Cautionary Statement About Forward-Looking Statements
This Report on Form 10-Q and certain information incorporated herein by
reference contains 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, acquisition-related challenges, the regulatory environment,
interest rate fluctuations, reliance on key strategic alliances, availability of
raw materials, fluctuations in operating results and other risks detailed from
time to time in our filings with the Securities and Exchange Commission ("SEC").
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. Lannett 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
and other events or factors, many of which are beyond our control, including
those resulting from such events, or the prospect of such events, such as public
health issues including health epidemics or pandemics, such as the outbreak of
the novel coronavirus ("COVID-19"), whether occurring in the United States or
elsewhere, which could disrupt our operations, disrupt the operations of our
suppliers and business development and other strategic partners, disrupt the
global financial markets or result in political or economic instability.
The following information should be read in conjunction with the consolidated
financial statements and notes in Part I, Item 1 of this Quarterly Report and
with Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2022. All references to "Fiscal 2023" shall mean the fiscal
year ending June 30, 2023 and all references to "Fiscal 2022" shall mean the
fiscal year ended June 30, 2022.
Company Overview
Lannett Company, Inc. (a Delaware corporation) and its subsidiaries
(collectively, the "Company," "Lannett," "we" or "us") primarily develop,
manufacture, package, market and distribute solid oral and extended release
(tablets and capsules), topical, liquids, nasal and oral solution finished
dosage forms of drugs, generic forms of both small molecule and biologic
medications, that address a wide range of therapeutic areas. Certain of these
products are manufactured by others and distributed by the Company.
Additionally, the Company is pursuing partnerships, research contracts and
internal expansion for the development and production of other dosage forms
including: ophthalmic, nasal, patch, foam, buccal, sublingual, suspensions, soft
gel, injectable and oral dosages.
The Company operates a pharmaceutical manufacturing plant in Seymour, Indiana.
During Fiscal 2022, the Company completed the sale of its Silarx facility in
Carmel, New York. In connection with the sale, the buyer will continue to
produce certain products on behalf of the Company at the Carmel facility while
the Company completes the transfer of such products to its Seymour, Indiana
plant.
The Company's customers include generic pharmaceutical distributors, drug
wholesalers, chain drug stores, private label distributors, mail-order
pharmacies, other pharmaceutical manufacturers, managed care organizations,
hospital buying groups, governmental entities and health maintenance
organizations.
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NYSE Notices of Failure to Satisfy a Continued Listing Rule or Standard
On March 2, 2022, we received notice from the New York Stock Exchange (the
"NYSE") that we were no longer in compliance with the NYSE continued listing
standards, set forth in Section 802.01B of the NYSE's Listed Company Manual,
because the Company's average global market capitalization over a consecutive 30
trading-day period was less than $50.0 million and, at the same time, our
shareholders' equity was less than $50.0 million. If the Company's average
global market capitalization over a consecutive 30 trading-day period drops
below $15.0 million, the NYSE will initiate delisting proceedings. As of January
31, 2022, the 30 trading-day average global market capitalization of the Company
was approximately $26.4 million, and the Company's absolute market
capitalization was approximately $23.7 million. In accordance with the NYSE
listing requirements, we submitted a plan that demonstrates how we expect to
return to compliance with Section 802.01B within 18 months. On May 26, 2022, the
Company received notice from the NYSE that the plan was accepted. The NYSE will
be performing quarterly reviews during the 18 months from the Company's receipt
of the notice for compliance with the goals and initiatives as outlined in the
Company's plan. Failure to satisfy the requisite goals or initiatives may result
in the Company being subject to NYSE trading suspension at that time. The
Company is required to achieve the minimum continued listing standards of either
average global market capitalization over a consecutive 30 trading-day period of
$50 million or total stockholders' equity of $50 million at the completion of
the 18-month plan period, and failure to achieve any of the minimum requirements
at the end of the 18-month period may result in the Company being suspended by
the NYSE, which may make an application to the SEC to delist the Company's
common stock. There can be no assurances that the Company will maintain
compliance with the plan.
In addition, on March 14, 2022, the Company received a second notice from the
NYSE that it was not in compliance with the continued listing standard set forth
in Section 802.01C of the NYSE's Listed Company Manual because the average
closing price of the Company's common stock was less than $1.00 per share over a
consecutive 30 trading-day period. In order to regain compliance, on the last
trading day of any calendar month during the cure period or on the last business
day of the six-month cure period, the Company's shares of common stock must
demonstrate (i) a closing price of at least $1.00 per share and (ii) an average
closing share price of at least $1.00 over the 30 trading-day period ending on
such date. On January 25, 2023, the stockholders of the Company and the Board of
Directors approved a 1-for-4 reverse stock split, and the Company plans to file
an amendment to our Certificate of Incorporation to effectuate the reverse stock
split on February 6, 2023. The Company's common stock will begin trading on a
split-adjusted basis on February 7, 2023. If the Company's stock price exceeds
$1.00 on a split-adjusted basis for at least 30 trading days following the
reverse stock split, the price condition will be deemed cured. However, there
can be no assurances that the Company will meet this continued listing standard
within the specified cure period.
