Lannett 10Q 2023 Q1 Quarterly report

Lannett (LCINQ) 10-Q2023 Q1 Quarterly report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2022

☐

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

FOR THE TRANSITION PERIOD FROM TO

Commission File No. 001-31298

LANNETT COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

State of Delaware		23-0787699
(State of Incorporation)		(I.R.S. Employer I.D. No.)

1150 Northbrook Drive, Suite 155

Trevose, PA 19053

(215) 333-9000

(Address of principal executive offices and telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		LCI		New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☒		Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-12 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each class of the registrant’s common stock, as of the latest practical date.


Class		Outstanding as of October 31, 2022
Common stock, par value $0.001 per share		43,002,613

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			Page No.
PART I. FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

		Consolidated Balance Sheets as of September 30, 2022 and June 30, 2022	3

		Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021	4

		Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2022 and 2021	5

		Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended September 30, 2022 and 2021	6

		Consolidated Statements of Cash Flows for the three months ended September 30, 2022 and 2021	7

		Notes to Consolidated Financial Statements	8

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

	ITEM 4.	CONTROLS AND PROCEDURES	44

PART II. OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS	45

	ITEM 1A.	RISK FACTORS	45

	ITEM 6.	EXHIBITS	46

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANNETT COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share data)


	September 30, 2022		June 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	77,916	$	87,854
Accounts receivable, net		54,916		56,241
Inventories		94,118		95,158
Current income taxes receivable		19,515		36,793
Assets held for sale		1,300		—
Other current assets		16,892		14,070
Total current assets		264,657		290,116
Property, plant and equipment, net		124,960		133,178
Intangible assets, net		29,997		32,179
Operating lease right-of-use assets		9,590		9,646
Income taxes receivable		17,272		—
Other assets		20,820		19,316
TOTAL ASSETS	$	467,296	$	484,435

LIABILITIES
Current liabilities:
Accounts payable	$	24,064	$	29,737
Accrued expenses		33,032		23,667
Accrued payroll and payroll-related expenses		7,957		8,342
Rebates payable		21,751		21,568
Royalties payable		7,591		5,677
Restructuring liability		284		490
Current operating lease liabilities		2,069		2,064
Other current liabilities		13,395		13,395
Total current liabilities		110,143		104,940
Long-term debt, net		619,343		614,948
Long-term operating lease liabilities		9,727		9,994
Other liabilities		5,644		5,616
TOTAL LIABILITIES		744,857		735,498
Commitments and contingencies (Notes 10 and 11)

STOCKHOLDERS’ DEFICIT
Common stock ($0.001 par value, 100,000,000 shares authorized; 42,918,228 and 42,269,137 shares issued; 41,169,648 and 40,704,572 shares outstanding at September 30, 2022 and June 30, 2022, respectively)		43		42
Additional paid-in capital		365,573		363,957
Accumulated deficit		(624,405)		(596,386)
Accumulated other comprehensive loss		(401)		(411)
Treasury stock (1,748,580 and 1,564,565 shares at September 30, 2022 and June 30, 2022, respectively)		(18,371)		(18,265)
Total stockholders’ deficit		(277,561)		(251,063)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	467,296	$	484,435

The accompanying notes are an integral part of the Consolidated Financial Statements.

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LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended
	September 30,
	2022		2021
Net sales	$	75,079	$	101,525
Cost of sales		61,285		81,008
Amortization of intangibles		1,195		3,996
Gross profit		12,599		16,521
Operating expenses (income):
Research and development expenses		7,179		5,764
Selling, general and administrative expenses		16,697		18,905
Restructuring expenses		146		—
Asset impairment charges		4,668		—
Gain on sale of intangible assets		(3,063)		—
Total operating expenses		25,627		24,669
Operating loss		(13,028)		(8,148)
Other income (expense), net:
Investment income		92		34
Interest expense		(15,030)		(14,224)
Other income (expense)		(19)		(62)
Total other expense, net		(14,957)		(14,252)
Loss before income tax		(27,985)		(22,400)
Income tax expense (benefit)		34		(58)
Net loss	$	(28,019)	$	(22,342)

Loss per common share (1):
Basic	$	(0.68)	$	(0.56)
Diluted	$	(0.68)	$	(0.56)

Weighted average common shares outstanding (1):
Basic		40,942,375		39,927,822
Diluted		40,942,375		39,927,822

(1)	See Note 13 “Loss Per Common Share” for details on calculation.

The accompanying notes are an integral part of the Consolidated Financial Statements.

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LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands)


	Three Months Ended
	September 30,
	2022		2021
Net loss	$	(28,019)	$	(22,342)
Other comprehensive income:
Foreign currency translation gain		10		24
Total other comprehensive income		10		24
Comprehensive loss	$	(28,009)	$	(22,318)

The accompanying notes are an integral part of the Consolidated Financial Statements.

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LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(UNAUDITED)

(In thousands)


	Three Months Ended September 30, 2022
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Accumulated		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Deficit		Loss		Stock		Deficit
Balance, June 30, 2022	42,269	$	42	$	363,957	$	(596,386)	$	(411)	$	(18,265)	$	(251,063)
Shares issued in connection with share-based compensation plans	649		1		37		—		—		—		38
Share-based compensation	—		—		1,579		—		—		—		1,579
Purchase of treasury stock	—		—		—		—		—		(106)		(106)
Other comprehensive income	—		—		—		—		10		—		10
Net loss	—		—		—		(28,019)		—		—		(28,019)
Balance, September 30, 2022	42,918	$	43	$	365,573	$	(624,405)	$	(401)	$	(18,371)	$	(277,561)


	Three Months Ended September 30, 2021
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Accumulated		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Deficit		Loss		Stock		Deficit
Balance, June 30, 2021	40,913	$	41	$	355,239	$	(364,766)	$	(548)	$	(17,437)	$	(27,471)
Shares issued in connection with share-based compensation plans	874		1		104		—		—		—		105
Share-based compensation	—		—		3,018		—		—		—		3,018
Purchase of treasury stock	—		—		—		—		—		(687)		(687)
Other comprehensive income	—		—		—		—		24		—		24
Net loss	—		—		—		(22,342)		—		—		(22,342)
Balance, September 30, 2021	41,787	$	42	$	358,361	$	(387,108)	$	(524)	$	(18,124)	$	(47,353)

The accompanying notes are an integral part of the Consolidated Financial Statements.

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LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Three Months Ended
	September 30,
	2022		2021
OPERATING ACTIVITIES:
Net loss	$	(28,019)	$	(22,342)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		6,214		9,585
Share-based compensation		1,579		3,018
Asset impairment charges		4,668		—
(Gain) loss on sale/disposal of assets		(3,063)		56
Accrual of payment-in-kind interest on Second Lien Credit Facility		2,709		4,949
Amortization of debt discount and other debt issuance costs		1,776		1,440
Provision for inventory write-downs		2,667		2,839
Other noncash expenses		242		206
Changes in assets and liabilities which provided (used) cash:
Accounts receivable, net		1,325		4,525
Inventories		(1,627)		(5,931)
Income taxes receivable/payable		34		535
Other assets		(4,434)		(2,360)
Rebates payable		183		6,800
Royalties payable		1,914		841
Restructuring liability		(206)		—
Operating lease assets/liabilities		(430)		(330)
Accounts payable		(5,673)		7,405
Accrued expenses		9,215		6,694
Accrued payroll and payroll-related expenses		(385)		(943)
Other liabilities		—		230
Net cash (used in) provided by operating activities		(11,311)		17,217
INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(2,769)		(3,472)
Proceeds from sale of assets		4,200		348
Purchases of intangible assets		—		(1,500)
Net cash provided by (used in) investing activities		1,431		(4,624)
FINANCING ACTIVITIES:
Proceeds from issuance of stock		38		105
Purchase of treasury stock		(106)		(687)
Net cash used in financing activities		(68)		(582)
Effect on cash and cash equivalents of changes in foreign exchange rates		10		24
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(9,938)		12,035
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD		92,854		98,286
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	82,916	$	110,321

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	2,820	$	100
Income taxes refunded	$	—	$	(592)
Purchases of property, plant and equipment included in accounts payable	$	1,193	$	1,624

The accompanying notes are an integral part of the Consolidated Financial Statements.

