Cautionary Statement About Forward-Looking Statements
This Report on Form 10-Q and certain information incorporated herein by
reference contains forward-looking statements which are not historical facts
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not promises or
guarantees and investors are cautioned that all forward-looking statements
involve risks and uncertainties, including but not limited to the impact of
competitive products and pricing, product demand and market acceptance, new
product development, acquisition-related challenges, the regulatory environment,
interest rate fluctuations, reliance on key strategic alliances, availability of
raw materials, fluctuations in operating results and other risks detailed from
time to time in our filings with the Securities and Exchange Commission ("SEC").
These statements are based on management's current expectations and are
naturally subject to uncertainty and changes in circumstances. We caution you
not to place undue reliance upon any such forward-looking statements which speak
only as of the date made. Lannett is under no obligation to, and expressly
disclaims any such obligation to, update or alter its forward-looking
statements, whether as a result of new information, future events or otherwise
and other events or factors, many of which are beyond our control, including
those resulting from such events, or the prospect of such events, such as public
health issues including health epidemics or pandemics, such as the outbreak of
the novel coronavirus ("COVID-19"), whether occurring in the United States or
elsewhere, which could disrupt our operations, disrupt the operations of our
suppliers and business development and other strategic partners, disrupt the
global financial markets or result in political or economic instability.
The following information should be read in conjunction with the consolidated
financial statements and notes in Part I, Item 1 of this Quarterly Report and
with Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2022. All references to "Fiscal 2023" shall mean the fiscal
year ending June 30, 2023 and all references to "Fiscal 2022" shall mean the
fiscal year ended June 30, 2022.
Company Overview
Lannett Company, Inc. (a Delaware corporation) and its subsidiaries
(collectively, the "Company," "Lannett," "we" or "us") primarily develop,
manufacture, package, market and distribute solid oral and extended release
(tablets and capsules), topical, liquids, nasal and oral solution finished
dosage forms of drugs, generic forms of both small molecule and biologic
medications, that address a wide range of therapeutic areas. Certain of these
products are manufactured by others and distributed by the Company.
Additionally, the Company is pursuing partnerships, research contracts and
internal expansion for the development and production of other dosage forms
including: ophthalmic, nasal, patch, foam, buccal, sublingual, suspensions, soft
gel, injectable and oral dosages.
The Company operates a pharmaceutical manufacturing plant in Seymour, Indiana.
During Fiscal 2022, the Company completed the sale of its Silarx facility in
Carmel, New York. In connection with the sale, the buyer will continue to
produce certain products on behalf of the Company at the Carmel facility while
the Company completes the transfer of such products to its Seymour, Indiana
plant.
The Company's customers include generic pharmaceutical distributors, drug
wholesalers, chain drug stores, private label distributors, mail-order
pharmacies, other pharmaceutical manufacturers, managed care organizations,
hospital buying groups, governmental entities and health maintenance
organizations.
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NYSE Notices of Failure to Satisfy a Continued Listing Rule or Standard
On March 2, 2022, we received notice from the New York Stock Exchange (the
"NYSE") that we were no longer in compliance with the NYSE continued listing
standards, set forth in Section 802.01B of the NYSE's Listed Company Manual,
because the Company's average global market capitalization over a consecutive 30
trading-day period was less than $50.0 million and, at the same time, our
shareholders' equity was less than $50.0 million. If the Company's average
global market capitalization over a consecutive 30 trading-day period drops
below $15.0 million, the NYSE will initiate delisting proceedings. As of 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.
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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
On April 22, 2021, the Company issued $350.0 million aggregate principal amount
of the Notes in a private placement to qualified institutional buyers pursuant
to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")
and outside the United States to persons other than U.S. persons in reliance
upon Regulation S under the Securities Act. The Notes bear interest
semi-annually in arrears on April 15 and October 15 of each year, beginning on
October 15, 2021, at a rate of 7.750% per annum in cash. The Notes will mature
on April 15, 2026, unless earlier redeemed or repurchased in accordance with
their terms.
Second Lien Secured Loan Facility
On April 5, 2021, the Company entered into an Exchange Agreement with certain
participating lenders to exchange a portion of their existing Term B Loans for
Second Lien Loans pursuant to a new $190.0 million Second Lien Secured Loan
Facility ("Second Lien Facility"). On April 22, 2021, in connection with the
issuance of the Notes and the entrance into the Amended ABL Credit Facility,
which is discussed further below, the exchange between the Company and the
participating lenders was consummated. From the Closing Date until the one-year
anniversary of the Closing Date, the Second Lien Loans bear 10.0% PIK interest.