If we are unable to satisfy the NYSE criteria for continued listing, our common
stock would be subject to delisting. A delisting of our common stock could
negatively impact our reputation and, consequently, our business by, among other
things, reducing the liquidity and market price of our common stock; reducing
the number of investors willing to hold or acquire our common stock, which could
negatively impact our ability to raise equity financing; decreasing the amount
of news and analyst coverage of the Company; and limiting our ability to issue
additional securities or obtain additional financing in the future. In addition,
if the Company ceases to be listed or quoted on any of The NYSE, The Nasdaq
Global Select Market or The Nasdaq Global Market (or any of their respective
successors), holders of the outstanding 4.50% Convertible Senior Notes (the
"Convertible Notes") will have the option to require the Company to repurchase
for cash all of such holder's notes at 100% of the principal amount, plus
accrued and unpaid interest. An acceleration of our debt maturities would put
significant pressure on our liquidity and ability to continue to operate as a
going concern; however, in the event of a delisting or likely delisting, the
Company intends to work proactively and collaboratively with its debt holders to
amend its credit documents and indentures or pursue other alternative plans that
are probable of execution in order to avoid a default and acceleration of the
Company's indebtedness.
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2022 Restructuring Plan
On December 15, 2022, the Company authorized a restructuring and cost savings
plan (the "2022 Restructuring Plan") to streamline and realign our operations to
ensure the continued progression of our existing pipeline and future growth. The
2022 Restructuring Plan includes operational improvements and cost efficiencies
as well as engagement with more external partners and technology providers,
globally, to execute on our R&D plans and operations.
The total reduction in headcount for the 2022 Restructuring Plan is expected to
be approximately 60 positions and is expected to be completed by the end of
Fiscal 2023. The Company estimates that it will incur approximately $3 million
in severance-related costs in connection with the 2022 Restructuring Plan.
In connection with the shift in our R&D operations, the Company also anticipates
exiting our State Road and Torresdale facilities in Philadelphia, Pennsylvania
by the end of our current fiscal year. In the first quarter of Fiscal 2023, the
Company recorded an impairment charge of $4.7 million to adjust the State Road
facility and certain equipment to fair value less costs to sell and the
remaining assets of $1.3 million were recorded in the assets held for sale
caption in the Consolidated Balance Sheet. In the second quarter of Fiscal 2023,
the Company recorded an impairment charge of $6.0 million to adjust the
Torresdale facility to its approximate fair value.
Supply Chain
The COVID-19 pandemic has contributed, in part, to global supply chain
disruptions, shortages, and recent inflationary pressures. While the Company is
still able to receive sufficient inventory of the key materials needed across
its network, the Company continues to experience pressure on its supply chain,
including shipping delays, higher prices from suppliers, and reduced
availability of materials, particularly excipients and packaging components. To
date, the supply chain pressure has not had a material impact on the Company's
results of operations. However, the Company is regularly communicating with its
suppliers, third-party partners, customers, healthcare providers and government
officials in order to respond rapidly to any issues as they arise. The longer
the current situation continues, it is more likely that the Company may
experience some sort of material interruption to our supply chain, and such an
interruption could adversely affect our business, including but not limited to,
our ability to timely manufacture and distribute our products.
Climate Change
The Company believes in a more sustainable future with a reduced environmental
footprint and a general view towards reducing our effect on the climate while
maintaining our focus on providing affordable medicines to our customers and
ultimately the patients who depend on them. The Company has begun to consider
climate-related risks that are pertinent to the Company. Our aspiration is to
reduce our environmental footprint. However, related efforts may result in
increased costs to the Company including, but not limited to, capital
investments, additional management and compliance costs, and reduced output, all
of which may be material. Costs incurred by our suppliers and vendors to comply
with their own sustainability commitments may also be passed through the supply
chain resulting in higher operational costs to the Company. Climate change and
the associated risks and regulations are expected to continue to evolve over
time and could materially impact the Company's results of operations and cash
flows in any given year. The Company monitors such matters and strives to
address them in a timely manner.