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LANNETT COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Interim Financial Information

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for the presentation of interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited financial statements do not include all the information and footnotes necessary for a comprehensive presentation of the financial position, results of operations and cash flows for the periods presented. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for the three months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2023. These unaudited financial statements should be read in combination with the other Notes in this section; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 2; and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. The Consolidated Balance Sheet as of June 30, 2022 was derived from audited financial statements.

Note 2. The Business and Nature of Operations

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company” or “Lannett”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, nasal and oral solution finished dosage forms of drugs that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the Company.

The Company operates a pharmaceutical manufacturing plant in Seymour, Indiana. During Fiscal 2022, the Company completed the sale of its Silarx Pharmaceuticals, Inc. (“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 October 31, 2022, the 30 trading-day average global market capitalization of the Company was approximately $19.7 million, and the Company’s absolute market capitalization was approximately $18.9 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. The Company intends to cure the deficiency within a period permissible under Section 802.01C of the NYSE’s Listed Company Manual. However, there can be no assurances that the Company will meet continued listing standards 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.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP.

Principles of consolidation

The Consolidated Financial Statements include the accounts of Lannett Company, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

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Reclassifications

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, returns and other adjustments including a provision for the Company’s liability under the Medicare Part D program. Additionally, significant estimates and assumptions are required when determining the value of inventories and long-lived assets, including intangible assets, income taxes, and contingencies.

Because of the inherent subjectivity and complexity involved in these estimates and assumptions, actual results could differ from those estimates.

Foreign currency translation

The Consolidated Financial Statements are presented in U.S. dollars, the reporting currency of the Company. The financial statements of the Company’s foreign subsidiary are maintained in local currency and translated into U.S. dollars at the end of each reporting period. Assets and liabilities are translated at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. The adjustments resulting from the use of differing exchange rates are recorded as part of stockholders’ equity (deficit) in accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in foreign currencies are recognized in the Consolidated Statements of Operations under other income (loss). Amounts recorded due to foreign currency fluctuations are immaterial to the Consolidated Financial Statements.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with original maturities less than or equal to three months at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value, and consist of bank deposits and money market funds. The Company maintains its cash deposits and cash equivalents at well-known, stable financial institutions. Such amounts frequently exceed insured limits. In connection with the Second Lien Secured Loan Facility (“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. At September 30, 2022 and June 30, 2022, the Company classified this balance as restricted cash, which is included in other assets on the Consolidated Balance Sheets.

Presented in the table below is a reconciliation of the cash, cash equivalents and restricted cash amounts presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended September 30, 2022 and 2021.


	September 30, 2022		September 30, 2021
Cash and cash equivalents	$	77,916	$	105,321
Restricted cash, included in other assets		5,000		5,000
Cash, cash equivalents and restricted cash as presented on the Consolidated Statements of Cash Flows	$	82,916	$	110,321

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Allowance for doubtful accounts

The Company complies with ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the Company to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are determined to be uncollectible.

Inventories

Inventories are stated at the lower of cost or net realizable value by the first-in, first-out method. Inventories are regularly reviewed and write-downs for excess and obsolete inventory are recorded based primarily on current inventory levels, expiration date and estimated sales forecasts.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the assets’ estimated useful lives. Repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

Intangible Assets

Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives, which commence upon shipment of the product. The Company continually evaluates the reasonableness of the useful lives of these assets. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred.

Valuation of Long-Lived Assets, including Intangible Assets

The Company’s long-lived assets primarily consist of property, plant and equipment and definite-lived intangible assets. Property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances (“triggering events”) indicate that the carrying amount of the asset may not be recoverable. If a triggering event is determined to have occurred, the asset’s carrying value is compared to the future undiscounted cash flows expected to be generated by the asset. If the carrying value exceeds the undiscounted cash flows of the asset, then impairment exists.

An impairment loss is measured as the excess of the asset’s carrying value over its fair value, which in most cases is calculated using a discounted cash flow model. Discounted cash flow models are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

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Segment Information

The Company operates in one reportable segment, generic pharmaceuticals. As such, the Company aggregates its financial information for all products. The following table identifies the Company’s net sales by medical indication for the three months ended September 30, 2022 and 2021.


	Three Months Ended
(In thousands)	September 30,
Medical Indication	2022		2021
Analgesic	$	3,424	$	5,314
Anti-Psychosis		2,620		3,715
Cardiovascular		10,882		14,100
Central Nervous System		20,794		22,785
Endocrinology		7,312		7,845
Gastrointestinal		7,942		15,240
Infectious Disease		5,069		12,515
Migraine		3,324		4,685
Respiratory/Allergy/Cough/Cold		1,202		3,114
Other		8,759		10,352
Contract manufacturing revenue		3,751		1,860
Total net sales	$	75,079	$	101,525

Customer, Supplier and Product Concentration

The following table presents the percentage of total net sales, for the three months ended September 30, 2022 and 2021, for certain of the Company’s products, defined as products containing the same active ingredient or combination of ingredients, which accounted for at least 10% of total net sales in any of those periods:

The following table presents the percentage of total net sales, for the three months ended September 30, 2022 and 2021, for certain of the Company’s customers which accounted for at least 10% of total net sales in any of those periods:


	Three Months Ended
	September 30,
	2022		2021
Customer A	21	%	30	%
Customer B	20	%	20	%
Customer C	17	%	15	%

Revenue Recognition

Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, the Company recognizes revenue when (or as) we satisfy our performance obligations by transferring a promised good or service to a customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. Under ASC 606, Revenue from Contracts with Customers, the Company recognizes certain contract manufacturing arrangements “over time.”

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When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments. These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual. Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.

Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity. While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions. Each major category is discussed in detail below:

Chargebacks

The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health, AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their Food and Drug Administration (“FDA”) approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug application ("ANDA”). Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

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Returns

Consistent with industry practice, the Company has a product returns policy that allows customers to return product within a specified time period prior to and subsequent to the product’s expiration date in exchange for a credit to be applied to future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices, credit terms and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve for returns increases as net sales increase.

Other Adjustments

Other adjustments consist primarily of “price adjustments,” also known as “shelf-stock adjustments” and “price protections,” which are both credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available. Other adjustments also include prompt payment discounts and “failure-to-supply” adjustments. If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.

Leases

Under ASC Topic 842, Leases, when the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. Once a lease has been identified, the Company must determine the lease term, the present value of lease payments and the classification of the lease as either operating or financing.

The lease term is determined to be the non-cancelable period including any lessee renewal options which are considered to be reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The present value of lease payments includes fixed and certain variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. To calculate the present value of lease payments, we use our incremental borrowing rate based on the information available at commencement date, as the rate implicit in the lease is generally not readily available.

In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors.

Upon the commencement of the lease, the Company will record a lease liability and right-of-use (“ROU”) asset based on the present value of the future minimum lease payments over the lease term at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.

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For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term unless an impairment has been recorded with respect to a leased asset. For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.

Cost of Sales, including Amortization of Intangibles

Cost of sales includes all costs related to bringing products to their final selling destination, which includes direct and indirect costs, such as direct material, labor and overhead expenses. Additionally, cost of sales includes product royalties, depreciation, amortization and costs to renew or extend recognized intangible assets, freight charges and other shipping and handling expenses.

Research and Development

Research and development costs are expensed as incurred, including all production costs until a drug candidate is approved by the FDA. Research and development expenses include costs associated with internal projects as well as costs associated with third-party research and development contracts.

Contingencies

Loss contingencies, including litigation-related contingencies, are included in the Consolidated Statements of Operations when the Company concludes that a loss is both probable and reasonably estimable. Legal fees for litigation-related matters are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative expenses line item.

Restructuring Costs

The Company records charges associated with approved restructuring plans to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges based on estimated employee terminations, site closure and consolidation plans. The Company accrues severance and other employee separation costs under these actions when it is probable that a liability exists, and the amount is reasonably estimable.

Share-Based Compensation

Share-based compensation costs are recognized over the requisite service period, typically the vesting period, using a straight-line method, based on the fair value of the instrument on the date of grant less an estimate for expected forfeitures. The Company uses the stock price on the grant date to value restricted stock and performance-based shares with vesting based on the satisfaction of a performance condition. The Company uses the Black-Scholes valuation model to determine the fair value of stock options and the Monte-Carlo simulation model to determine the fair value of performance-based shares with a market condition. The Black-Scholes valuation and Monte-Carlo simulation models include various assumptions, including the expected volatility, the expected life of the award, dividend yield and the risk-free interest rate as well as performance assumptions of peer companies. These assumptions involve inherent uncertainties based on market conditions which are generally outside the Company’s control. Changes in these assumptions could have a material impact on share-based compensation costs recognized in the Consolidated Financial Statements.

