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TMCNet:  CADISTA HOLDINGS INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[June 27, 2014]

CADISTA HOLDINGS INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) This discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Report.

Operating results are not necessarily indicative of results that may occur in the future periods. Certain statements in this Report under this Item 7, Item 1, "Business", Item 1A, "Risk Factors" and elsewhere in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. We disclaim any obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise, except as required by law.


36 Overview We are engaged in the development, manufacture, sale and distribution of prescription generic pharmaceutical products in the United States through our wholly-owned subsidiary, Jubilant Cadista Pharmaceuticals Inc. ("Cadista Pharmaceuticals"). Pharmaceutical products commonly referred to as "generics" are the pharmaceutical and therapeutic equivalents of brand-name drug products and are usually marketed under their established non-proprietary drug names, rather than under a brand name. Generic pharmaceuticals are generally sold at prices significantly less than the brand product. Generic pharmaceuticals contain the same active ingredient and are of the same route of administration, dosage form, strength and indication(s) as brand-name pharmaceuticals already approved for use in the United States by the Food and Drug Administration ("FDA"). In order to gain FDA approval for a generic drug, we or one of our suppliers of finished dosage products must file and the FDA must approve an abbreviated new drug application ("ANDA") for such drug.

We sell our products in the United States primarily through pharmaceutical wholesalers and to national and regional pharmacy chains, mass merchandisers, government agencies and mail order pharmacies. Our sales are generated primarily by our own sales force, with the support of our senior management team, customer service, and distribution employees. For our fiscal years ended March 31, 2014 and March 31, 2013, approximately 93% and 93% of our product sales revenue, respectively, were derived from products sold under our own product label. The balance of our product sales revenue was comprised of private label product sales (which products are sold by a customer under its name). In addition to our product sales revenue, from time to time we provide drug development and manufacturing services to Jubilant and third parties (see "Development and Manufacturing Services" of "Item 1. Business"). These drug development services represented $0.05 million and $0.4 million of our revenues in each of fiscal years 2014 and 2013, respectively.

In December 2012, we entered into a master supply agreement (the "2012 Master Supply Agreement") with Jubilant pursuant to which Jubilant acquired exclusive marketing rights to nine of our products in 27 countries outside of the United States. Pursuant to the terms of the 2012 Master Supply Agreement, we will supply Jubilant with finished dosage of each product covered under the Agreement. Jubilant's marketing of each of these products in each country is subject to receipt of applicable regulatory approval in such country. To date no applications have been filed for regulatory approval of those products; accordingly, to date no such approval has been obtained.Therefore, Jubilant has not commenced marketing any of these products, and we have not received any revenues pursuant to this agreement.

As of March 31, 2014, we marketed 19 products, all of which are prescription generic pharmaceutical products. Six of such products are marketed by us pursuant to a Master Supply Agreement we entered into with Jubilant Life Sciences Ltd. ("Jubilant"), the parent company of our principal stockholder, in May 2011, which was amended in December 2012 (as amended, the "2011 Master Supply Agreement"). As of March 31, 2014, our new product pipeline consisted of 19 products for which ANDAs were pending with the FDA (17 of which are ANDAs filed and owned by Jubilant with respect to which we have marketing rights under the 2011 Master Supply Agreement) and one additional product for which we have begun initial development activities, with the objective to assemble and file an ANDA with the FDA. The ANDAs owned by us that are currently under review by the FDA have each been on file with the FDA for 72 months. We anticipate that our portfolio of marketed products will continue to grow as a result of launches of products under ANDAs that have already been approved, approval of our ANDAs (and Jubilant's ANDAs covered under the 2011 Master Supply Agreement) currently under review by the FDA, approval of a future ANDA for the product that we currently have in an earlier stage of development, additional products as to which we acquire marketing rights pursuant to the 2011 Master Supply Agreement, and potentially acquiring FDA approved ANDAs from third parties.

We filed our first ANDA with the FDA in May, 1996, and through March 31, 2014 have filed a total of 19 ANDAs with the FDA (including two for products that were approved but which we have since discontinued marketing). Our first ANDA approval was received from the FDA in October, 1997. In September 2012, we received two products approvals, for Losartan Potassium Tablets and Losartan Potassium Hydrochlorothiazide Tablets. We did not receive any new product approvals, during our fiscal year ended March 31, 2014. The specific timing of our new product launches is subject to a variety of factors, some of which are beyond our control, including the timing of FDA approval for ANDAs currently under review or that we or Jubilant file with respect to new products to be marketed by us. The timing of these and other new product launches will have a significant impact on our results of operations.

37 The active compounds for our products, also called active pharmaceutical ingredients ("APIs") are purchased from specialized manufacturers, including Jubilant, and are essential to our business operations. Each individual API must be approved by the FDA as part of the ANDA approval process. API manufacturers are also regularly inspected by the FDA. We do not manufacture API for any of our products at our Salisbury, Maryland facility. While we believe that there are alternative suppliers available for the API used in our products, any interruption of API supply or inability to obtain API used in our products, or any significant API price increase not passed on to our customers, could have a material adverse impact on our business operations and financial condition.

Results of Operations for the Year Ended March 31, 2014 Compared to the Year Ended March 31, 2013 2014 2013 Change $000's $000's $000's Percent Revenues 107,661 114,901 (7,240 ) (6 )% Costs of revenues (exclusive of depreciation and amortization) 51,981 42,136 9,845 23 % Research and development expense (exclusive of depreciation and amortization) 9 274 (265 ) (97 )% Selling, general and administrative expense (exclusive of depreciation and amortization) 7,941 5,739 2,202 38 % Depreciation and amortization 2,161 2,437 (276 ) (11 )% Income from operations 45,569 64,315 (18,746 ) (29 )% Other income / (expense) net 1,944 651 1,293 199 % Income before income tax 47,513 64,966 (17,453 ) (27 )% Income tax expense 17,589 24,620 (7,031 ) (29 )% Net income 29,924 40,346 (10,422 ) (26 )% Revenues We generate revenue principally from the sale of generic pharmaceutical products, which include a variety of products and dosage forms. In addition to our product sales revenue, from time to time we provide drug development and manufacturing services to Jubilant and third parties (see "Development and Manufacturing Services" in Item 1-"Business"). These drug development services contributed $0.05 million and $0.4 million of our revenue in fiscal year 2014 and 2013, respectively.

Revenues for the year ended March 31, 2014 decreased 6% or $7.24 million to $107.66 million compared to revenues of $114.90 million from the prior fiscal year. The decrease in revenues is mainly attributable to a decrease in sales of Methylprednisolone ( due to reduction in volume and price erosion), offset by an increase in sales of Prednisone and products that we sell pursuant to the 2011 Master Supply Agreement (i.e. Donepezil, Pantoprazole, Valacyclovir, Olanzapine ODT and Escitolapram).

Total revenues of our top selling products were as follows: March 31, Change 2014 2013 $000's $000's $000's Product Methylprednisolone tablets 59,220 73,215 (13,995 ) Meclizine 11,645 12,339 (694 ) Other product revenues 36,745 28,934 7,811 Net product sales 107,610 114,488 (6,878 ) Other revenues 51 413 (362 ) Total revenues 107,661 114,901 (7,240 ) 38 During the year ended March 31, 2014, our top two products (Methylprednisolone and Meclizine) accounted for approximately 66% of our total net product sales and approximately 90% of our total consolidated gross margins for such year.