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Results of Operations - Three months ended December 31, 2022 compared with the
three months ended December 31, 2021
Net sales decreased 6% to $80.9 million for the three months ended December 31,
2022. The table below identifies the Company's net product sales by medical
indication for the three months ended December 31, 2022 and 2021.
(In thousands) December 31,
Medical Indication 2022 2021
Analgesic $ 2,592 $ 3,919
Anti-Psychosis 2,575 2,095
Cardiovascular 13,089 9,753
Central Nervous System 21,782 22,340
Endocrinology 5,831 8,297
Gastrointestinal 8,716 14,023
Infectious Disease 4,989 6,520
Migraine 3,574 4,446
Respiratory/Allergy/Cough/Cold 1,468 1,868
Other
10,955 10,275
Contract manufacturing revenue 5,323 2,972
Total net sales
$ 80,894 $ 86,508
The decrease in net sales was driven by a decrease in the selling price of
products of $9.5 million partially offset by an increase in volumes of $3.9
million. The decrease in the selling price of products was primarily driven by
lower sales prices for certain products in the Endocrinology medical indication,
Posaconazole, which is included within the Infectious Disease medical
indication, and Dexmethylphenidate and Amphetamine Salts, which are included
within the Central Nervous System medical indication. The pressure on sales
prices across our portfolio is a reflection of the competitive environment in
the generic drug industry. The decrease in the selling price of products was
partially offset by an increase in overall volumes, specifically higher volumes
of Verapamil, which is included in the Cardiovascular medical indication, and an
increase in volumes in our contract manufacturing business. However, volumes
within the Gastrointestinal medical indication were lower as a result of certain
product discontinuances in connection with the 2021 Restructuring Plan.
The following chart details price and volume changes by medical indication:
Sales volume Sales price
Medical indication change % change %
Analgesic (22) % (12) %
Anti-Psychosis 21 % 2 %
Cardiovascular 44 % (10) %
Central Nervous System 10 % (12) %
Endocrinology 26 % (56) %
Gastrointestinal (44) % 6 %
Infectious Disease 14 % (37) %
Migraine (9) % (11) %
Respiratory/Allergy/Cough/Cold (60) % 39 %
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The Company sells its products to customers in various distribution channels.
The table below presents the Company's net sales to each distribution channel
for the three months ended:
(In thousands) December 31, December 31,
Customer Distribution Channel 2022 2021
Wholesaler/Distributor $ 63,404 $ 65,682
Retail Chain 10,280 15,209
Mail-Order Pharmacy 1,887 2,645
Contract manufacturing revenue 5,323 2,972
Total net sales $ 80,894 $ 86,508
The overall decrease in sales was primarily driven by lower sales of certain key
products due to new competitors entering the market and the discontinuance of
two low-margin prescription products as part of the 2021 Restructuring Plan. The
Company has also seen increased competitive market pressure among the existing
competitor base in recent years, which has resulted in an overall decrease in
sales to the distribution channels above. We will continue to seek opportunities
for additional launches to offset these competitive pressures.
Levothyroxine Tablets
In August 2020, the Company commenced distributing Cediprof, Inc.'s ("Cediprof")
Levothyroxine Tablets product under an interim exclusive supply and distribution
agreement, which had been previously distributed by Sandoz, Inc. ("Sandoz")
under a separate distribution contract. At around the same time, Sandoz filed
several complaints and motions for temporary restraining orders against the
Company and Sandoz to prevent the Company from distributing Cediprof's product.
The complaints were subsequently dismissed, and the temporary restraining orders
were denied. Sandoz subsequently proceeded against Cediprof in an arbitration in
New York, where the Company has agreed to indemnify Cediprof. On August 5, 2022,
the arbitrator issued a final award, finding that Cediprof had breached the
Sandoz contract and determining that Sandoz is entitled to lost profits, among
other damages. The portion of the award subject to indemnification from the
Company amounted to $10.9 million, which is included in accrued expenses on the
Consolidated Balance Sheets. The Company's indemnification obligation will only
be triggered if and when Cediprof pays the award. See Note 11 "Legal, Regulatory
Matters and Contingencies" for additional information regarding this matter.
Cost of Sales, including amortization of intangibles. Cost of sales, including
amortization of intangibles, for the second quarter of Fiscal 2023 decreased 18%
to $66.6 million from $80.8 million in the same prior-year period. Amortization
expense included in cost of sales decreased to $1.4 million in the second
quarter of Fiscal 2023 compared to $3.8 million in Fiscal 2022 as a result of
intangible asset impairment charges incurred during the prior fiscal year, which
resulted in a lower amortizable base for certain assets. In addition, the 2021
Restructuring Plan included the discontinuance of two high volume prescription
products and a lower overall headcount, which further reduced cost of sales in
the second quarter of Fiscal 2023.
