Current Provision		Actual Credits in Current Period			Ending Balance October 31
Chargebacks	$	6,685,000	$	61,442,000	$	(56,637,000	)	$	11,490,000
Sales Discounts		1,405,000		3,555,000		(3,483,000	)		1,477,000
Sales Allowances & Returns		6,766,000		15,771,000		(17,616,000	)		4,921,000

Total Adjustment for Returns & Price Allowances	$	14,856,000	$	80,768,000	$	(77,736,000	)	$	17,888,000


*For the six months ended October 31, 2009*
Chargebacks	$	3,299,000	$	38,928,000	$	(34,646,000	)	$	7,581,000
Sales Discounts		786,000		2,898,000		(2,807,000	)		877,000
Sales Allowances & Returns		8,140,000		15,891,000		(14,084,000	)		9,947,000

Total Adjustment for Returns & Price Allowances	$	12,225,000	$	57,717,000	$	(51,537,000	)	$	18,405,000

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

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 October 31, 2010 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.

Interest Rate Risks

As of October 31, 2010, the Company had $621,000 in long-term debt outstanding under an equipment financing agreement. This borrowing and any future borrowings will bear interest at negotiated rates and would be subject to interest rate risk. The agreement includes interest rates at the option of the Company that are based on: (i) the Prime rate; (ii) Adjusted LIBOR plus the Applicable Margin. The effective interest rate was 1.84 % for the six months ended October 31, 2010.

Assuming no changes in the Company’s financial structure as it stood at October 31, 2010, if market interest rates average an increase of 100 basis points over the final six months period for Fiscal 2011 compared to the interest rates incurred for the six month period ended October 31, 2010, there would be an immaterial change in interest expense. This amount was determined by calculating the effect of the average hypothetical interest rate increase on the Company’s variable rate under the equipment financing agreement.

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)
08/01/10 – 08/31/10		0	$	0	$	0	$	0
09/01/10 – 09/30/10		0	$	0	$	0	$	0
10/01/10 – 10/31/10		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.

RESERVED

None

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

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: December 10, 2010
By:	/S/ DAVID S. SELTZER
	David S. Seltzer
	(President and Chief Executive Officer)

		Date: December 10, 2010
By:	/S/ WILLIAM PETERS
	William Peters
	(Vice President and Chief Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company