We launched Methylprednisolone tablets prior to July 2005. We sell Methylprednisolone tablets, which are the generic equivalent of Medrol®, in four strengths (4 mg, 8 mg, 16 mg, and 32 mg) and a total of two pack sizes for one strength and one pack size for the other three strengths. We believe that during both our 2014 fiscal year and 2013 fiscal year, there were at least four competitors supplying this generic product in the U.S. market in 4mg and 8 mg strengths. We believe that there is one competitor currently supplying this generic product in 16 mg or 32 mg strengths in the U.S. market.

Methylprednisolone tablets are a steroid product. The volume of Methylprednisolone products sold during our fiscal year ended March 31, 2014 was slightly lower than fiscal year ended March 31, 2013, but pricing was materially more competitive than in our fiscal year ended March 31, 2013 resulting in a material reduction of our net revenues from sales of this product during our 2014 fiscal year. Pricing was materially more competitive in our fiscal year ended March 31, 2014 as compared to our prior fiscal year, primarily as a result of: competitors more aggressively pursuing market share; continued consolidation of wholesalers and retailers into larger buying groups; and customers more aggressively seeking lower prices. We currently anticipate that these market dynamics will continue and that pricing for Methylprednisolone will continue to be very competitive. There can be no assurance that we are aware of all activities in this market or plans of our competitors. There can be no assurance that new competitors will not commence supplying this generic product in the future. Any new competition could result in further reduction in unit price and sales volume, which could negatively impact our revenue and gross margin inthe future.

We launched Meclizine tablets in June 2010. We sell Meclizine tablets, which are the generic version of Antivert®, in 12.5 mg and 25 mg strengths and two pack sizes for each strength. We believe that there were two competitors supplying this generic product in the U.S. market through the end of our fiscal year ended March 31, 2012. However, two additional competitors received FDA approval since that date. We believe, of these two additional competitors, one entered the market in the quarter ended June 30, 2013 and that the other competitor entered the market in the quarter ending June 30, 2014 We believe that the new competition has resulted in significant declines in our sales volume and unit price, and may also negatively impact our revenues and gross margins for future periods.

Our other product revenues ("Other Product Revenues"), in addition to sales from our top two products, during the year ended March 31, 2014 consisted of sales of Terazosin capsules, Lamotrigine tablets, Cyclobenzaprine tablets, Oxcarbazepine tablets, HCTZ capsules, Prednisone tablets, Prochlorperazine tablets, Alendronate tablets, Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets, Olanzapine ODT tablets, Losartan Potassium tablets, Losartan Potassium Hydrochlorothiazide tablets, Escitolapram tablets and Anipryl tablets. Our revenues from sales of these other products increased during the year ended March 31, 2014 compared to the year ended March 31, 2013.

Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets, Olanzapine ODT tablets and Escitolapram tablets are marketed pursuant to the 2011 Master Supply Agreement with Jubilant; we commenced marketing Donepezil tablets in the quarter ended September 30, 2011 and commenced marketing Risperidone ODT, Pantoprazole DR tablets, Valacyclovir tablets and Olanzapine ODT tablets, during the quarters ended June 30, 2012, September 30, 2012, December 31, 2012 and March 31, 2013 respectively and Escitolapram tablets during the quarter ended December 31, 2013. The increase in Other Product Revenues for year ended March 31, 2014 compared to the year ended March 31, 2013 was primarily attributable to an aggregate increase of $9,662 from the sales of Lamotrigine tablets, Prednisone tablets, Alendronate tablets, Donepezil tablets, Pantoprazole DR tablets, Valacyclovir tablets, Olanzapine ODT tablets,Anipryl tablets, Escitolapram tablets, Losartan Potassium tablets and Losartan Potassium Hydrochlorothiazide tablets offset by a reduction in the revenues generated from our sales of Terazosin capsules, Cyclobenzaprine tablets, Oxcarbazepine tablets, Prochlorperazine tablets, Risperidone ODT tablets, and HCTZ tablets and capsules. We believe that there is significant competition with respect to each of these generic products and that our pricing and gross margins for these products are always under pressure.

Cost of Revenues Cost of revenues include our production and packaging costs, third party acquisition costs for materials supplied by others, inventory reserve charges and shipping and handling costs incurred by us to transport products to customers. Cost of revenues does not include costs for amortization, including for acquired product rights or other acquired intangibles, nor depreciation, including with respect to our facility or equipment.

39 Cost of revenues increased 23% or $9.84 million to $51.98 million in the fiscal year ended March 31, 2014 compared to $42.14 million in the prior year. This increase in cost of revenues was mainly attributable to increase in volumes of products with higher manufacturing cost/cost of purchased products, an increase in production related payroll and write down of short dated/obsolete inventories.

Our cost of revenues as a percentage of net revenues in the fiscal year ended March 31, 2014, increased 11% from our prior fiscal year, increasing from 37% in the fiscal year ended March 31, 2013 to 48% in our fiscal year ended March 31, 2014. The majority of such 11% increase was attributable to the higher percentage sales of products with relatively low margins due to higher volumes of products with higher manufacturing cost/cost of purchased products and price erosion with respect to other lower manufacturing cost products during the fiscal year ended March 31, 2014.

Research and Development Expenses Research and development ("R&D") expenses consist mainly of personnel-related costs, API costs, contract research and bio-study costs associated with the development of our products. R&D expenses do not include any amortization or depreciation costs.

R&D expenses decreased $0.265 million to $0.009 million for the year ended March 31, 2014 compared to $0.274 million in the prior year. This decrease was primarily a result of $0.25 million invoiced under the 2005 Supply Agreement by Jubilant to the Company for two pre-ANDAs, ANDAs for which were approved by the FDA during fiscal year ended March 31, 2013 against the $0.009 million of expenses during the fiscal year ended March 31, 2014 for new products whichthe Company is exploring.

Selling, General and Administrative Expenses Selling, general and administrative expenses consist mainly of personnel-related costs, advertising and promotion costs, professional services costs and insurance and travel costs. Selling, general and administrative expenses do not include any amortization or depreciation costs.

Selling, general and administrative expenses increased 38% or $2.20 million to $7.94 million for the year ended March 31, 2014 compared to $5.74 million for the prior year. The increase in expense was primarily the result of increase of $0.59 million in legal and professional charges, $0.23 million in FDA user fees, $0.95 million towards upfront costs for participation in a REMS program with respect to two products the ANDAs for which are still pending approval by the FDA and $0.05 million in payroll and benefits offset by a decrease of $0.09 million in bank charges.

Depreciation and Amortization Depreciation and amortization consists of depreciation on our real and personal property and amortization on an ANDA that we acquired in 2002.

Depreciation and amortization decreased 11% or $0.28 million to $2.16 million for the year ended March 31, 2014 compared to $2.44 million for the prior year.

During the year ended March 31, 2013 depreciation was higher because the Company revised its estimation of the useful life of certain production equipment used in manufacturing from 4 years to 1 year. In addition, the Company assessed the useful life of some of its production equipment to "Nil". As a result of such revision in the estimated useful lives of assets in 2013, depreciation expense was increased by $0.55 million in that year.