Gross Profit. Gross profit for the second quarter of Fiscal 2023 increased 150%
to $14.3 million or 18% of net sales from $5.7 million or 7% of net sales in the
same prior-year period. The increase in gross profit percentage was primarily
the result of the discontinuance of two low-margin prescription products as part
of the 2021 Restructuring Plan.
Research and Development Expenses. Research and development expenses for the
second quarter of Fiscal 2023 increased 4% to $4.9 million from $4.7 million for
the second quarter of Fiscal 2022.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 3% to $18.3 million for the second quarter of
Fiscal 2023 compared with $18.8 million for the second quarter of Fiscal 2022.
Asset impairment charges. In December 2022, the Company announced the 2022
Restructuring Plan, which includes a plan to exit and sell its Torresdale
facility. The Company adjusted the assets to approximate fair value, which
resulted in a $6.0 million impairment charge.
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Other Loss. Interest expense for the three months ended December 31, 2022
totaled $15.2 million compared to $14.4 million for the three months ended
December 31, 2021. The weighted average interest rate for the second quarter of
Fiscal 2023 and 2022 was 9.1% and 8.9%, respectively.
In Fiscal 2017, the Company signed an agreement with a third-party company
operating in the online pharmaceutical business, under which the Company agreed
to provide up to $15.0 million in revolving loans for the purpose of expansion
and other business needs. Any outstanding balance under the loan would bear
interest at 2.0% and be due seven years from the date of the agreement. As of
12/31/2022, after a review of the third-party's current financial condition as
well as their projected liquidity levels, the Company determined that it is more
likely than not that the third party will be unable to repay the outstanding
loan. Therefore, the Company recorded a full write-off of the loan receivable of
$6.8 million during the second quarter of Fiscal 2023.
Income Tax. The Company recorded income tax expense of $32 thousand in the
second quarter of Fiscal 2023 as compared to an income tax benefit of $1.4
million in the second quarter of Fiscal 2022. The effective tax rate for the
three months ended December 31, 2022 was (0.1)% compared to 1.7% for the three
months ended December 31, 2021.
Net Loss. For the three months ended December 31, 2022, the Company reported net
loss of $36.3 million, or $(0.88) per diluted share. Comparatively, net loss in
the corresponding prior-year period was $81.1 million, or $(2.01) per diluted
share.
Results of Operations - Six months ended December 31, 2022 compared with the six
months ended December 31, 2021
Net sales decreased 17% to $156.0 million for the six months ended December 31,
2022. The table below identifies the Company's net product sales by medical
indication for the six months ended December 31, 2022 and 2021.
(In thousands) December 31,
Medical Indication 2022 2021
Analgesic $ 6,016 $ 9,233
Anti-Psychosis 5,195 5,810
Cardiovascular 23,971 23,853
Central Nervous System 42,576 45,125
Endocrinology 13,143 16,142
Gastrointestinal 16,658 29,263
Infectious Disease 10,058 19,035
Migraine 6,898 9,131
Respiratory/Allergy/Cough/Cold 2,670 4,982
Other
19,714 20,627
Contract manufacturing revenue 9,074 4,832
Total net sales
$ 155,973 $ 188,033
The decrease in net sales was driven by a decrease in the selling price of
products of $16.5 million and a decrease in volumes of $15.5 million. The
decrease in the selling price of products was primarily driven by lower sales
prices of Posaconazole, which is included within the Infectious Disease medical
indication, certain products in the Endocrinology medical indication, and
Dexmethylphenidate and Amphetamine Salts, which are included within the Central
Nervous System medical indication. The pressure on sales prices across our
portfolio is a reflection of the competitive environment in the generic drug
industry. Overall volumes, particularly volumes of Posaconazole, were also
negatively impacted by the competitive environment. In addition, volumes,
specifically within the Gastrointestinal medical indication, were lower as a
result of certain product discontinuances in connection with the 2021
Restructuring Plan. The decrease in overall sales volumes was partially offset
by an increase in volumes in our contract manufacturing business.
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The following chart details price and volume changes by medical indication:
Sales volume Sales price
Medical indication change % change %
Analgesic (25) % (10) %
Anti-Psychosis (9) % (2) %
Cardiovascular 7 % (7) %
Central Nervous System 4 % (10) %
Endocrinology 13 % (32) %
Gastrointestinal (48) % 5 %
Infectious Disease (18) % (29) %
Migraine (14) % (10) %
Respiratory/Allergy/Cough/Cold (51) % 5 %
The Company sells its products to customers in various distribution channels.