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Self-Insurance

The Company self-insures for certain employee medical and prescription benefits. The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure. The liability for self-insured risks is primarily calculated using independent third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported. Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The liability for self-insured risks under this plan was $0.7 million and $0.5 million as of September 30, 2022 and June 30, 2022, respectively, and is recorded in the accrued payroll and payroll-related expenses caption in the Consolidated Balance Sheets.

Income Taxes

The Company uses the liability method to account for income taxes as prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. The Company evaluates the need for a valuation allowance each reporting period weighing all positive and negative evidence. The factors used to assess the likelihood of realization include, but are not limited to, the Company’s forecast of future taxable income, historical results of operations, statutory expirations and available tax planning strategies and actions that could be implemented to realize the net deferred tax assets. Under ASC 740, Income Taxes, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative accounting standards also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

Earnings (Loss) Per Common Share

The presentation of basic and diluted earnings (loss) per common share is required on the face of the Company's Consolidated Statements of Operations as well as a reconciliation of the computation of basic earnings (loss) per common share to diluted earnings (loss) per common share. In accordance with ASC 260, Earnings per share, the Company computes earnings (loss) per share using the two-class method, which requires an allocation of earnings between the holders of common stock and the Company’s participating security holders. The warrants issued in connection with the Second Lien Secured Loan Facility (the “Warrants”) are considered participating securities, as discussed further in Note 12 “Warrants.” Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders, which excludes the income allocated to participating security holders, by the basic weighted average common shares outstanding.

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For purposes of determining diluted earnings per share, the Company further adjusts the basic earnings per share to include the effect of potentially dilutive shares outstanding, including options and restricted stock awards, the 4.50% Convertible Senior Notes (the “Convertible Notes”), and the Warrants. In this calculation, the Company reallocates net income based on the rights of each potentially dilutive share and will report the most dilutive earnings (loss) per share. The weighted average number of diluted shares is adjusted for the potential dilutive effect of the exercise of stock options, treats unvested restricted stock as if it were vested, includes performance-based shares that would be issued if the performance criteria were met as of the end of the reporting period, and assumes the conversion of the Convertible Notes. The Company uses the “if-converted" method to compute earnings (loss) per share when assuming the conversion of the Convertible Notes, which is calculated by dividing the adjusted "if-converted" net income by the adjusted weighted average number of shares of common stock outstanding during the period. The adjusted "if-converted" net income is adjusted for interest expense and amortization of debt issuance costs, both net of tax, associated with the Convertible Notes. Because the Warrants do not participate in losses, the Company will allocate undistributed earnings when calculating basic and diluted earnings per share in periods of net income only. Anti-dilutive securities are excluded from the calculation. Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) reflects all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. This includes, but is not limited to, foreign currency translation gain (loss). Other comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss) but excluded from income (loss) for all amounts are recorded directly as an adjustment to stockholders’ equity.

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity, with changes to modify and simplify the application of U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU does not have a material impact on the Company’s Consolidated Financial Statements.

Note 4. Accounts Receivable, net

Accounts receivable, net consisted of the following components at September 30, 2022 and June 30, 2022:


	September 30,		June 30,
(In thousands)	2022		2022
Gross accounts receivable	$	180,598	$	199,242
Less: Chargebacks reserve		(44,059)		(54,501)
Less: Rebates reserve		(28,677)		(26,921)
Less: Returns reserve		(39,294)		(46,478)
Less: Other deductions		(12,703)		(14,117)
Less: Allowance for doubtful accounts		(949)		(984)
Accounts receivable, net	$	54,916	$	56,241

For the three months ended September 30, 2022, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $86.1 million, $21.6 million, $5.3 million and $6.7 million, respectively. For the three months ended September 30, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $131.2 million, $28.8 million, $5.9 million and $19.0 million, respectively.

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The following table identifies the activity and ending balances of each major category of revenue-related reserve for the three months ended September 30, 2022 and 2021:


Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2022	$	54,501	$	48,489	$	46,478	$	14,117	$	163,585
Current period provision		86,149		21,575		5,347		6,746		119,817
Credits issued during the period		(96,591)		(19,636)		(12,531)		(8,160)		(136,918)
Balance at September 30, 2022	$	44,059	$	50,428	$	39,294	$	12,703	$	146,484


Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2021	$	69,564	$	35,297	$	38,395	$	15,505	$	158,761
Current period provision		131,195		28,760		5,939		19,010		184,904
Credits issued during the period		(128,952)		(21,640)		(7,872)		(15,547)		(174,011)
Balance at September 30, 2021	$	71,807	$	42,417	$	36,462	$	18,968	$	169,654

For the three months ended September 30, 2022 and 2021, as a percentage of gross sales the provision for chargebacks was 45.1% and 46.1 %, the provision for rebates was 11.3% and 10.1%, the provision for returns was 2.8% and 2.1% and the provision for other adjustments was 3.5% and 6.7%, respectively.

The decrease in the reserve for chargebacks from June 30, 2022 to September 30, 2022 was primarily attributable to changes in product and customer sales mix. The reserve for returns also decreased during the first quarter of Fiscal 2023 due to the timing of payments as a result of the higher than average returns in prior periods.

Note 5. Inventories

Inventories at September 30, 2022 and June 30, 2022 consisted of the following:


	September 30,		June 30,
(In thousands)	2022		2022
Raw Materials	$	37,246	$	39,297
Work-in-process		7,061		9,313
Finished Goods		49,811		46,548
Total	$	94,118	$	95,158

During the three months ended September 30, 2022 and 2021, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $2.7 million and $2.8 million, respectively.

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Note 6. Property, Plant and Equipment, net

Property, plant and equipment, net at September 30, 2022 and June 30, 2022 consisted of the following:


		September 30,		June 30,
(In thousands)	Useful Lives	2022		2022
Land	—	$	500	$	533
Building and improvements	10 - 39 years		84,034		93,701
Machinery and equipment	5 - 10 years		157,224		158,854
Furniture and fixtures	5 - 7 years		3,108		3,367
Less accumulated depreciation			(135,309)		(136,433)
			109,557		120,022
Construction in progress			15,403		13,156
Property, plant and equipment, net		$	124,960	$	133,178

Depreciation expense for the three months ended September 30, 2022 and 2021 was $5.0 million and $5.6 million, respectively.

Property, plant and equipment, net included amounts held in foreign countries in the amount of $0.7 million at September 30, 2022 and June 30, 2022.

Note 7. Fair Value Measurements

The Company’s financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt obligations. The Company’s cash and cash equivalents include bank deposits and money market funds. The carrying value of certain financial instruments, primarily cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair values based upon the short-term nature of their maturity dates.

The Company follows the authoritative guidance of ASC Topic 820, Fair Value Measurements and Disclosures.” Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is defined as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 — Directly or indirectly observable inputs, other than quoted prices, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are material to the fair value of the asset or liability. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation are examples of Level 3 assets and liabilities.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

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Financial Instruments Disclosed, But Not Reported, at Fair Value

We estimate the fair value of 7.750% senior secured notes due 2026 (the “Notes”) and the Convertible Notes using market quotations for debt that have quoted prices in active markets (Level 1). Since our Second Lien Facility does not trade on a daily basis in an active market, the fair value estimate is based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). The estimated fair value of the Notes as of September 30, 2022 and June 30, 2022 was approximately $98 million and $140 million, respectively. The estimated fair value of the Second Lien Facility as of September 30, 2022 and June 30, 2022 was approximately $53 million and $76 million, respectively. The decline in the fair value of the Notes and Second Lien Facility is primarily a reflection of the increased competitive pressures on the Company’s recent financial performance, which, in part, resulted in a downgrade to the Company’s credit rating. The estimated fair value of the Convertible Notes was approximately $26 million and $25 million as of September 30, 2022 and June 30, 2022, respectively. The fair value of the Convertible Notes as of September 30, 2022 was lower than the carrying value primarily due to the Company’s stock price of $0.45 at September 30, 2022 as compared to the $15.29 conversion price as well as the Company’s downgraded credit rating.