40 Other Income, net Other income consists of interest and miscellaneous income offset against interest and other finance costs.

Other income, net increased 199% or $1.30 million to $1.95 million for the year ended March 31, 2014 compared to $0.65 million for the prior year. This increase was primarily the result of an increase in interest income as a result of a $10 million loan given to our affiliate company, HSL Holdings Inc. ("HSL Holdings"), which we funded on November 25, 2011 (the "2011 HSL Loan"), that currently bears interest a rate equal to five percent (5%) per annum and interest income on a $20 million loan we provided to HSL Holdings on January 30, 2013 that currently bears interest at a rate equal to four percent (4%) per annum (the "2013 HSL Loan;" collectively, the 2011 HSL Loan together with the 2013 HSL Loan are referred to as the "HSL Loans"). In addition, on August 23, 2013 we entered into a loan agreement with our affiliate, Jubilant Draximage Inc. ("Draximage"), pursuant to which we provided a $15 million loan to Draximage (the "Draximage Loan"), which was funded in two installments. A $12 million installment was funded on August 23, 2013 and a $3 million installment was funded on September 30, 2013. The Draximage Loan bears interest at an initial rate of four percent (4%) per annum, which interest rate may be reset on each September 1 and March 1 (each, a "Reset Date"), commencing with March 1, 2014, based upon the increase in the Six Month Libor Rate over such rate on August 15, 2013 (the "Reference Date") (with the resets subject to a floor of four percent (4%) per annum and a cap of seven percent (7%) per annum). Pursuant to amendments to the loan agreements with HSL Holdings that we entered into in November 2013, identical interest reset provisions were added with respect to the HSL Loans, with the following differences: there is no cap of seven percent (7%) per annum with respect to the resets; the interest rate on the 2013 HSL Loan is subject to a floor of four percent (4%) per annum and the interest rate on the 2011 HSL Loan is subject to a floor of five percent (5%) per annum; there is no adjustment to the 2011 HSL Loan unless there is at least a one hundred (100) basis point increase in the Six Month Libor Rate on the applicable Reset Date over the Six Month Libor Rate on the Reference Date.

Income Tax Benefit, Expense The income tax expense for the period decreased by $7.03 million to $17.59 million for the year ended March 31, 2014 compared to $24.62 million for the prior year. The income tax expense represents the current and deferred tax due to profits made by us and our future prospects. As our profits decreased during fiscal year ended March 31, 2014 as compared to profits for the corresponding period of last year, the tax on profits also was reduced.

During the quarter ended December 31, 2011, we entered into a tax sharing agreement with Jubilant Life Sciences Holdings, Inc. now known as Jubilant Pharma Holdings, Inc. ("Jubilant Holdings"), with an effective date of October 1, 2011 (the "Tax Sharing Agreement"). The Tax Sharing Agreement sets forth, among other things, each of the Company's and Jubilant Holding's obligations in connection with filing consolidated Federal, state and foreign tax returns. The agreement provides that current income tax (benefit) is computed on a separate return basis and members of the tax group shall make payments (or receive reimbursement) to or from Jubilant Holdings to the extent their income (loses and other credits) contribute to (reduce) the consolidated income tax expense.

The consolidating companies are reimbursed for the net operating losses or other tax attributes they have generated when utilized in the consolidated returns. As of March 31, 2014, we had a payment obligation to Jubilant Holdings with respect to federal taxes in the amount of $1.76 million and state taxes in the amount of $1.11 million (including carryover from previous year) under the Tax Sharing Agreement. We make tax-sharing payments to Jubilant Holdings equal to the taxes that we would pay (or receive) if we filed a return on a stand-alone basis.

During the year ended March 31, 2014, the Company paid $16.20 million to Jubilant Holdings under the Tax Sharing Agreement.

41 Results of Operations for the Year Ended March 31, 2013 Compared to the Year Ended March 31, 2012 2013 2012 Change $000's $000's $000's Percent Revenues 114,901 90,987 23,914 26 % Costs of revenues (exclusive of depreciation and amortization) 42,136 34,791 7,345 21 % Research and development expense (exclusive of depreciation and amortization) 274 - 274 - % Selling, general and administrative expense (exclusive of depreciation and amortization) 5,739 4,826 913 19 % Depreciation and amortization 2,437 1,546 891 58 % Income from operations 64,315 49,824 14,491 29 % Other income / (expense) net 651 49 602 1229 % Income before income tax 64,966 49,873 15,093 30 % Income tax expense 24,620 16,752 7,868 47 % Net income 40,346 33,121 7,225 22 % Revenues Drug development services contributed $0.4 million and $Nil of our revenue in fiscal year 2013 and 2012, respectively.

Revenues for the year ended March 31, 2013 increased 26% or $23.91 million to $114.90 million compared to revenues of $90.99 million from the prior fiscal year. The increase in revenues is mainly attributable to an increase in sales of Methylprednisolone, a small increase in sales of Lamotrigine and an increase in sales of products that we sell pursuant to the 2011 Master Supply Agreement (i.e. Donepezil, Pantoprazole, Risperidone ODT, Valacyclovir and Olanzapine ODT).

Total revenues of our top selling products were as follows: March 31, Change 2013 2012 $000's $000's $000's Product Methylprednisolone tablets 73,215 54,361 18,854 Meclizine 12,339 13,478 (1,139 ) Other product revenues 28,934 23,148 5,786 Net product sales 114,488 90,987 23,501 Other revenues 413 - 413 Total revenues 114,901 90,987 23,914 During the year ended March 31, 2013, our top two products (Methylprednisolone and Meclizine) accounted for approximately 75% of our total net product sales and approximately 89% of our total consolidated gross margins for such year.

We launched Methylprednisolone tablets prior to July 2005. We sell Methylprednisolone tablets, which are the generic equivalent of Medrol®, in four strengths (4 mg, 8 mg, 16 mg, and 32 mg) and a total of two pack sizes for one strength and one pack size for the other three strengths. We believe that during both our 2013 fiscal year and 2012 fiscal year, there were at least four competitors supplying this generic product in the U.S. market in 4mg and 8 mg strengths. We do not believe that there are any competitors currently supplying this generic product in 16 mg or 32 mg strengths in the U.S. market.

Methylprednisolone tablets are a steroid product. In March 2011, we initiated a voluntary recall of batches of two strengths (4 mg and 8 mg) of Methylprednisolone tablets due to some of those tablets being of low weight or not conforming to certain physical specifications. This recall was designated a Class III recall by the FDA. In connection with this recall, we voluntarily elected to make certain process revalidations and were out of the market for both strengths of this product for a short period of time, which negatively impacted our revenues from Methylprednisolone tablets during our fiscal year ended March 31, 2011. We re-launched our 4 mg Methylprednisolone dose packs in June, 2011 and 8mg tablets in the quarter ended December 31, 2011. Because of interruptions in the supply of Methylprednisolone API that occurred in the quarter ended June 30, 2011, that caused disruptions in the supply of finished Methylprednisolone products generally, combined with other potential dynamics affecting the Methylprednisolone market during the year ended March 31, 2012, we realized higher prices during the year ended March 31, 2012 with respect to sales of finished Methylprednisolone products, as compared to our 2013 fiscal year; however, the volume of Methylprednisolone products sold during our fiscal year ended March 31, 2012 was significantly lower due to our being out of the market for the 4 mg Methylprednisolone product for the early part of our fiscal year ended March 31, 2012. There can be no assurance that we are aware of all activities in this market or plans of our competitors. There can be no assurance that new competitors will not commence supplying this generic product in the future. Any new competition could result in further reduction in unit price, and perhaps sales volume, which could negatively impact our revenue and gross margin in the future.