The table below presents the Company's net sales to each distribution channel
for the six months ended:
(In thousands) December 31, December 31,
Customer Distribution Channel 2022 2021
Wholesaler/Distributor $ 123,442 $ 150,526
Retail Chain 19,668 27,935
Mail-Order Pharmacy 3,789 4,740
Contract manufacturing revenue 9,074 4,832
Total net sales $ 155,973 $ 188,033
The overall decrease in sales was primarily driven by lower sales of certain key
products due to new competitors entering the market and the discontinuance of
two low-margin prescription products as part of the 2021 Restructuring Plan. The
Company has also seen increased competitive market pressure among the existing
competitor base in recent years, which has resulted in an overall decrease in
sales to the distribution channels above. We will continue to seek opportunities
for additional launches to offset these competitive pressures.
Cost of Sales, including amortization of intangibles. Cost of sales, including
amortization of intangibles, for the first six months of Fiscal 2023 decreased
22% to $129.1 million from $165.8 million in the same prior-year period.
Amortization expense included in cost of sales decreased to $2.6 million for the
first six months of Fiscal 2023 compared to $7.8 million for the first six
months Fiscal 2022 as a result of intangible asset impairment charges incurred
during the prior fiscal year, which resulted in a lower amortizable base for
certain assets. The Company has experienced increased competitive market
pressure in recent years, which has resulted in overall decrease in sales
volumes and, therefore, lower cost of sales in the current period. In addition,
the 2021 Restructuring Plan included the discontinuance of two high volume
prescription products and a lower overall headcount, which further reduced cost
of sales in the second quarter of Fiscal 2023.
Gross Profit. Gross profit for the first six months of Fiscal 2023 increased 21%
to $26.9 million or 17% of net sales. In comparison, gross profit for the first
six months of Fiscal 2022 was $22.2 million or 12% of net sales.
Research and Development Expenses. Research and development expenses for the
first six months of Fiscal 2023 increased 15% to $12.1 million from $10.5
million in Fiscal 2022. The increase was primarily due to the timing of spend
related to product development projects and distribution agreements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 7% to $35.0 million for the first six months
of Fiscal 2023 compared with $37.7 million in Fiscal 2022. The decrease was
primarily driven by higher expenses in the first quarter of Fiscal 2022 related
to the reimbursement of legal costs associated with a distribution agreement.
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Asset impairment charges. In December 2022, the Company announced the 2022
Restructuring Plan, which includes a plan to exit and sell its Torresdale
facility. The Company adjusted the assets to approximate fair value, which
resulted in a $6.0 million impairment charge.
In September 2022, the Company signed a listing and sale agreement to engage a
broker to sell its State Road facility and certain equipment at the facility.
The Company adjusted the assets to fair value less costs to sell, which resulted
in a $4.7 million impairment charge.
Gain on sale of intangible assets. In connection with the sale of the Company's
Carmel, NY facility in Fiscal 2022, Chartwell had the option to purchase certain
ANDAs from the Company. In the first quarter of Fiscal 2023, Chartwell exercised
this option and purchased additional ANDAs under a separate agreement, which
resulted in an aggregate gain totaling $3.1 million.
Other Loss. Interest expense for the six months ended December 31, 2022 totaled
$30.2 million compared to $28.7 million for the six months ended December 31,
2021. The weighted average interest rate for the first six months of Fiscal 2023
and 2022 was 9.1% and 8.9%, respectively.
In Fiscal 2017, the Company signed an agreement with a third-party company
operating in the online pharmaceutical business, under which the Company agreed
to provide up to $15.0 million in revolving loans for the purpose of expansion
and other business needs. Any outstanding balance under the loan would bear
interest at 2.0% and be due seven years from the date of the agreement. As of
12/31/2022, after a review of the third-party's current financial condition as
well as their projected liquidity levels, the Company determined that it is more
likely than not that the third party will be unable to repay the outstanding
loan. Therefore, the Company recorded a full write-off of the loan receivable of
$6.8 million during the second quarter of Fiscal 2023.
Income Tax. The Company recorded income tax expense of $66 thousand in the first
six months of Fiscal 2023 as compared to an income tax benefit of $1.4 million
in the first six months of Fiscal 2022. The effective tax rate for the six
months ended December 31, 2022 was (0.1)% compared to 1.4% for the six months
ended December 31, 2021.
Net Loss. For the six months ended December 31, 2022, the Company reported net
loss of $64.3 million, or $(1.57) per diluted share. Comparatively, net loss in
the corresponding prior-year period was $103.4 million, or $(2.58) per diluted
share.