Note 8. Intangible Assets

Intangible assets, net as of September 30, 2022 and June 30, 2022 consisted of the following:


	Weighted	Gross Carrying Amount				Accumulated Amortization				Intangible Assets, Net
	Avg. Life	September 30,		June 30,		September 30,		June 30,		September 30,		June 30,
(In thousands)	(Yrs.)	2022		2022		2022		2022		2022		2022
Definite-lived:
KUPI trade name	2	$	2,920	$	2,920	$	(2,920)	$	(2,920)	$	—	$	—
KUPI other intangible assets	15		19,000		19,000		(8,678)		(8,362)		10,322		10,638
Silarx product rights	15		18,531		20,000		(6,074)		(6,222)		12,457		13,778
Other product rights	7		16,242		16,242		(9,024)		(8,479)		7,218		7,763
Total intangible assets, net		$	56,693	$	58,162	$	(26,696)	$	(25,983)	$	29,997	$	32,179

For the three months ended September 30, 2022 and 2021, the Company recorded amortization expense of $1.2 million and $4.0 million, respectively.

Future annual amortization expense consists of the following as of September 30, 2022:


(In thousands)	Amortization
Fiscal Year Ending June 30,	Expense
2023	$	3,453
2024		3,874
2025		3,774
2026		3,606
2027		3,469
Thereafter		11,821
	$	29,997

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Note 9. Long-Term Debt

Long-term debt, net consisted of the following:


	September 30,		June 30,
(In thousands)	2022		2022
7.75% Senior Secured Notes due 2026	$	350,000	$	350,000
Unamortized discount and other debt issuance costs		(4,337)		(4,599)
7.75% Senior Secured Notes due 2026, net		345,663		345,401
Second Lien Secured Loan Facility due 2026 ($190.0M Principal, $5.7M Exit Fee, and $24.7M and $22.0M accrued PIK interest at September 30, 2022 and June 30, 2022 respectively)		220,430		217,721
Unamortized discount and other debt issuance costs		(31,009)		(32,308)
Second Lien Secured Loan Facility due 2026, net		189,421		185,413
4.50% Convertible Senior Notes due 2026		86,250		86,250
Unamortized discount and other debt issuance costs		(1,991)		(2,116)
4.50% Convertible Senior Notes, net		84,259		84,134
$45.0 million Amended ABL Credit Facility		—		—
Total long-term debt, net	$	619,343	$	614,948

The weighted average interest rate for the three months ended September 30, 2022 and 2021 was 9.1% and 8.8%, respectively. As of September 30, 2022, the Company recorded interest payable of $16.6 million, which is included in the accrued expenses caption of the Consolidated Balance Sheet.

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.

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 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 at an exercise price of $6.88 per share. Refer to Note 12 “Warrants” for further information on the Warrants issued.

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 September 30, 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. The Second Lien Facility also contains an affirmative covenant requiring delivery of the Company’s year-end financial statements, accompanied by an audit opinion that is not qualified, subject to customary exceptions, as to the status of the Company as a going concern.

In addition to the Notes Offering and the Second Lien Facility, 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

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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).

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 per annum 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

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. See Note 2 “The Business and Nature of Operations” for additional information regarding the out-of-compliance notices received from the NYSE.

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.

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Long-term debt amounts due, for the twelve-month periods ending September 30 are as follows:


	Amounts Payable
(In thousands)	to Institutions
2023	$	—
2024		—
2025		—
2026		656,680
2027		—
Total	$	656,680

The long-term debt amounts due above include accrued PIK interest on the Second Lien Facility as of September 30, 2022. As of April 22, 2022, which is the one-year anniversary of the closing date of the Second Lien Facility, the Company may now elect to pay in cash any interest previously required to be paid in the form of PIK interest. To date, the Company has not paid any PIK interest in cash.

The outstanding Notes, Second Lien Facility, and Amended ABL Credit Facility amounts above are guaranteed by all of Lannett’s significant wholly-owned domestic subsidiaries and are collateralized by substantially all present and future assets of the Company.

Note 10. Legal, Regulatory Matters and Contingencies

Federal Investigation into the Generic Pharmaceutical Industry

In November and December 2014, the Company and certain affiliated individuals and customers were served with grand jury subpoenas relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The subpoenas requested corporate documents of the Company relating to corporate, financial and employee information, communications or correspondence with competitors regarding the sale of generic prescription medications and the marketing, sale, or pricing of certain products, generally for the period of 2005 through the dates of the subpoenas.

The Company received a Civil Investigative Demand (“CID”) from the Department of Justice on May 14, 2018. The CID requested information from 2009-present regarding allegations that the generic pharmaceutical industry engaged in market allocation, price fixing, payment of illegal remuneration and submission of false claims. The Company has responded to the CID.

Based on internal investigations performed to date, the Company believes that it has acted in compliance with all applicable laws and regulations.

Government Pricing

On May 22, 2019, following an audit conducted by the Company, the Department of Veterans Affairs issued a Contracting Officer’s Final Decision and Demand for Payment, assessing the sum of $9.4 million for overpayments by the Veteran’s Administration (“VA”) as a result of certain commercial customer prices that were not properly disclosed to the VA for the period of January 1, 2012 through June 30, 2016. In August 2019, the Company remitted payment to the VA and was indemnified from UCB for the portion of that related to the period prior to the acquisition of KUPI (January 1, 2012 to November 24, 2015) totaling $8.1 million. The VA requested additional information for the period of July 1, 2016 through March 2018. The Company is in the process of responding to the information request.

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State Attorneys General and Private Plaintiffs Antitrust and Consumer Protection Litigation

In December 2016, the Connecticut Attorney General and various other State Attorneys General filed a civil complaint alleging that six pharmaceutical companies engaged in anti-competitive behavior. The Company was not named in the action and does not compete on the products that formed the basis of the complaint. The complaint was later transferred for pretrial purposes to the United States District Court for the Eastern District of Pennsylvania as part of a multidistrict litigation captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation (the “MDL”). On October 31, 2017, the State Attorneys General filed a motion for leave to amend their complaint to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs. The District Court granted that motion on June 5, 2018. The State Attorneys General filed their amended complaint on June 18, 2018. The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, but does not involve the pricing for digoxin. The State Attorneys General also allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. On August 15, 2019, the Court denied the defendants' joint motion to dismiss the overarching conspiracy claims but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it. On June 7, 2022, the Court granted a joint motion of all defendants to dismiss the federal claim of the State Attorneys General for disgorgement of defendants’ allegedly ill-gotten gains, but denied defendants’ motion to dismiss their parens patriae federal claims for injunctive relief due to lack of standing.

On May 10, 2019, the State Attorneys General filed a new lawsuit naming the Company and one of its employees as defendants, along with 33 other companies and individuals. The complaint again alleges an overarching conspiracy and contains claims for price-fixing and market allocation under the Sherman Act and related state laws. The complaint focuses on the conduct of another generic pharmaceutical company, and the relationships that company had with other generic companies and their employees. The specific allegations in this complaint against Lannett relate to the Company’s sales of baclofen and levothyroxine. The complaint also names another current employee as a defendant, but the allegations pertain to conduct that occurred prior to their employment by Lannett. In June 2020, the State Attorneys General filed a third overarching conspiracy complaint involving scores of different drugs used primarily to treat dermatological conditions, including alleged price-fixing by the Company for acetazolamide. Both complaints have been added to the MDL.

In 2016 and 2017, the Company and certain competitors were named as defendants in a number of lawsuits filed by private plaintiffs alleging that the Company and certain generic pharmaceutical manufacturers have conspired to fix prices of generic digoxin, levothyroxine, ursodiol and baclofen. These cases are part of a larger group of more than 100 lawsuits generally alleging that over 30 generic pharmaceutical manufacturers and distributors conspired to fix prices for multiple different generic drugs in violation of the federal Sherman Act, various state antitrust laws, and various state consumer protection statutes. The United States also has been granted leave to intervene in the cases. On April 6, 2017, these cases were added to the MDL. The various plaintiffs are grouped into three categories - Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers - and filed Consolidated Amended Complaints (“CACs”) against the Company and the other defendants in August 2017.