42 We launched Meclizine tablets in June 2010. We sell Meclizine tablets, which are the generic version of Antivert®, in 12.5 mg and 25 mg strengths and two pack sizes for each strength. We believe that there were two competitors supplying this generic product in the U.S. market through the end of our fiscal year ended March 31, 2012. However, two additional competitors received FDA approval since that date. We believe, of these two additional competitors, one entered the market in the quarter ended June 30, 2013 and that the other competitor entered the market in the quarter ended June 30, 2014. We believe that the new competition has resulted in significant declines in our sales volume and unit price, and may also negatively impact our revenues and gross margins for future periods.

Our other product revenues ("Other Product Revenues"), in addition to sales from our top two products, during the year ended March 31, 2013 consisted of sales of Terazosin capsules, Lamotrigine tablets, Cyclobenzaprine tablets, Oxcarbazepine tablets, HCTZ tablets and capsules, Prednisone tablets, Prochlorperazine tablets, Alendronate tablets, Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets and Olanzapine ODT tablets. Our revenues from sales of these other products increased during the year ended March 31, 2013 compared to the year ended March 31, 2012. Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT tablets, Valacyclovir tablets and Olanzapine ODT tablets are marketed pursuant to the 2011 Master Supply Agreement with Jubilant; we commenced marketing Donepezil tablets in the quarter ended September 30, 2011 and commenced marketing Risperidone ODT, Pantoprazole DR tablets, Valacyclovir tablets and Olanzapine ODT tablets, during the quarters ended June 30, 2012, September 30, 2012, December 31, 2012 and March 31, 2013 respectively. The increase in Other Product Revenues for year ended March 31, 2013 compared to the year ended March 31, 2012 was primarily attributable to an aggregate increase of $8,306 from the sales of Prochlorperazine tablets, Lamotrigine tablets, Prednisone tablets, Alendronate tablets, Donepezil tablets, Pantoprazole DR tablets, Risperidone ODT, Valacyclovir tablets and Olanzapine ODT tablets, offset by a reduction in the revenues generated from our sales of Terazosin capsules, Cyclobenzaprine tablets, Oxcarbazepine tablets, and HCTZ tablets and capsules. We believe that there is significant competition with respect to each of these generic products and that our pricing and gross margins for these products are always under pressure.

In February 2013, we initiated a voluntary recall with respect to two lots of our Pantoprazole DR (delayed release) 40 mg tablets. The recall was caused by a small number of tablets having surface blemishes potentially affecting the delayed release coating. The tablets were manufactured and supplied by Jubilant pursuant to the Master Supply Agreement that we entered into with Jubilant in May 2011. We first launched the products in the United States in the fiscal quarter ended September 30, 2012. The Company voluntarily temporarily suspended marketing Pantoprazole DR (delayed released) 40 mg. tablets in connection with its recall. The Company resumed marketing the product after a two month hiatus.

Jubilant is responsible for the expenses of the recall. The recall of the Pantoprazole DR 40 mg tablets did not have a material adverse effect on our results for the year ended March 31, 2013.

Cost of Revenues Cost of revenues include our production and packaging costs, third party acquisition costs for materials supplied by others, inventory reserve charges and shipping and handling costs incurred by us to transport products to customers. Cost of revenues does not include costs for amortization, including for acquired product rights or other acquired intangibles, nor depreciation, including with respect to our facility or equipment.

43 Cost of revenues increased 21% or $7.35 million to $42.14 million in the fiscal year ended March 31, 2013 compared to $34.79 million in the prior year. This increase in cost of revenues was mainly attributable to higher product sales and change in product mix towards products with higher manufacturing costs in our 2013 fiscal year, partially offset by manufacturing efficiencies, including an increase in utilization of our manufacturing capacity.

Our cost of revenues as a percentage of net revenues in the fiscal year ended March 31, 2013, decreased 1% from our prior fiscal year, decreasing from 38% in the fiscal year ended March 31, 2012 to 37% in our fiscal year ended March 31, 2013. The majority of such 1% decrease was attributable to higher volume of Methylprednisolone 4mg tablet dose packs during our year ended March 31, 2013 which has a higher gross margin relative to our other products. The remainder of such 1% decrease is attributable to improvements in our manufacturing efficiency, including a reduction of the period of time that we require to change from manufacturing one product line to another during which our manufacturing equipment is not being utilized to manufacture product, and manufacturing larger batch sizes of products, which reduces the number of product line changes we need to make during any given period.

Research and Development Expenses Research and development ("R&D") expenses consist mainly of personnel-related costs, API costs, contract research and bio-study costs associated with the development of our products. R&D expenses do not include any amortization or depreciation costs.

R&D expenses increased $0.27 million to $0.27 million for the year ended March 31, 2013 compared to Nil in the prior year. This increase was primarily a result of $0.25 million invoiced under the 2005 Supply Agreement by Jubilant to the Company for two pre-ANDAs, the ANDAs for which were approved by the FDA during the quarter ended September 30, 2012.

Selling, General and Administrative Expenses Selling, general and administrative expenses consist mainly of personnel-related costs, advertising and promotion costs, professional services costs and insurance and travel costs. Selling, general and administrative expenses do not include any amortization or depreciation costs.

Selling, general and administrative expenses increased 19% or $0.91 million to $5.74 million for the year ended March 31, 2013 compared to $4.83 million for the prior year. The increase in expense was primarily the result of an increase of $0.46 million of administrative expenses, $0.54 million in professional fees, offset by reductions of $0.04 million in payroll and benefits, and $0.05 million in bank charges.

Depreciation and Amortization Depreciation and amortization consists of depreciation on our real and personal property and amortization on an ANDA that we acquired in 2002.

Depreciation and amortization increased 58% or $0.89 million to $2.44 million for the year ended March 31, 2013 compared to $1.55 million for the prior year.

This increase was primarily the result of depreciation of assets acquired during the fiscal year ended March 31, 2012 on which we claim depreciation in the current period. Also, during the year ended March 31, 2013, the Company revised its estimation of the useful life of certain production equipment used in the manufacturing from 4 years to 1 year. In addition, the Company assessed the useful life of some of its production equipment to "Nil". As a result of such revision in the estimated useful lives of assets, depreciation expense increased by $0.55 million.

Other Income, net Other income consists of interest and miscellaneous income offset against interest and other finance costs.

44 Other income, net increased 1229% or $0.60 million to $0.65 million for the year ended March 31, 2013 compared to $0.05 million for the prior year. This increase was primarily the result of lower interest cost because of no borrowings under our credit facilities and an increase in interest income as a result of a $10 million loan given to our affiliate company, HSL Holdings Inc. ("HSL Holdings"), which we funded on November 25, 2011 (the "2011 HSL Loan"), that bears interest a rate equal to five percent (5%) per annum and interest income on a $20 million loan we provided to HSL Holdings on January 30, 2013 that bears interest at a rate equal to four percent (4%) per annum (the "2013 HSL Loan;" collectively, the 2011 HSL Loan together with the 2013 HSL Loan are referred to as the "HSL Loans").