Liquidity and Capital Resources
Cash Flow
The Company has historically financed its operations with cash flow generated
from operations and has access to $43.2 million on the Amended ABL Credit
Facility, which includes use of the facility for letters of credit and is
discussed further below. However, more recently, the Company has experienced and
continues to expect cash flow pressures related to the competitive environment
within the industry. Management has maintained discipline spending and has
implemented various working capital improvements and cost-cutting initiatives,
namely the 2022 Restructuring Plan, to offset some of these pressures. The
Company currently expects to maintain a sufficient cash balance to run its
operations for at least the next 12 months; however, there is no guarantee that
management's efforts to improve our cash flows will be successful enough to
support our operations beyond that period. At December 31, 2022, working capital
was $139.0 million as compared to $185.2 million at June 30, 2022, a decrease of
$46.2 million.
Net cash used in operating activities of $30.5 million for the six months ended
December 31, 2022 reflected net loss of $64.3 million, adjustments for non-cash
items of $42.3 million, as well as cash used in operating assets and liabilities
of $8.5 million. In comparison, net cash provided by operating activities of
$13.8 million for the six months ended December 31, 2021 reflected net loss of
$103.4 million, adjustments for non-cash items of $91.0 million, as well as cash
provided by changes in operating assets and liabilities of $26.2 million.
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Significant changes in operating assets and liabilities from June 30, 2022 to
December 31, 2022 were comprised of:
An increase in accounts receivable of $24.1 million mainly due to higher gross
sales in the three months ended December 31, 2022 compared to the three months
ended June 30, 2022 and the timing of customer receipts. The Company's days
? sales outstanding ("DSO") at December 31, 2022, based on gross sales for the
six months ended December 31, 2022 and gross accounts receivable at December
31, 2022, was 85 days. The level of DSO at December 31, 2022 was comparable to
the Company's expectation that DSO will be in the 70 to 85-day range based on
customer payment terms.
? A decrease in income taxes receivable totaling $18.9 million primarily due to
income tax refunds received during the second quarter of Fiscal 2023.
An increase in other assets of $6.3 million primarily due to the retention
? bonuses for Named Executive Officers ("NEOs") and certain other employees paid
in September and October 2022, which will be recognized on the Consolidated
Statement of Operations over a three-year clawback period.
? An increase in accounts payable of $3.4 million mainly due to the timing of
vendor invoices and payments.
Significant changes in operating assets and liabilities from June 30, 2021 to
December 31, 2021 were comprised of:
A decrease in accounts receivable of $32.6 million mainly due to lower gross
sales in the three months ended December 31, 2021 compared to the three months
ended June 30, 2021. The Company's days sales outstanding ("DSO") at December
? 31, 2021, based on gross sales for the six months ended December 31, 2021 and
gross accounts receivable at December 31, 2021, was 71 days. The level of DSO
at December 31, 2021 was comparable to the Company's expectation that DSO will
be in the 70 to 85-day range based on customer payment terms.
? An increase in rebates payable of $6.2 million mainly due to the timing of
payments in Fiscal 2022.
Net cash used in investing activities of $1.5 million for the six months ended
December 31, 2022 was mainly the result of purchases of property, plant and
equipment of $5.2 million and purchases of intangible assets of $1.0 million
partially offset by proceeds from the sale of assets of $4.7 million. Net cash
used in investing activities of $7.9 million for the six months ended December
31, 2021 was mainly the result of purchases of property, plant and equipment of
$6.8 million and purchases of intangible assets of $1.5 million.
Net cash used in financing activities was not material for the six months ended
December 31, 2022. Net cash used in financing activities of $0.6 million for the
six months ended December 31, 2021 was due to purchases of treasury stock
totaling $0.8 million, partially offset by proceeds from issuance of stock
pursuant to stock compensation plans of $0.2 million.
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Credit Facility and Other Indebtedness
The Company has previously entered into and may enter future agreements with
various government agencies and financial institutions to provide additional
cash to help finance the Company's acquisitions, various capital investments and
potential strategic opportunities. These borrowing arrangements as of December
31, 2022 are as follows:
7.750% Senior Secured Notes due 2026
On April 22, 2021, the Company issued $350.0 million aggregate principal amount
of the Notes in a private placement to qualified institutional buyers pursuant
to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")
and outside the United States to persons other than U.S. persons in reliance
upon Regulation S under the Securities Act. The Notes bear interest
semi-annually in arrears on April 15 and October 15 of each year, beginning on
October 15, 2021, at a rate of 7.750% per annum in cash. The Notes will mature
on April 15, 2026, unless earlier redeemed or repurchased in accordance with
their terms.