The CACs naming the Company as a defendant involve generic digoxin, levothyroxine, ursodiol and baclofen. Pursuant to a court-ordered schedule grouping the 18 different drug cases into three separate tranches, the Company and other generic pharmaceutical manufacturer defendants in October 2017 filed joint and individual motions to dismiss the CACs involving the six drugs in the first tranche, including digoxin. In October 2018, the Court (with one exception) denied defendants’ motions to dismiss plaintiffs’ Sherman Act claims with respect to the drugs in the first tranche. In March 2019, the Company and other defendants filed answers to the Sherman Act claims. In addition, in February 2019, the Court dismissed certain of the plaintiffs’ state law claims but denied the remainder of defendants’ motions to dismiss and set a deadline of April 1, 2019 for certain plaintiffs to amend their existing complaints. Those plaintiffs amended their complaints, but further motions to dismiss the state-law claims remain pending.

Following the lead of the state Attorneys General, the Direct Purchaser Plaintiffs, End Payer Plaintiffs and Indirect Reseller Plaintiffs filed their own complaints in June 2018 alleging an overarching conspiracy relating to 14 generic drugs in the End Payer complaint and 15 generic drugs in the Indirect Reseller complaint. Although the complaints allege an overarching conspiracy with respect to all of the drugs identified, the specific allegations related to drugs the Company manufactures involve acetazolamide and doxycycline monohydrate.

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In addition, between December 2019 and February 2020, the End Payer Plaintiffs, Indirect Reseller Purchasers, and Direct Purchaser Plaintiffs filed separate complaints alleging overarching, industry-wide price-fixing conspiracies modeled on the second one filed by the state Attorneys General. The new complaint involves 135 new drugs in addition to those named in previous complaints. As to the Company, the new drugs involved are pilocarpine HCL, triamterene HCTZ capsules, amantadine HCL, and oxycodone HCL. None of the defendants, including the Company, has responded yet to these new complaints.

Between January 2018 and December 2020, a number of opt-out parties filed individual complaints or otherwise commenced actions against the Company and dozens of other companies and individuals alleging an overarching conspiracy and individual conspiracies to fix the prices and allocate markets on scores of different drug products, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen. The opt-out parties include various retailers, insurers and county governments, which have filed federal suits in Pennsylvania, New York, California, Minnesota and Texas. All of those complaints have been added to the MDL but none of the defendants, including the Company, has responded to any of the complaints. Other groups of insurers have commenced actions in Pennsylvania state court against the Company and other drug companies by filing writs of summons, which are not complaints but can serve to toll the running of statutes of limitations. Those state-court cases have not been added to the MDL, although the parties have agreed to stay those cases pending further developments in the MDL. One of the insurance state-court plaintiffs filed a motion to have its case removed from deferred status so it could be litigated simultaneously in the Philadelphia Court of Common Pleas, but the Court denied that motion on October 3, 2022, so the case currently remains in deferred status.

In June 2020, the Company and a number of other generic pharmaceutical manufacturers were named as defendants in a Statement of Claim in a proposed class proceeding in federal court in Toronto, Ontario, Canada. The case alleges a violation of Canada’s Competition Act. The allegations are similar to those in the MDL alleging an overarching, industry-wide conspiracy to allocate markets and fix the price of generic drugs. That alleged conspiracy reached Canada because these same manufacturers also allegedly sell the majority of generic drugs in Canada. The Statement of Claim alleges that the conspiracy extends to the entire generic pharmaceutical market. The specific drugs identified with respect to the Company are: acetazolamide, baclofen, digoxin, doxycycline monohydrate, levothyroxine, and ursodiol. The Company has not yet responded to the Statement of Claim.

On July 13, 2020, the District Court overseeing the MDL selected as “bellwether” cases the second overarching conspiracy case filed by the state Attorneys General in May 2019 as well as individual-conspiracy cases filed by the Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers involving the drugs clobetasol, clomipramine and pravastatin. The Company is a defendant only in the overarching conspiracy case. On February 9, 2021, the District Court vacated the order selecting the bellwether cases. Thereafter, the District Court re-designated the clobetasol and clomipramine cases as individual-conspiracy bellwethers, and on May 7, 2021, selected the third complaint filed by the state Attorneys General in June 2020 as the new overarching conspiracy bellwether case. On September 9, 2021, the state Attorneys General amended their bellwether complaint. To date, none of the bellwether cases have been scheduled for trial.

The Company believes that it acted in compliance with all applicable laws and regulations. Accordingly, the Company disputes the allegations set forth in these class actions and plans to vigorously defend itself against these claims.

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Shareholder Litigation

In November 2016, a putative class action lawsuit was filed against the Company and two of its former officers in the federal district court for the Eastern District of Pennsylvania, alleging that the Company and two of its former officers damaged the purported class by making false and misleading statements regarding the Company’s drug pricing methodologies and internal controls. In December 2017, counsel for the putative class filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint in February 2018. In July 2018, the court granted the Company’s motion to dismiss the second amended complaint. In September 2018, counsel for the putative class filed a third amended complaint alleging that the Company and two of its former officers made false and misleading statements regarding the impact of competition on prices and sales of certain of the Company’s products, regarding the potential effects on the Company of regulatory investigations and antitrust litigation, and regarding the defendants’ investigation of purported anticompetitive conduct. The Company filed a motion to dismiss the third amended complaint in November 2018. In May 2019, the court denied the Company’s motion to dismiss the third amended complaint. In July 2019, the Company filed an answer to the third amended complaint. In October 2020, counsel for the putative class filed a motion for class certification. In March 2021, the Company filed a brief in opposition to the motion to certify the putative class. In August 2021, the court granted the motion to certify the proposed class, to appoint class representatives, and to appoint class counsel. In August 2021, the Company filed a petition for permission to appeal the court’s class certification order. In September 2021, counsel for the class filed a response in opposition to the Company’s petition. In November 2021, the United States Court of Appeals for the Third Circuit granted the Company’s petition for permission to appeal the class certification order. In January 2022, the Third Circuit granted the Company’s motion to stay the case pending a decision on the interlocutory appeal. The Company believes it acted in compliance with all applicable laws and continues to vigorously defend itself from these claims. The Company cannot reasonably predict the outcome of the suit at this time.

Sandoz, Inc.

On July 20, 2020, Sandoz, Inc. (“Sandoz”) filed a complaint in federal court in Philadelphia, alleging claims for tortious interference with contract, unfair competition and conversion of confidential information, arising out of Cediprof, Inc.’s (“Cediprof”) termination of Sandoz’s contract to distribute levothyroxine tablets in the United States and certain territories. Along with the complaint, Sandoz filed a motion for a temporary restraining order and preliminary injunction, seeking to enjoin the Company from commencing the distribution of levothyroxine tablets on August 3, 2020. On the same day, Sandoz filed a separate complaint and application for a temporary restraining order and preliminary injunction against Cediprof in federal court in New York, seeking to prevent Cediprof from selling its levothyroxine tablets in the United States and certain of its territories to anyone other than Sandoz. On July 27, 2020, the New York court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling Sandoz had failed to establish irreparable harm. Sandoz subsequently dismissed the complaint and is proceeding against Cediprof in an Arbitration in New York, where the Company has agreed to indemnify Cediprof. On July 28, 2020, the Philadelphia court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling that Sandoz had failed to establish irreparable harm and failed to establish that it is likely to succeed on the merits of its claim against Lannett. On October 5, 2020, the Company filed a motion to dismiss the complaint. On December 28, 2020, the Court granted in part and denied in part the motion, dismissing certain of the claims. The Company has filed a motion to stay the case pending the Arbitration of the Sandoz/Cediprof dispute. On January 11, 2021, the Company filed an answer and counterclaim to the complaint. Upon the conclusion of fact discovery, the Court entered an order on July 16, 2021 staying the remaining deadlines in the case pending the outcome of the Arbitration between Sandoz and Cediprof, which began on January 31, 2022. 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 the Company has accrued as of June 30, 2022. The Company’s indemnification obligation will only be triggered if and when Cediprof pays the award.

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Ranitidine Oral Solution, USP

On June 1, 2020, a class action complaint was served upon the Company and approximately forty-five (45) other companies asserting claims for personal injury arising from the presence of NDMA in Ranitidine products. All claims are expressly denied by the Company. The complaint is consolidated in a multidistrict litigation (“MDL”) pending in the United States District Court for the Southern District of Florida. The Company filed a motion to dismiss the complaint filed in the MDL which was granted with leave to amend on December 31, 2020. The plaintiffs filed a First Amended complaint on February 9, 2021, to which the generic manufacturer defendants, including the Company, filed a renewed motion to dismiss all claims. On July 8, 2021, the Court issued an Order granting the motion and dismissing all claims with prejudice based on federal preemption. The Plaintiffs filed an appeal to the Eleventh Circuit Court of Appeals. The appeal is currently pending.