Income Tax Benefit, Expense The income tax expense for the period increased by $7.87 million to $24.62 million for the year ended March 31, 2013 compared to $16.75 million for the prior year. The income tax expense represents the current and deferred tax due to profits made by us and our future prospects. As our profits increased during fiscal year ended March 31, 2013 as compared to profits for the corresponding period of last year, the expense recognized out of deferred taxes in the period increased.

As of March 31, 2013, we were entitled to a refund from Jubilant Holdings in the amount of $0.15 million with respect to federal taxes and we had a payment obligation to Jubilant Holdings with respect to state taxes in the amount of $0.20 million under the Tax Sharing Agreement that we entered into with Jubilant Holdings in the quarter ended December 31, 2011. During the year ended March 31, 2013, the Company paid $21.45 million to Jubilant Holdings under the Tax Sharing Agreement.

Liquidity and Capital Resources Our primary uses of cash are to fund working capital requirements and operating expenses. Historically, we have funded our operations primarily through cash flow from operations, private placements of equity securities to, and loan advances from, Jubilant including its affiliates and borrowings under a term loan and revolving credit facilities with banks. As of March 31, 2014, we had no outstanding borrowings under any bank credit facilities. As of March 31, 2014, our principal sources of liquidity consisted of cash and cash equivalents (excluding restricted cash) of $11.11 million. In addition, the $30 million principal amount of loans we had outstanding as of March 31, 2014 to our affiliate company, HSL Holdings, and $15 million to another affiliate company, Draximage, are other potential sources of liquidity. $25 million principal amount of such loans is repayable upon 30 days prior notice and $20 million principal amount of such loans is repayable upon 60 days prior notice. See Item 13. "Certain Relationships and Related Transactions and Director Independence - Financings" for a more detailed description of these loan transactions.

Funding Requirements Our future capital requirements will depend on a number of factors, including: · the continued commercial success of our existing products; · launching four products that are represented by two ANDAs owned by us that have been approved and the two ANDAs owned by us that are pending approval by the FDA as of March 31, 2014; · The development of one new product that is currently being developed by us and for which an ANDA is expected to be filed with the FDA for review. The launch of additional products that we market pursuant to the 2011 Master Supply Agreement with Jubilant; · The launch by Jubilant of certain of our products outside of the United States pursuant to the 2012 Master Supply Agreement; and · Successfully identifying and sourcing other new product and business opportunities.

45 Based on our existing business plan, we believe our existing sources of liquidity as of March 31, 2014 will be sufficient to fund our planned operations, including the continued development of our product pipeline, for at least the next 12 months. However, we may require additional funds earlier than we currently anticipate in the event we change our business plan or encounter unexpected developments, including unforeseen competitive conditions within our product markets, changes in the regulatory environment, the loss of key relationships with suppliers or customers.

If required, additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling convertible debt securities, further dilution to our existing stockholders may result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or collaboration arrangements. Some of these transactions may be with Jubilant and its affiliates and some may be with third parties.

If adequate funds are not available, we may be required to terminate, significantly modify or delay the development or commercialization of new products. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

Cash Flows Overview On March 31, 2014, cash and cash equivalents (excluding restricted cash of $0.03 million) on hand totaled $11.11 million, working capital totaled $94.08 million and our current ratio (current assets to current liabilities) was approximately 10.85 to 1.

The following tables summarize key elements of our financial position and sources and uses of cash and cash equivalents as of each of the three years ended March 31, 2014, 2013 and 2012: As of March 31, 2014 2013 2012 (in thousands) Summary of Financial Position: Cash and cash equivalents (including restricted cash) $ 11,135 $ 5,642 $ 2,169 Working capital (excluding cash and cash equivalents) 94,072 51,457 38,913 Total assets 138,103 107,869 68,511 Long-term debt (excluding current portion) net of cost of debt - - - For the year ended March 31, 2014 2013 2012 (in thousands) Net cash (used in) / provided by: Operating activities $ 24,120 $ 30,820 $ 22,418 Investing activities (18,627 ) (27,347 ) (14,190 ) Financing activities - - (6,853 ) Net increase / (decrease) in cash and cash equivalents 5,493 3,473 1,375 46 Sources and Uses of Cash Operating activities. Cash flows from operations represent net income adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided in operating activities was $24.12 million for the fiscal year ended March 31, 2014, compared to $30.82 million for the fiscal year ended March 31, 2013. This net decrease in cash in 2014 compared to 2013 was primarily due to income from operations of $32.07 million (after adjustments of noncash items amounting to an aggregate of $2.15 million) in fiscal 2014 as compared to $44.77 million (after adjustments of noncash items amounting to an aggregate of $4.42 million) in fiscal 2013, offset by less cash used in an acquisition of inventory of $7.05 million in fiscal 2014 as compared to $9.80 million in fiscal 2013 (which was higher in fiscal 2013 as a result of a build up of inventory for anticipated future sales of marketed products and the launch of new products).

Accounts receivable increased during fiscal year 2014 causing a $1.49 million use of cash as compared to use of cash of $2.04 million in fiscal 2013 as a result of an increase of accounts receivable during that fiscal year. Accounts payable, amounts due to/from related parties and prepaid expenses and other current assets increased by a net amount of $0.6 million in fiscal 2014, resulting in a net positive adjustment for such amount to cash flow for such year, as compared to a net decrease of $2.1 million in fiscal 2013, resulting in a net negative adjustment for such amount to cash flow for such year. Net cash provided in operating activities was $30.82 million for the fiscal year ended March 31, 2013, compared to $22.42 million for the fiscal year ended March 31, 2012. This net increase in cash in 2013 compared to 2012 was primarily due to income from operations of $44.77 million (after adjustments of noncash items amounting to an aggregate of $4.42 million) in fiscal 2013 as compared to $34.52 million (after adjustments of noncash items amounting to an aggregate of $1.40 million) in fiscal 2012 and a use of cash of $9.98 million in fiscal year 2012 as a result of an increase of accounts receivable during that year as compared to a $2.04 million use of cash in fiscal year 2013 as a result of an increase of accounts receivable during that fiscal year, offset by the following: more cash used in acquisition of inventory of $9.80 million in fiscal 2013 as compared to $6.97 million in fiscal 2012 to meet future sales demands and launch new products; and accounts payable, amounts due to/from related parties and prepaid expenses and other current assets decreased by a net amount of $2.1 million in fiscal 2013, resulting in a net negative adjustment for such amount to cash flow for such year, as compared to a net increase of $4.84 million in fiscal 2012 resulting in a net positive adjustment for such amount to cash flow for that fiscal year.