Second Lien Secured Loan Facility
On April 5, 2021, the Company entered into an Exchange Agreement with certain
participating lenders to exchange a portion of their existing Term B Loans for
Second Lien Loans pursuant to a new $190.0 million Second Lien Secured Loan
Facility ("Second Lien Facility"). On April 22, 2021, in connection with the
issuance of the Notes and the entrance into the Amended ABL Credit Facility,
which is discussed further below, the exchange between the Company and the
participating lenders was consummated. From the Closing Date until the one-year
anniversary of the Closing Date, the Second Lien Loans bear 10.0% PIK interest.
Thereafter, the Second Lien notes will bear 5.0% cash interest and 5.0% PIK
interest until maturity, except to the extent the Company elects to pay all or
portion of the PIK interest in cash. To date, the Company has not paid any PIK
interest in cash. The Second Lien Loans will mature on July 21, 2026. In
connection with the Second Lien Facility, the Company issued to the
Participating Lenders warrants to purchase up to 8,280,000 shares of common
stock of the Company ("Warrants") at an exercise price of $6.88 per share. The
Warrants were issued on April 22, 2021 with an eight-year term. The
Participating Lenders received registration rights with respect to the shares of
common stock of the Company to be received upon exercise of the Warrants. The
holders of the Warrants are entitled to receive dividends or distributions of
any kind made to the common stockholders to the same extent as if the holder had
exercised the Warrant into common stock. The Warrants are considered
participating securities under ASC 260, Earnings per share.
In connection with the Second Lien Facility, the Company is required to maintain
at least $5.0 million in a deposit account at all times subject to control by
the Second Lien Collateral Agent, and a minimum cash balance of $15.0 million as
of the last day of each month. At December 31, 2022, the Company classified the
$5.0 million required deposit account balance as restricted cash, which is
included in other assets caption in the Consolidated Balance Sheet.
Amended ABL Credit Facility
On December 7, 2020, the Company entered into a credit and guaranty agreement,
which provided for an asset-based revolving credit facility (the "ABL Credit
Facility") of up to $30.0 million, subject to borrowing base availability, and
included letter of credit and swing line sub-facilities. On April 22, 2021, the
Company entered into an amendment to that certain Credit and Guaranty Agreement,
dated as of December 7, 2020 (such agreement as so amended, the "Amended ABL
Credit Agreement"), among the Company, certain of its wholly-owned domestic
subsidiaries party thereto, as borrowers or as guarantors, Wells Fargo Bank,
National Association, as administrative agent and as collateral agent, and the
other lenders party thereto, for the purpose of, among other things, increasing
the aggregate amount of the revolving credit facility from $30.0 million to
$45.0 million and extending the maturity thereof to the fifth anniversary of the
closing date of Notes Offering (subject to a springing maturity as set forth
therein).
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The Amended ABL Credit Agreement provides for a revolving credit facility (the
"Amended ABL Credit Facility") that includes letter of credit and swing line
sub-facilities. Borrowing availability under the Amended ABL Credit Facility is
determined by a monthly borrowing base collateral calculation that is based on
specified percentages of eligible accounts receivable less certain reserves and
subject to certain other adjustments as set forth in the Amended ABL Credit
Agreement. Availability is reduced by issuance of letters of credit as well as
any borrowings. Loans outstanding under the Amended ABL Credit Agreement bear
interest at a floating rate measured by reference to, at the Company's option,
either an adjusted London Inter-Bank Offered Rate ("LIBOR") (subject to a floor
of 0.75%) plus an applicable margin of 2.50% per annum, or an alternate base
rate plus an applicable margin of 1.50% per annum. Unused commitments under the
Amended ABL Credit Facility are subject to a fee of 0.50% per annum, which fee
increases to 0.75% per annum for any quarter during which the Company's average
usage under the Amended ABL Credit Facility is less than $5.0 million.