The Attorney General of New Mexico filed a complaint asserting claims regarding the presence of NDMA in Ranitidine products. The complaint was conditionally transferred to the MDL, but ultimately remanded back to the state court. The Company, along with other defendants filed a motion to dismiss on preemption grounds. The motion was denied on August 17, 2021. A motion for reconsideration was denied. The Company, along with other generics, filed a motion to dismiss on personal jurisdiction grounds. The Court reserved its decision pending reciprocal discovery.

The Mayor of Baltimore filed a complaint asserting claims regarding the presence of NDMA in Ranitidine products. The complaint was conditionally transferred to the MDL, but ultimately remanded back to the state court. The Company filed a motion to dismiss on preemption grounds, which was granted on February 1, 2022. The Mayor of Baltimore is proceeding against other defendants. The Company is monitoring the litigation in the event of a final judgment or interlocutory appeal.

In 2021 and 2022, three separate complaints were filed against the Company and others in Philadelphia Court of Common Pleas by parents on behalf of minor children regarding the presence of NDMA in Ranitidine. The Company filed preliminary objections to two of the complaints, seeking dismissal on the basis of preemption and pleading insufficiency grounds. The Philadelphia Court of Common Pleas denied the Company’s preliminary objections in the first filed case. The Company has since filed an answer and new matter. The Philadelphia Court of Common Pleas granted the Company’s preliminary objections in the second case and, thereafter, the plaintiff filed an amended complaint. The Company renewed its preliminary objections, which are pending. Motions to consolidate these complaints with other ranitidine cases in the same jurisdiction was filed and granted. A case management order was recently entered setting a schedule for pretrial filings.

Other Litigation Matters

The Company is also subject to various legal proceedings arising out of the normal course of its business including, but not limited to, product liability, intellectual property, patent infringement claims and antitrust matters. It is not possible to predict the outcome of these various proceedings. An adverse determination in any of these proceedings or in any of the proceedings described above in the future could have a significant impact on the financial position, results of operations and cash flows of the Company.

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Note 11. Commitments

Leases

At September 30, 2022 and June 30, 2022, the Company had a ROU lease asset of $9.6 million and an operating lease liability of $11.8 million and $12.1 million, respectively. The current balance of the operating lease liability at September 30, 2022 was $2.1 million.

Components of lease costs are as follows:


	Three Months Ended
	September 30,
(In thousands)	2022		2021
Operating lease cost	$	466	$	461
Variable lease cost		38		41
Short-term lease cost (a)		84		69
Total	$	588	$	571

______________________

(a)

Not recorded on the Consolidated Balance Sheet

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

Weighted-average remaining lease term and discount rate for our operating leases are as follows:

Maturities of lease liabilities by fiscal year for our operating leases are as follows:


(In thousands)	Amounts Due
2023	$	1,559
2024		2,083
2025		2,103
2026		2,124
2027		2,145
Thereafter		6,368
Total lease payments		16,382
Less: Imputed interest		4,586
Present value of lease liabilities	$	11,796

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Other Commitments

In Fiscal 2020, the Company executed a License and Collaboration Agreement with North South Brother Pharmacy Investment Co., Ltd. and HEC Group PTY, Ltd. (collectively, “HEC”) to develop an insulin glargine product that would be biosimilar to Lantus Solostar. Under the terms of the deal, among other things, the Company shall fund up to the initial $32.0 million of the development costs and split 50/50 any development costs in excess thereof. As of September 30, 2022, the Company has incurred approximately $9.0 million of development costs towards the $32.0 million commitment made by the Company. As we have completed dosing of subjects in the clinical trial at this time, we expect development funding will be well less than $32.0 million. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of HEC for the following five years.

On February 8, 2021, the Company executed a License and Collaboration Agreement and a Supply Agreement with Sunshine Lake Pharma Co., Ltd. an HEC Group company (“Sunshine”) with respect to the development of a biosimilar insulin aspart product. Under the terms of the deal, among other things, the Company shall fund up to the initial $32.0 million of the development costs, provided that if total development and other costs paid by Lannett are less than $32.0 million then the difference will be paid to Sunshine over the first year of commercialization. As of September 30, 2022, the Company has incurred approximately $1.8 million towards the $32.0 million commitment made by the Company. The parties shall negotiate the sharing of any development costs in excess of $32.0 million. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of Sunshine for the following five years.

In conjunction with the HEC collaboration efforts to develop biosimilar insulin glargine and aspart, the Company also separately entered into two Customization and Supply Agreements with Ypsomed AG (“Ypsomed”) in October 2020 and July 2021 to develop, manufacture and supply an injection device to be used with both insulin products. In April 2022, the Company executed an amendment to the Customization and Supply Agreements to allow Ypsomed to expand their production capacity to meet the anticipated demand. Under the terms of the deal, the Company is required to pay 14 million Swiss Francs (“CHF”) to Ypsomed over various future milestone dates to fund the capacity expansion in exchange for a predetermined discount on future purchases of the injection device. In April 2022, The Company paid Ypsomed 4.0 million CHF, the equivalent of approximately $4.3 million, which is recorded in the other assets caption of the Consolidated Balance Sheet as of September 30, 2022. The remaining 4.0 million and 6.0 million CHF payments are to be paid in installments in calendar years 2023 and 2024, respectively.

Note 12. Warrants

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 (the “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 Company concluded that the Warrants were indexed to its own stock and, therefore, are classified as an equity instrument. In accordance with ASC 470, Debt, the Company allocated the proceeds of the Second Lien Facility issuance based on the relative fair value of the debt instrument and the Warrants separately at the time of issuance, which was determined using the Black-Scholes valuation model. The relative fair value allocated to the Warrants was $24.4 million at the issuance date.

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. Although the Company did not issue or declare dividends during the period, the Warrants are considered participating securities under ASC 260, Earnings per share, for purposes of calculating earnings (loss) per share under the two-class method. Refer to Note 13 “Loss Per Common Share” for further details of the two-class method and the Company’s calculation of earnings (loss) per share.

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Note 13. Loss Per Common Share

A reconciliation of the Company’s basic and diluted loss per common share was as follows:


	Three Months Ended
	September 30,
(In thousands, except share and per share data)	2022		2021
Numerator:
Net loss	$	(28,019)	$	(22,342)
Net income allocated to participating securities for the Warrants		—		—
Interest expenses applicable to the Convertible Notes, net of tax		—		—
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax		—		—
Adjusted "if-converted" net loss	$	(28,019)	$	(22,342)

Denominator:
Basic weighted average common shares outstanding		40,942,375		39,927,822
Effect of potentially dilutive options, restricted stock awards and performance-based shares		—		—
Effect of conversion of the Convertible Notes		—		—
Effect of participating securities for the Warrants		—		—
Diluted weighted average common shares outstanding		40,942,375		39,927,822

Loss per common share:
Basic	$	(0.68)	$	(0.56)
Diluted	$	(0.68)	$	(0.56)

In accordance with ASC 260, Earnings per share, the Company computes earnings (loss) per share using the two-class method, which requires an allocation of earnings between the holders of common stock and the Company’s participating security holders. Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders, which excludes the income allocated to participating security holders, by the basic weighted average common shares outstanding. For purposes of determining diluted earnings per share, the Company further adjusts the basic earnings per share to include the effect of potentially dilutive shares outstanding, including options, restricted stock awards, performance-based shares, the Convertible Notes, and the Warrants. In this calculation, the Company reallocates net income based on the rights of each potentially dilutive share and will report the most dilutive earnings (loss) per share. Because the Warrants do not participate in losses, the Company will allocate undistributed earnings when calculating basic and diluted earnings per share in periods of net income only. The effect of the Warrants is excluded from the calculation of basic and diluted loss per share for the three months ended September 30, 2022 and 2021.

The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the three months ended September 30, 2022 and 2021 were 7.4 million and 8.3 million, respectively. The effect of potentially dilutive shares was excluded from the calculation of diluted loss per share in the three months ended September 30, 2022 and 2021 because the effect of including such securities would be anti-dilutive.