Investing activities. Investing cash flows consist primarily of capital expenditures and proceeds from sales of property, plant or equipment and a short term loan, given to an affiliate company. Net cash used in investing activities was $18.63 million for the year ended March 31, 2014, compared to $27.35 million for the year ended March 31, 2013 and $14.19 million for the year ended March 31, 2012. The primary reason for this decrease was a loan, in the amount of $15 million, made to Draximage, an affiliated company during the 2014 fiscal year as compared to loan, in the amount of $20 million, made to HSL Holdings, an affiliated company during the 2013 fiscal year.During our 2014 fiscal year, capital expenditures primarily consisted of the purchase of additional equipment to replace old equipment, modification of building (including upgrading the facility to meet the specific requirements of manufacturing two products that was completed during our 2013 fiscal year). During fiscal years 2013 and 2012 capital expenditures primarily consisted of the purchase of equipment to support increased production at our Salisbury, Maryland facility and replace old equipment and additionally during our 2012 fiscal year, the modification ofour Salisbury, Maryland facility.

Financing activities. Financing cash flows consist primarily of borrowings and repayments of debt. There was no cash provided from or used with respect to financing activities during fiscal year ended March 31, 2014 or March 31, 2013.

Contractual Obligations and Commitments The following table summarizes our expected cash payments on contractual obligations as of March 31, 2014. Some of the amounts included herein are based on management's estimates and assumptions about some of these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors.

Payments due by period Less than 1 More than 5 Total year 1-3 years 3-5 years years (in thousands) Long-term debt obligations and other debt(1) - - - - - Operating lease obligations(2) 233 105 128 - - Other obligations and commitments(3) 1,704 1,704 - - - Total (4) $ 1,937 $ 1,809 $ 128 $ - $ - 47 (1) Amount represents total anticipated cash payments and anticipated interest payments, on our short-term debt obligations and the current and long-term portion of our long term-debt obligations assuming existing debt maturity.

(2) Includes annual minimum lease payments related to non-cancelable operating leases.

(3) Other obligations and commitments include agreements to purchase third-party manufactured products, capital purchase obligations for the construction or purchase of property, plant and equipment.

(4) Total does not include contractual obligations already included in current liabilities on our Consolidated Balance Sheet (except for short-term debt and the current portion of long-term debt) or certain purchase obligations, which are discussed below.

For purposes of the table above, obligations for the purchase of goods or services are included only for purchase orders that are enforceable, legally binding and specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the timing of the obligation. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our suppliers within a relatively short period.

At March 31, 2014, we have open purchase orders, that represent authorizations to purchase rather than binding agreements, that are not included in the table above.

Off-Balance Sheet Arrangements We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, net revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Capital Expenditures Our capital expenditures during our fiscal year 2014, 2013, and 2012 were $3.63 million, $7.37 million, and $4.19 million, respectively. Capital expenditures in each such fiscal year were attributable to the upgrade of the facility to meet specific requirements to manufacture two products and to purchase scientific equipment and make improvements to our Salisbury, Maryland facility. We currently anticipate that our capital expenditures will increase in order to continue our facility expansion, add new packaging lines and upgrade and improve our existing facility.

Effects of Inflation We do not believe that our sales or operating results have been materially impacted by inflation during the periods presented in our financial statements.

There can be no assurance, however, that our sales operating results will not be impacted by inflation in the future.

Critical Accounting Policies Critical accounting policies are those that require application of our management's most difficult, subjective or complex judgments often as a need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The most significant estimates in our consolidated financial statements are discussed below. Actual results couldvary from those estimates.

Revenue Recognition and Provision for Sales Returns and Allowances Revenue from sale of goods is recognized when significant risks and rewards in respect of ownership of the products are transferred to the customer and when the following criteria are met: § Persuasive evidence of an arrangement exists; § The price to the buyer is fixed and determinable; § Delivery has occurred and/or services have been rendered; and § Collectability of the sales price is reasonably assured.

48 Revenue from sale of goods is shown net of provisions for estimated chargeback, rebates, returns, cash discounts, price protection reserve and other deductions.

We participate in prime vendor programs with a government entity whereby pricing on products is extended below the wholesale list price. This government entity purchases products through wholesalers at the lower prime vendor price, and the wholesaler charges the difference between their acquisition cost and the lower prime vendor price back to us. We determine our estimates of the prime vendor chargeback primarily based on historical experience regarding prime vendor chargebacks and current contract prices under the prime vendor programs.

We sell our products directly to wholesalers, retail drug store chains, drug distributors, mail order pharmacies and other direct purchasers. The retail drug store chains also purchase our products through the wholesalers in the event of a stock out at a particular pharmacy store. We often negotiate product pricing directly with retail drug stores that purchase our products through our wholesale customers. In those instances, chargeback credits are issued to the wholesaler for the difference between the invoice price paid to us by our wholesale customer for a particular product and the negotiated contract price that the retail drug store pays for that product to the wholesaler. In addition, the retail drug store charges us for the difference between the price paid to the wholesaler and the negotiated contract price with them. Accruals for such differential charges is based upon historical purchasing patterns of qualified customers who purchase product directly from us and supplement their purchases indirectly through our wholesale customers. Our chargeback provision and related reserve varies with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks also takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at contract prices. Accruals for these chargebacks and related reserves are reflected as a direct reduction to revenues and accounts receivable. See "Revenue Recognition and Provision for Sales Returns and Allowances - Chargebacks" below.

Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than one unit of accounting.

An item can generally be considered a separate unit of accounting if all ofthe following criteria are met: § The delivered item(s) has value to the customer on a standalone basis; § There is objective and reliable evidence of the fair value of the undelivered item(s); and § If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

If an arrangement contains more than one element, the arrangement consideration is allocated among separately identified elements based on relative fair values of each element or residual method.

Revenues related to contract manufacturing arrangement are recognized when performance obligations are substantially fulfilled. Revenues related to development contracts are recognized on proportionate performance basis.

Customarily for contract manufacturing and development services, we receive upfront non-refundable payments which are recorded as deferred revenue. These amounts are recognized as revenues as obligations are fulfilled under contract manufacturing arrangement and as milestones are achieved for development arrangements.

When we receive advance payments from customers for sale of products, such payments are reported as advances from customers until all conditions for revenue recognition are met.

Allowances for sales returns are estimated and provided for in the year of sales. Such allowances are made based on the historical trends. We have the ability to make a reasonable estimate of the amount of future returns due to the volumes of homogeneous transactions and historical experience with similar types of sales of products. In respect of new products launched or expected to be launched, the sales returns are not expected to be different from the existing products as such products relate to categories where established products exist and are sold in the market. Further, we evaluate the sales returns of all the products at the end of each reporting period and necessary adjustments, ifany, are made.

49 As customary in the pharmaceutical industry, our gross product sales are subject to a variety of deductions in arriving at reported net product sales. When we recognize revenue from the sale of our products, an estimate of sales returns and allowances ("SRA") is recorded which reduces product sales. Accounts receivable and/or accrued liabilities are also reduced and/or increased by the SRA amount. These adjustments include estimates for chargebacks, rebates, cash discounts and returns and other allowances. These provisions are estimated based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and current contract sales terms with direct and indirect customers. We use a variety of methods to assess the adequacy of our SRA reserves to ensure that our financial statements are fairly stated. This includes periodic reviews of customer inventory data, customer contract programs and product pricing trends to analyze and validate the SRA reserves.