4.50% Convertible Senior Notes due 2026
On September 27, 2019, the Company issued $86.3 million aggregate principal
amount of the Convertible Notes in a private offering to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The
Convertible Notes are senior unsecured obligations of the Company and bear
interest at an annual rate of 4.50% payable semi-annually in arrears on April 1
and October 1 of each year, beginning on April 1, 2020. The Convertible Notes
will mature on October 1, 2026, unless earlier repurchased, redeemed or
converted in accordance with their terms. The Convertible Notes are convertible
into shares of the Company's common stock at an initial conversion rate of
65.4022 shares per $1,000 principal amount of Convertible Notes (which is
equivalent to an initial conversion price of approximately $15.29 per share),
subject to adjustments upon the occurrence of certain events (but will not be
adjusted for any accrued and unpaid interest). The Company may redeem all or a
part of the Convertible Notes on or after October 6, 2023 at a redemption price
equal to 100% of the principal amount of the Convertible Notes redeemed, plus
accrued and unpaid interest, if any, up to, but excluding, the redemption date,
subject to certain conditions relating to the Company's stock price having been
met. Following certain corporate events that occur prior to the maturity date or
if the Company delivers a notice of redemption, the Company will, in certain
circumstances, increase the conversion rate for a holder who elects to convert
its Convertible Notes in connection with such corporate event or notice of
redemption. The indenture covering the Convertible Notes contains certain other
customary terms and covenants, including that upon certain events of default
occurring and continuing, either the trustee or holders of at least 25% in
principal amount of the outstanding Convertible Notes may declare 100% of the
principal of, and accrued and unpaid interest on, all the Convertible Notes to
be due and payable. In addition, if the Company ceases to be listed or quoted on
any of The NYSE, The Nasdaq Global Select Market or The Nasdaq Global Market (or
any of their respective successors), holders of the outstanding Convertible
Notes will have the option to require the Company to repurchase for cash all of
such holder's notes at 100% of the principal amount, plus accrued and unpaid
interest.
In connection with the offering of the Convertible Notes, the Company also
entered into privately negotiated "capped call" transactions with several
counterparties. The capped call transaction will initially cover, subject to
customary anti-dilution adjustments, the number of shares of common stock that
initially underlie the Convertible Notes. The capped call transactions are
expected to generally reduce the potential dilutive effect on the Company's
common stock upon any conversion of the Convertible Notes with such reduction
subject to a cap which is initially $19.46 per share.
Other Liquidity Matters
Along with executing on our existing pipeline products, we are continuously
evaluating the potential for product and company acquisitions as a part of our
future growth strategy. In conjunction with a potential acquisition, the Company
may utilize current resources or seek additional sources of capital to finance
any such acquisition, which could have an impact on future liquidity. The
continued competitive pressures on our current portfolio may impact the ultimate
success of existing pipeline projects, which may result in the Company exploring
alternative opportunities for capital to support the launch of products in the
future.
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We may also from time to time depending on market conditions and prices,
contractual restrictions, our financial liquidity and other factors, seek to
prepay outstanding debt or repurchase our outstanding debt through open market
purchases, privately negotiated purchases, or otherwise. The amounts involved in
any such transactions, individually or in the aggregate, may be material and may
be funded from available cash or from additional borrowings.
The Company files income tax returns in the United States federal jurisdiction
and its Fiscal 2015 through 2017, 2019, 2020 and 2021 federal returns are
currently under examination by the Internal Revenue Service ("IRS"). As part of
a lengthy process, the Company has received various Information Document
Requests and Notices of Proposed Adjustment with respect to positions taken in
certain income tax issues, including an accounting method change related to
chargebacks and rebates that the IRS is proposing to disallow. We are in the
process of assessing the impact of these notices and preparing a response to the
IRS. We believe that it is more likely than not that our positions will
ultimately be sustained upon further examination, and, if necessary, will
contest any additional tax determined to be owed; however, an adverse outcome
could have a material impact to the Company's Consolidated Statements of
Operations and financial position.
Research and Development Arrangements
In the normal course of business, the Company has entered into certain research
and development and other arrangements. As part of these arrangements, the
Company has agreed to certain contingent payments, which generally become due
and payable only upon the achievement of certain developmental, regulatory,
commercial and/or other milestones. In addition, under certain arrangements, we
may be required to make royalty payments based on a percentage of future sales,
or other metric, for products currently in development in the event that the
Company begins to market and sell the product. Due to the inherent uncertainty
related to these developmental, regulatory, commercial and/or other milestones,
it is unclear if the Company will ever be required to make such payments.
Critical Accounting Policies
The preparation of our Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States and the rules and
regulations of the U.S. Securities & Exchange Commission requires the use of
estimates and assumptions. A listing of the Company's significant accounting
policies is detailed in Note 3 "Summary of Significant Accounting Policies." A
subsection of these accounting policies has been identified by management as
"Critical Accounting Policies and Estimates." Critical accounting policies and
estimates are those which require management to make estimates using assumptions
that were uncertain at the time the estimates were made and for which the use of
different assumptions, which reasonably could have been used, could have a
material impact on the financial condition or results of operations.
Management has identified the following as "Critical Accounting Policies and
Estimates": Revenue Recognition, Inventories, Income Taxes, and Valuation of
Long-Lived Assets, including Intangible Assets. Refer to the Company's Form 10-K
for the fiscal year ended June 30, 2022 for a description of our Critical
Accounting Policies.
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