Thereafter, the Second Lien notes will bear 5.0% cash interest and 5.0% PIK
interest until maturity, except to the extent the Company elects to pay all or
portion of the PIK interest in cash. To date, the Company has not paid any PIK
interest in cash. The Second Lien Loans will mature on July 21, 2026. In
connection with the Second Lien Facility, the Company issued to the
Participating Lenders warrants to purchase up to 8,280,000 shares of common
stock of the Company (Warrants") at an exercise price of $6.88 per share. The
Warrants were issued on April 22, 2021 with an eight-year term. The
Participating Lenders received registration rights with respect to the shares of
common stock of the Company to be received upon exercise of the Warrants. The
holders of the Warrants are entitled to receive dividends or distributions of
any kind made to the common stockholders to the same extent as if the holder had
exercised the Warrant into common stock. The Warrants are considered
participating securities under ASC 260, Earnings per share.
In connection with the Second Lien Facility, the Company is required to maintain
at least $5.0 million in a deposit account at all times subject to control by
the Second Lien Collateral Agent, and a minimum cash balance of $15.0 million as
of the last day of each month. At 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.
Amended ABL Credit Facility
On December 7, 2020, the Company entered into a credit and guaranty agreement,
which provided for an asset-based revolving credit facility (the "ABL Credit
Facility") of up to $30.0 million, subject to borrowing base availability, and
included letter of credit and swing line sub-facilities. On April 22, 2021, the
Company entered into an amendment to that certain Credit and Guaranty Agreement,
dated as of December 7, 2020 (such agreement as so amended, the "Amended ABL
Credit Agreement"), among the Company, certain of its wholly-owned domestic
subsidiaries party thereto, as borrowers or as guarantors, Wells Fargo Bank,
National Association, as administrative agent and as collateral agent, and the
other lenders party thereto, for the purpose of, among other things, increasing
the aggregate amount of the revolving credit facility from $30.0 million to
$45.0 million and extending the maturity thereof to the fifth anniversary of the
closing date of Notes Offering (subject to a springing maturity as set forth
therein).
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The Amended ABL Credit Agreement provides for a revolving credit facility (the
"Amended ABL Credit Facility") that includes letter of credit and swing line
sub-facilities. Borrowing availability under the Amended ABL Credit Facility is
determined by a monthly borrowing base collateral calculation that is based on
specified percentages of eligible accounts receivable less certain reserves and
subject to certain other adjustments as set forth in the Amended ABL Credit
Agreement. Availability is reduced by issuance of letters of credit as well as
any borrowings. Loans outstanding under the Amended ABL Credit Agreement bear
interest at a floating rate measured by reference to, at the Company's option,
either an adjusted London Inter-Bank Offered Rate ("LIBOR") (subject to a floor
of 0.75%) plus an applicable margin of 2.50% per annum, or an alternate base
rate plus an applicable margin of 1.50% per annum. Unused commitments under the
Amended ABL Credit Facility are subject to a fee of 0.50% per annum, which fee
increases to 0.75% per annum for any quarter during which the Company's average
usage under the Amended ABL Credit Facility is less than $5.0 million.
4.50% Convertible Senior Notes due 2026
On September 27, 2019, the Company issued $86.3 million aggregate principal
amount of the Convertible Notes in a private offering to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The
Convertible Notes are senior unsecured obligations of the Company and bear
interest at an annual rate of 4.50% payable semi-annually in arrears on April 1
and October 1 of each year, beginning on April 1, 2020. The Convertible Notes
will mature on October 1, 2026, unless earlier repurchased, redeemed or
converted in accordance with their terms. The Convertible Notes are convertible
into shares of the Company's common stock at an initial conversion rate of
65.4022 shares per $1,000 principal amount of Convertible Notes (which is
equivalent to an initial conversion price of approximately $15.29 per share),
subject to adjustments upon the occurrence of certain events (but will not be
adjusted for any accrued and unpaid interest). The Company may redeem all or a
part of the Convertible Notes on or after October 6, 2023 at a redemption price
equal to 100% of the principal amount of the Convertible Notes redeemed, plus
accrued and unpaid interest, if any, up to, but excluding, the redemption date,
subject to certain conditions relating to the Company's stock price having been
met. Following certain corporate events that occur prior to the maturity date or
if the Company delivers a notice of redemption, the Company will, in certain
circumstances, increase the conversion rate for a holder who elects to convert
its Convertible Notes in connection with such corporate event or notice of
redemption. The indenture covering the Convertible Notes contains certain other
customary terms and covenants, including that upon certain events of default
occurring and continuing, either the trustee or holders of at least 25% in
principal amount of the outstanding Convertible Notes may declare 100% of the
principal of, and accrued and unpaid interest on, all the Convertible Notes to
be due and payable. In addition, if the Company ceases to be listed or quoted on
any of The NYSE, The Nasdaq Global Select Market or The Nasdaq Global Market (or
any of their respective successors), holders of the outstanding Convertible
Notes will have the option to require the Company to repurchase for cash all of
such holder's notes at 100% of the principal amount, plus accrued and unpaid
interest.