Chargebacks - The provision for chargebacks is our most significant sales allowance. A chargeback represents an amount payable in the future to a wholesaler for the difference between the invoice price paid to us by our wholesale customer for a particular product and the negotiated contract price that the wholesaler's customer pays for that product. Our chargeback provision and related reserve varies with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks also takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at contract prices. Historically we have validated the chargeback accrual annually through a review of the inventory reports obtained from our largest wholesale customers. Commencing with our 2012 fiscal year, we conduct such reviews quarterly based upon such inventory reports. This customer inventory information is used to verify the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent 85% - 90% of our chargeback payments. We continually monitor current pricing trends and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated. Accruals for these chargebacks are reflected as a direct reduction to revenues and accounts receivables.

Rebates - Rebates include volume related incentives to direct and indirect customers and Medicaid rebates based on claims from Medicaid benefit providers.

Volume rebates are generally offered to customers as an incentive to continue to carry our products and to encourage greater product sales. These rebate programs include contracted rebates based on customers' purchases made during an applicable monthly, quarterly or annual period. The provision for rebates is estimated based on our customers' contracted rebate programs and our historical experience of rebates paid. Any significant changes to our customer rebate programs are considered in establishing our provision for rebates. We continually monitor our customer rebate programs to ensure that the liability for accrued rebates is fairly stated.

The provision for Medicaid rebates is based upon historical experience of claims submitted by the various states. We monitor Medicaid legislative changes to determine what impact such legislation may have on our provision for Medicaid rebates. Our accrual of Medicaid rebates is based on historical payment rates and is reviewed on a quarterly basis against actual claim data to ensure the liability is fairly stated.

Returns and Other Allowances - Our provision for returns and other allowances include returns, pricing adjustments, promotional allowances. Bill back adjustments primarily reflect the service level penalties and are charged to our income statement at actual amounts.

Consistent with industry practice, we maintain a return policy that allows our customers to return product for credit. In accordance with our return goods policy, credit for customer returns of product is applied against outstanding account activity or by check. Product exchanges are not permitted. Customer returns of product are not resalable unless the return is due to a shipping error and then only if the item is returned within 14 days of shipment. Our estimate of the provision for returns is based upon historical experience and current trends of actual customer returns. Additionally, we consider other factors when estimating our current period return provision, including levels of inventory in our distribution channel as well as significant market changes which may impact future expected returns, and make adjustments to our current period provision for returns when it appears product returns may differ from our original estimates.

50 Pricing adjustments, which include shelf stock adjustments, are credits issued to reflect price decreases in selling prices charged to our direct customers.

Shelf stock adjustments are based upon the amount of product our customers have in their inventory at the time of an agreed-upon price reduction. The provision for shelf stock adjustments is based upon specific terms with our direct customers and includes estimates of existing customer inventory levels based upon their historical purchasing patterns. We regularly monitor all price changes to help evaluate our reserve balances. The adequacy of these reserves is readily determinable as pricing adjustments and shelf stock adjustments are negotiated and settled on a customer-by-customer basis.

Promotional allowances are credits that are issued in connection with a product launch or as an incentive for customers to begin carrying our product. We establish a reserve for promotional allowances based upon these contractual terms.

Bill back adjustments are credits that are issued to certain customers who purchase directly from us as well as indirectly through a wholesaler. These credits are issued in the event there is a difference between the customer's direct and indirect contract price.

Cash Discounts - Cash discounts are provided to customers that pay within a specific period. The provision for cash discounts are estimated based upon invoice billings, utilizing historical customer payment experience. Our customer's payment experience is fairly consistent and most customer payments qualify for the cash discount. Accordingly, our reserve for cash discountsis readily determinable.

The estimation process used to determine our SRA provision has been applied on a consistent basis and there have been no significant changes in underlying estimates that have resulted in a material adjustment, other than for shelf stock adjustments and chargebacks, to our SRA reserves. Historically, until the quarter ended September 30, 2011, the Company did not experience any material shelf stock adjustments (i.e. credits issued to a customer, in accordance with specific terms agreed to with the customer, to reflect price reductions and based upon the amount of the product the customer has in its inventory).

Accordingly, the Company did not create any reserve for the shelf stock adjustments. As a result of the Company's currently selling certain products where the Company expects increased competition resulting in lower prices, the Company has assessed that there is a greater chance that it will experience shelf stock adjustments than it has in the past and has established a reserve for these adjustments, which is referred to as the "Price Protection Reserve." Historically, the Company did not include in its reserve for chargebacks an estimation of charges by retail drug stores for the difference between the price paid to a wholesaler and our negotiated contract price with the retailer.

Commencing with our fiscal year ended March 31, 2013, we have included the estimate for these charges as the company has assessed that there is a greater chance that it will incur these charges than in the past. The Company does not expect future payments of SRA to materially exceed our current estimates.

However, if future SRA payments were to materially exceed our estimates, such adjustments may have a material adverse impact on our financial position, results of operations and cash flows.

Our gross revenues for the fiscal years ended March 31, 2014, March 31, 2013 and March 31, 2012, before deductions for chargebacks, rebates and incentive programs (including rebates paid under federal and state government Medicaid drug reimbursement programs), sales returns and other sales allowances were as follows (in $ thousands): 51 Description 2014 2013 2012 Gross Revenues 166,700 145,086 120,010 Chargebacks 42,496 17,263 13,021 Rebates, fees, incentives and cash discounts 11,628 9,086 11,028 Medicaid 1,544 1,333 1,677 Returns 1,942 998 1,943 Price Protection Reserve 1,429 1,505 1,354 Net product sales 107,661 114,901 90,987 Net to Gross % 64.6 % 79.2 % 75.8 % The following tables summarize the roll forward for the fiscal years ended March 31, 2014, 2013 and 2012 in the accounts affected by the estimated provisions described below (in $ thousands): For the Year Ended March 31, 2014 Provision Provision recorded reversal for recorded current for prior Beginning period period Credits Ending Accounts receivable reserves balance sales sales(1) processed balance Chargebacks 1,963 42,496 - 34,383 * 10,076 Rebates and incentive programs 2,751 10,072 - 8,318 4,505 Returns 1,280 1,942 - 1,667 1,555 Cash discounts and other 578 3,100 - 2,850 828 Price Protection reserve 1,174 1,540 (111 ) 2,029 574 Total 7,746 59,150 (111 ) 49,247 17,538 For the Year Ended March 31, 2013 Provision Provision recorded reversal for recorded current for prior Beginning period period Credits Ending Accounts receivable reserves balance sales sales(1) processed balance Chargebacks 1,427 17,263 - 16,727 1,963 Rebates and incentive programs 4,264 7,934 - 9,447 2,751 Returns 1,807 998 - 1,525 1,280 Cash discounts and other 455 2,485 - 2,362 578 Price Protection reserve 1,354 1,505 - 1,685 1,174 Total 9,307 30,185 - 31,746 7,746 52 For the Year Ended March 31, 2012 Provision Provision recorded reversal for recorded current for prior Beginning period period Credits Ending Accounts receivable reserves balance sales sales(1) processed balance Chargebacks 1,677 13,021 - 13,271 1,427 Rebates and incentive programs 1,199 10,519 - 7,454 4,264 Returns 457 2,012 (69 ) 593 1,807 Cash discounts and other 254 2,186 - 1,985 455 Price Protection reserve - 1,386 (32 ) - 1,354 Total 3,587 29,124 (101 ) 23,303 9,307 (1) Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, we have determined that our chargeback estimates remain reasonable.