Note 14. Share-based Compensation

At September 30, 2022, the Company had two share-based employee compensation plans (the 2014 Long-Term Incentive Plan (“LTIP”) and the 2021 LTIP). Together these plans authorized an aggregate total of 8.0 million shares to be issued. As of September 30, 2022, the plans have a total of 1.5 million shares available for future issuances.

Historically, the Company has issued share-based compensation awards with a vesting period ranging up to 3 years and a maximum contractual term of 10 years. The Company issues new shares of stock when stock options are exercised. As of September 30, 2022, there was $6.8 million of total unrecognized compensation cost related to non-vested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 1.4 years.

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The target award value mix in Fiscal 2022 for Named Executive Officers (“NEOs”) was 50% performance shares, 30% restricted stock, and 20% provided in the form of a cash-based incentive where the value varies based on changes in our stock price over the three-year period ending June 30, 2024. In the first quarter of Fiscal 2023, the Compensation Committee approved the granting of 50% of the target long-term incentive for Fiscal 2023 (calculated based on the NEO’s Fiscal 2022 salary) in the form of a cash-based retention award, which was paid in September 2022. The cash-based retention award was paid as a result of the potential dilution associated with granting equity incentives; however, the awards are subject to a 36-month service-based clawback. The clawback on one-third of the retention awards will expire annually based on continued service. The Company will recognize the expense on the awards across the three-year clawback period and prepaid expense of approximately $1.0 million and $2.0 million is included in other current assets and other assets on the Consolidated Balance Sheet at September 30, 2022, respectively. The remaining 50% of the target long-term incentive for Fiscal 2023 was re-allocated to the target of each NEO’s performance-based short-term incentive plan.

Stock Options

The Company measures share-based compensation costs for options using the Black-Scholes option pricing model, which includes the use of various weighted average assumptions to estimate the fair values of stock options granted. Expected volatility is based on the historical volatility of the price of our common shares during the historical period equal to the expected term of the option. The Company uses historical information to estimate the expected term, which represents the period of time that options granted are expected to be outstanding. The risk-free rate for the period equal to the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period. This assumption is based on our actual forfeiture rate on historical awards. Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. Additionally, the expected dividend yield is typically equal to zero, as the Company has not historically issued a dividend.

There were no stock options granted during the three months ended September 30, 2022 and 2021. In addition, there were no exercises or forfeitures of stock options during the three months ended September 30, 2022.

Restricted Stock

The Company measures restricted stock compensation costs based on the stock price at the grant date less an estimate for expected forfeitures. The annual forfeiture rate used to calculate compensation expense was 6.5% for the three months ended September 30, 2022 and 2021.

A summary of restricted stock awards as of September 30, 2022 and changes during the three months then ended, is presented below:


		Weighted
		Average Grant-date		Aggregate
(In thousands, except for weighted average price data)	Awards	Fair Value		Intrinsic Value
Non-vested at June 30, 2022	1,355	$	5.28
Granted	—		—
Vested	(549)		5.46	$	317
Forfeited	(22)		5.00
Non-vested at September 30, 2022	784	$	5.17

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Performance-Based Shares

The Company grants performance-based awards to certain key executives. The stock-settled awards will cliff vest based on a three-year performance measurement period. Awards issued prior to July 2021 are based on relative Total Shareholder Return (“TSR”) over a three-year period, which, in accordance with ASC 718, Compensation – Stock Compensation, are considered awards tied to market conditions. Half of the performance shares granted in July 2021 will be tied to our relative TSR, consistent with awards granted in prior years, with the other half tied to a variety of strategic portfolio goals, which, in accordance with ASC 718, Compensation – Stock Compensation, are considered awards tied to performance conditions. The Company measures share-based compensation cost for TSR awards using a Monte-Carlo simulation model. Compensation cost for awards tied to strategic portfolio goals is measured using the stock price at the grant date and is recognized based on performance at target award levels. However, in accordance with ASC 718, Compensation – Stock Compensation, the Company will assess the probability that the strategic portfolio goals will be met and adjust the cumulative compensation cost recognized accordingly at each reporting period.

There were no changes to the outstanding performance-based share awards during the three months ended September 30, 2022.

Employee Stock Purchase Plan

In February 2003, the Company’s stockholders approved an Employee Stock Purchase Plan (“2003 ESPP”), under which the Company is authorized to issue 1.1 million shares of the Company’s common stock. The 2003 ESPP was implemented on April 1, 2003 and is qualified under Section 423 of the Internal Revenue Code. In January 2022, the stockholders of the Company approved a new ESPP (“2022 ESPP” and, together with the 2003 ESPP, “ESPPs”). The Company is authorized to issue an additional 1.5 million shares of the Company’s common stock under the 2022 ESPP, which is qualified under Section 423 of the Internal Revenue Code. During the three months ended September 30, 2022 and 2021, 100 thousand shares and 38 thousand shares were issued under the ESPPs, respectively. As of September 30, 2022, 1.4 million total cumulative shares have been issued under the ESPPs. Employees eligible to participate in the ESPP may purchase shares of the Company’s stock at 85% of the lower of the fair market value of the common stock on the first day of the calendar quarter, or the last day of the calendar quarter. Under the ESPP, employees can authorize the Company to withhold up to 10% of their compensation during any quarterly offering period, subject to certain limitations.

The following table presents the allocation of share-based compensation costs recognized in the Consolidated Statements of Operations by financial statement line item:


	Three Months Ended
	September 30,
(In thousands)	2022		2021
Selling, general and administrative expenses	$	1,444	$	2,697
Research and development expenses		28		95
Cost of sales		107		226
Total	$	1,579	$	3,018

Tax benefit at statutory rate	$	355	$	679

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Note 15. Employee Benefit Plan

The Company has a 401(k) defined contribution plan (the “Plan”) covering substantially all employees. Pursuant to the Plan provisions, the Company was required to make matching contributions equal to 50% of each employee’s contribution, not to exceed 4% of the employee’s compensation for the Plan year. Contributions to the Plan were $0.4 million and $0.3 million during the three months ended September 30, 2022 and 2021, respectively.

In Fiscal 2020, the Company implemented a non-qualified deferred compensation plan for certain senior-level management and executives. The non-qualified deferred compensation plan allows certain eligible employees to defer additional pre-tax earnings for retirement, beyond the IRS limits in place under the Plan. Contributions to the non-qualified deferred compensation plan during the three months ended September 30, 2022 were not material.

Note 16. Income Taxes

The federal, state and local income tax expense for the three months ended September 30, 2022 was $34 thousand compared to income tax benefit of $0.1 million for the three months ended September 30, 2021. The effective tax rates for the three months ended September 30, 2022 and 2021 were (0.1)% and 0.3%, respectively.

As of September 30, 2022 and June 30, 2022, the Company has total unrecognized tax benefits of $4.6 million, of which $4.5 million would impact the Company’s effective tax rate for each period, if recognized. As a result of the positions taken during the period, the Company has not recorded any material interest and penalties for the period ended September 30, 2022 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s statement of financial position as of September 30, 2022 and June 30, 2022. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.

The Company files income tax returns in the United States federal jurisdiction and various states. The Company’s federal tax returns for Fiscal 2014 and prior generally are no longer subject to review as such years are closed. The Company’s 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 addition 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. In September 2022, the IRS notified the Company that a portion of its income tax receivables balance will be held until the completion of the examination of its federal tax returns. As such, the Company reclassified the balance expected to be held by the IRS from current income taxes receivable to income taxes receivable on its Consolidated Balance Sheet as of September 30, 2022.

In October 2018, the Commonwealth of Pennsylvania initiated a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns. In November 2021, the Company was notified that the State of Florida will conduct an audit of the Company’s Fiscal 2019 and 2020 corporate tax returns. In March 2022, the Company was notified that the Commonwealth of Pennsylvania and the State of Florida concluded their audits, which did not result in any assessments.

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Note 17. Related Party Transactions

The Company had sales of $0.4 million and $0.2 million during the three months ended September 30, 2022 and 2021, respectively, to a generic distributor, Auburn Pharmaceutical Company (“Auburn”), which is a member of the Premier Buying Group. Jeffrey Farber, a current board member, is the owner of Auburn. Accounts receivable includes amounts due from Auburn of $0.4 million and $0.3 million at September 30, 2022 and June 30, 2022, respectively.