In connection with the offering of the Convertible Notes, the Company also
entered into privately negotiated "capped call" transactions with several
counterparties. The capped call transaction will initially cover, subject to
customary anti-dilution adjustments, the number of shares of common stock that
initially underlie the Convertible Notes. The capped call transactions are
expected to generally reduce the potential dilutive effect on the Company's
common stock upon any conversion of the Convertible Notes with such reduction
subject to a cap which is initially $19.46 per share.
Other Liquidity Matters
Along with executing on our existing pipeline products, we are continuously
evaluating the potential for product and company acquisitions as a part of our
future growth strategy. In conjunction with a potential acquisition, the Company
may utilize current resources or seek additional sources of capital to finance
any such acquisition, which could have an impact on future liquidity. The
continued competitive pressures on our current portfolio may impact the ultimate
success of existing pipeline projects, which may result in the Company exploring
alternative opportunities for capital to support the launch of products in the
future.
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We may also from time to time depending on market conditions and prices,
contractual restrictions, our financial liquidity and other factors, seek to
prepay outstanding debt or repurchase our outstanding debt through open market
purchases, privately negotiated purchases, or otherwise. The amounts involved in
any such transactions, individually or in the aggregate, may be material and may
be funded from available cash or from additional borrowings.
The Company files income tax returns in the United States federal jurisdiction
and its Fiscal 2015 through 2017, 2019, 2020 and 2021 federal returns are
currently under examination by the Internal Revenue Service ("IRS"). As part of
a lengthy process, the Company has received various Information Document
Requests and Notices of Proposed Adjustment with respect to positions taken in
certain income tax issues, including an accounting method change related to
chargebacks and rebates that the IRS is proposing to disallow. We are in the
process of assessing the impact of these notices and preparing a response to the
IRS. We believe that it is more likely than not that our positions will
ultimately be sustained upon further examination, and, if necessary, will
contest any additional tax determined to be owed; however, an adverse outcome
could have a material impact to the Company's Consolidated Statements of
Operations and financial position.
Research and Development Arrangements
In the normal course of business, the Company has entered into certain research
and development and other arrangements. As part of these arrangements, the
Company has agreed to certain contingent payments, which generally become due
and payable only upon the achievement of certain developmental, regulatory,
commercial and/or other milestones. In addition, under certain arrangements, we
may be required to make royalty payments based on a percentage of future sales,
or other metric, for products currently in development in the event that the
Company begins to market and sell the product. Due to the inherent uncertainty
related to these developmental, regulatory, commercial and/or other milestones,
it is unclear if the Company will ever be required to make such payments.
Critical Accounting Policies
The preparation of our Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States and the rules and
regulations of the U.S. Securities & Exchange Commission requires the use of
estimates and assumptions. A listing of the Company's significant accounting
policies is detailed in Note 3 "Summary of Significant Accounting Policies." A
subsection of these accounting policies has been identified by management as
"Critical Accounting Policies and Estimates." Critical accounting policies and
estimates are those which require management to make estimates using assumptions
that were uncertain at the time the estimates were made and for which the use of
different assumptions, which reasonably could have been used, could have a
material impact on the financial condition or results of operations.
Management has identified the following as "Critical Accounting Policies and
Estimates": Revenue Recognition, Inventories, Income Taxes, and Valuation of
Long-Lived Assets, including Intangible Assets. Refer to the Company's Form 10-K
for the fiscal year ended June 30, 2022 for a description of our Critical
Accounting Policies.
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LANNETT COMPANY, INC. 