* Effective July 1, 2013, one of our wholesale customers changed the pricing from net to wholesale acquisition cost ("WAC"). Based on the inventory lying with the wholeseller on that date, a credit of $1,810 was given to the Company by the wholeseller as negative chargeback. Corresponding chargeback claims were made by the wholeseller as they liquidated the opening inventory under the eligible program. The credits processed amounting to $34,383 during the fiscal year ended March 31, 2014, is net of negative chargeback of $1,810.

Inventory Valuation Inventories consist of finished goods held for distribution, raw materials and work in process. Included in inventory are generic pharmaceutical products that are capitalized only when the bioequivalence of the product is demonstrated or the product is already FDA approved and is waiting to enter the marketplace.

Inventory valuation reserves are established based on a number of factors/situations including, but not limited to, raw materials, work in process, or finished goods not meeting product specifications, product obsolescence, and lower of cost (first-in, first-out method) or market (net realizable value) write downs. The determination of events requiring the establishment of inventory valuation reserves, together with the calculation of the amount of such reserves may require judgment. Assumptions utilized in our quantification of inventory reserves include, but are not limited to, estimates of future product demand, consideration of current and future market conditions, product net selling price, anticipated product launch dates, potential product obsolescence and other events relating to special circumstances surrounding certain products. No material adjustments have been required to our inventory reserve estimates for the periods presented. Adverse changes in assumptions utilized in our inventory reserve calculations could result in an increase to our inventory valuation reserves and higher cost of revenues.

Depreciation on Property, plant and equipment During the year ended March 31, 2013 the Company revised its estimation of the useful life of certain production equipment used in the manufacturing from 4 years to 1 year. In addition, the Company assessed the useful life of some of its production equipment to "Nil". As a result of such revision in the estimated useful lives of assets in 2013, depreciation expense increased by $0.55 million for the year ended March 31, 2013.

The Company depreciates property, plant and equipment over the estimated useful life using the straight-line method.

The revised estimated useful lives of assets are as follows: Building 30 years Machinery and equipment 1 - 10 years Office furniture and equipment 10 years Computers 5 years Vehicles 3 - 5 years Any change in the estimated life would have the impact on our financial position.

53 Intangible assets and amortization Intangible assets are amortized over their respective individual estimated useful lives in proportion to the economic benefits consumed. The estimated useful lives of the intangible assets are as follows: Abbreviated New Drug Applications (ANDAs) 10 years Enterprise Resource Planning Software (SAP) 5 years The estimated useful life of an identifiable intangible asset is based on a number of factors including the effects of obsolescence, demand, competition and other economic factors (such as the stability of the industry, and known technological advances) and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. Any change in the estimated life would have the impact on our financial position.

Research and development Product development costs are expensed as incurred. These expenses include the costs of our internal product development efforts, acquired in-process product development, as well as external API, contract research and bioequivalence study costs associated with the development of our products. Capital expenditure incurred on equipment and facilities that are acquired or constructed for research and development activities and having alternative future uses is capitalized as tangible assets when acquired or constructed.

Income taxes Income taxes are accounted for using the asset and liability method. The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to us. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance of any tax benefits of which future realization is uncertain.

In assessing the realisability of deferred tax assets, management considers whether it is more likely than not, that some portion, or all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment.

We apply a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining, based on the technical merits, that the position will be more likely than not sustained upon examination. The second step is to measure the tax benefit as the largest amount of the tax benefit that is greater than 50% likely of being realized upon settlement. We include interest and penalties related to unrecognized tax benefits within our provision for income tax expense.

On November 7, 2011, we entered into a tax sharing agreement (the "Tax Sharing Agreement") with Jubilant Life Sciences Holdings Inc., now known as Jubilant Pharma Holdings Inc. ("Jubilant Holdings"), the holder, through its wholly owned subsidiary, of over 82% of our outstanding common stock. The Tax Sharing Agreement has an effective date of October 1, 2011. The Tax Sharing Agreement sets forth, among other things, each of the Company's and Jubilant Holding's obligations in connection with filing consolidated Federal, state and foreign tax returns. The agreement provides that current income tax expense (benefit) is computed on a separate return basis and members of the tax group shall make payments (or receive reimbursement) to or from Jubilant Holdings to the extent their incomes (losses and other credits) contribute to (reduce) the consolidated income tax expense. The consolidating companies are reimbursed for the net operating losses or other tax attributes they have generated when utilized in the consolidated returns. We may recognize a benefit in the calculation of our provision for income taxes to the extent that foreign tax credits, capital losses and other tax attributes generated by us can be utilized both on a separate-company basis and in the consolidated or combined tax returns of Jubilant Holdings.

54 Other Accounting Estimates In addition to the above described estimates, we make estimates regarding the following: Allowances for our accounts receivable are made in accordance with our own assessments, which are based upon analysis of historical payment patterns, customer concentrations, customer credit worthiness and current economic trends.

If the financial condition of a customer deteriorates, additional allowances may be required. Our current customer base consists of large wholesalers, highly established pharmacy retail chains and grocery chains. We have historically not experienced non-payment of receivables as a result of the financial condition of customers. As a result of this experience and the composition of our current customer base, during our fiscal years ended March 31, 2014 and 2013, we did not consider it necessary to establish a reserve for doubtful accounts based upon the present and prospective financial condition of our customers. Our past due receivables as of such dates were primarily based upon unresolved disputes with respect to particular shipments of products. These disputes are often resolved through proper documentation. At the point that we make a determination that we will not be able to resolve a dispute through proper documentation, we make a decision to write-off the resulting uncollectible receivable. Because our reserves for doubtful accounts receivable, as of March 31, 2014 and March 31, 2013, are primarily based upon the actual amount of our disputed receivables as of such dates they did not fluctuate in proportion to the increase in our accounts receivable from the end of our 2013 fiscal year to the end of our 2014 fiscal year. We determined that our reserve for doubtful accounts of $0.35 million was adequate as of March 31, 2014, based upon the then total amount of disputed accounts receivable that remain to be resolved through production of proper documentation at that date that were not otherwise written off during the year.

Our estimate of liability relating to pending litigation or other proceedings is based on currently available facts, advice from our legal counsel and our assessment of the probability of an unfavorable outcome. Taking into account the uncertainty of the ultimate outcome of any litigation and the amount of any losses, we reassess our estimates as and when additional information becomes available. Such revisions in our estimates could materially impact our results of operations and our financial position.

Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income". This amended guidance requires an entity to report, in one place, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. Reclassifications must be disclosed if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. The guidance in this topic currently does not apply to the Company as the Company has no items of other comprehensive income in any period presented and in such cases the Company is excluded from reporting other comprehensive income or comprehensive income.

In July 2013, the FASB issued guidance to address the diversity in practice related to the financial statement presentation of unrecognized tax benefits as either a reduction of a deferred tax asset or a liability when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists.

This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company's financial statement presentation is in accordance with this guidance; therefore this pronouncement is not expected to have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the revised guidance will require the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will require the Company to (1) identify the contract(s) with a customer (2) identify the performance obligations in the contract (3) determine the transaction price (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the Company satisfies a performance obligation. The amendments in this Update are effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.

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