Note 18. Assets Held for Sale

State Road Facility

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. As of September 30, 2022, the assets identified for sale at the State Road facility, totaling $1.3 million, were recorded in the assets held for sale caption in the Consolidated Balance Sheets.

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

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.

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NYSE Notices of Failure to Satisfy a Continued Listing Rule or Standard

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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 has recently experienced 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.

Results of Operations - Three months ended September 30, 2022 compared with the three months ended September 30, 2021

Net sales decreased 26% to $75.1 million for the three months ended September 30, 2022. The table below identifies the Company’s net product sales by medical indication for the three months ended September 30, 2022 and 2021.


(In thousands)	September 30,
Medical Indication	2022		2021
Analgesic	$	3,424	$	5,314
Anti-Psychosis		2,620		3,715
Cardiovascular		10,882		14,100
Central Nervous System		20,794		22,785
Endocrinology		7,312		7,845
Gastrointestinal		7,942		15,240
Infectious Disease		5,069		12,515
Migraine		3,324		4,685
Respiratory/Allergy/Cough/Cold		1,202		3,114
Other		8,759		10,352
Contract manufacturing revenue		3,751		1,860
Total net sales	$	75,079	$	101,525

The decrease in net sales was driven by a decrease in volumes of $19.3 million and a decrease in the selling price of products of $7.2 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, 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.

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In January 2017, a provision in the Bipartisan Budget Act of 2015 required drug manufacturers to pay additional rebates to state Medicaid programs if the prices of their generic drugs rise at a rate faster than inflation. The provision negatively impacted the Company’s net sales by $1.9 million and $3.3 million during the three months ended September 30, 2022 and 2021, respectively.

The following chart details price and volume changes by medical indication:


	Sales volume		Sales price
Medical indication	change %		change %
Analgesic	(26)	%	(10)	%
Anti-Psychosis	(17)	%	(12)	%
Cardiovascular	(18)	%	(5)	%
Central Nervous System	—	%	(9)	%
Endocrinology	—	%	(7)	%
Gastrointestinal	(52)	%	4	%
Infectious Disease	(39)	%	(20)	%
Migraine	(20)	%	(9)	%
Respiratory/Allergy/Cough/Cold	(53)	%	(8)	%

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)	September 30,		September 30,
Customer Distribution Channel	2022		2021
Wholesaler/Distributor	$	60,038	$	84,844
Retail Chain		9,388		12,726
Mail-Order Pharmacy		1,902		2,095
Contract manufacturing revenue		3,751		1,860
Total net sales	$	75,079	$	101,525

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. Cediprof 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 10 “Legal, Regulatory Matters and Contingencies” for additional information regarding this matter.

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Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the first quarter of Fiscal 2023 decreased 26% to $62.5 million from $85.0 million in the same prior-year period. Amortization expense included in cost of sales decreased to $1.2 million in the first quarter of Fiscal 2023 compared to $4.0 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. 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. The 2021 Restructuring Plan resulted in lower overall headcount, which further reduced cost of sales in the first quarter of Fiscal 2023.

Gross Profit. Gross profit for the first quarter of Fiscal 2023 decreased 24% to $12.6 million or 17% of net sales. In comparison, gross profit for the first quarter of Fiscal 2022 was $16.5 million or 16% of net sales.

Research and Development Expenses. Research and development expenses for the first quarter of Fiscal 2023 increased 25% to $7.2 million from $5.8 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 12% to $16.7 million for the first quarter of Fiscal 2023 compared with $18.9 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.

Asset impairment charges. 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 three months ended September 30, 2022 totaled $15.0 million compared to $14.2 million for the three months ended September 30, 2021. The weighted average interest rate for the first quarter of Fiscal 2023 and 2022 was 9.1% and 8.8%, respectively.

Income Tax. The Company recorded income tax expense of $34 thousand in the first quarter of Fiscal 2023 as compared to an income tax benefit of $0.1 million in the first quarter of Fiscal 2022. The effective tax rate for the three months ended September 30, 2022 was (0.1)%, compared to 0.3% for the three months ended September 30, 2021.

Net Loss. For the three months ended September 30, 2022, the Company reported net loss of $28.0 million, or $(0.68) per diluted share. Comparatively, net loss in the corresponding prior-year period was $22.3 million, or $(0.56) per diluted share.

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Liquidity and Capital Resources

Cash Flow

The Company has historically financed its operations with cash flow generated from operations and has access to $43.4 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 2021 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 September 30, 2022, working capital was $154.5 million as compared to $185.2 million at June 30, 2022, a decrease of $30.7 million.

Net cash used in operating activities of $11.3 million for the three months ended September 30, 2022 reflected net loss of $28.0 million, adjustments for non-cash items of $16.8 million, as well as cash used by changes in operating assets and liabilities of $0.1 million. In comparison, net cash provided by operating activities of $17.2 million for the three months ended September 30, 2021 reflected net loss of $22.3 million, adjustments for non-cash items of $22.1 million, as well as cash provided by changes in operating assets and liabilities of $17.4 million.

Significant changes in operating assets and liabilities from June 30, 2022 to September 30, 2022 were comprised of:

●

An increase in accrued expenses of $9.2 million primarily attributable to the interest related to the 7.750% Senior Secured Notes, which was paid in October 2022.

●

An increase in accounts payable of $5.7 million mainly due to the timing of vendor invoices and payments.

●

An increase in other assets of $4.4 million primarily due to the retention bonuses for Named Executive Officers (“NEOs”) paid in September 2022, which will be recognized on the Consolidated Statement of Operations over a three-year clawback period.

Significant changes in operating assets and liabilities from June 30, 2021 to September 30, 2021 were comprised of:

●

A decrease in accounts receivable of $4.5 million mainly due to the timing of sales and cash receipts. The Company’s days sales outstanding (“DSO”) at September 30, 2021, based on gross sales for the three months ended September 30, 2021 and gross accounts receivable at September 30, 2021, was 77 days. The level of DSO at September 30, 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 accounts payable of $7.4 million mainly due to the timing of vendor invoices and payments.

●

An increase in accrued expenses of $6.7 million primarily attributable to the interest related to the 7.750% Senior Secured Notes, which was paid in October 2021.

Net cash provided by investing activities of $1.4 million for the three months ended September 30, 2022 was mainly the result of proceeds from the sale of assets of $4.2 million partially offset by purchases of property, plant and equipment of $2.8 million. Net cash used in investing activities of $4.6 million for the three months ended September 30, 2021 was mainly the result of purchases of property, plant and equipment of $3.5 million and purchases of intangible assets of $1.5 million.

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Net cash used in financing activities of $0.1 million for the three months ended September 30, 2022 was primarily due to purchases of treasury stock. Net cash used in financing activities of $0.6 million for the three months ended September 30, 2021 was due to purchases of treasury stock totaling $0.7 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of $0.1 million.

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 September 30, 2022 are as follows:

7.750% Senior Secured Notes due 2026

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.

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

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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has historically invested in equity securities, U.S. government agency securities and corporate bonds, which are exposed to market and interest rate fluctuations. The market value, interest and dividends earned on these investments may vary based on fluctuations in interest rate and market conditions.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Lannett’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Change in Internal Control Over Financial Reporting

There has been no change in Lannett’s internal control over financial reporting during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in Note 10 “Legal, Regulatory Matters and Contingencies” of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

Lannett Company, Inc’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022 includes a detailed description of its risk factors.

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ITEM 6. EXHIBITS

(a)

A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-Q is shown on the Exhibit Index filed herewith.

Exhibit Index


31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith

32**	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2022	Filed Herewith

101.INS	XBRL Instance Document – the instance document does not appear within the Interactive Data File because its XRBL tags are embedded within the Inline XRBL Document	Filed Herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed Herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed Herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed Herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed Herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed Herewith

104	Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XRBL tags are embedded within the Inline XRBL document	Filed Herewith

** Furnished Herewith

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		LANNETT COMPANY, INC.

Dated: November 3, 2022	By:	/s/ Timothy Crew
		Timothy Crew
		Chief Executive Officer


Dated: November 3, 2022	By:	/s/ John Kozlowski
		John Kozlowski
		Vice President of Finance, Chief Financial Officer and Principal Accounting Officer

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Readability	H.S. sophomore Avg

Three Months Ended

September 30,