LANNETT CO INC - Quarter Report: 2021 December (Form 10-Q)

Six Months Ended

December 31,

(In thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

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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 December 31, 2021

☐

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 January 31, 2022
Common stock, par value $0.001 per share		42,950,149

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			Page No.
PART I. FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

		Consolidated Balance Sheets as of December 31, 2021 and June 30, 2021	3

		Consolidated Statements of Operations for the three and six months ended December 31, 2021 and 2020	4

		Consolidated Statements of Comprehensive Income/Loss for the three and six months ended December 31, 2021 and 2020	5

		Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and six months ended December 31, 2021 and 2020	6

		Consolidated Statements of Cash Flows for the six months ended December 31, 2021 and 2020	7

		Notes to Consolidated Financial Statements	8

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51

	ITEM 4.	CONTROLS AND PROCEDURES	51

PART II. OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS	52

	ITEM 1A.	RISK FACTORS	52

	ITEM 6.	EXHIBITS	53

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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)


	December 31, 2021		June 30, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	98,635	$	93,286
Accounts receivable, net		66,275		98,834
Inventories		105,779		109,545
Income taxes receivable		35,847		35,050
Assets held for sale		12,733		2,678
Other current assets		15,345		14,170
Total current assets		334,614		353,563
Property, plant and equipment, net		143,104		166,674
Intangible assets, net		90,972		137,835
Operating lease right-of-use assets		10,227		10,559
Other assets		16,020		15,106
TOTAL ASSETS	$	594,937	$	683,737

LIABILITIES
Current liabilities:
Accounts payable	$	25,988	$	29,585
Accrued expenses		11,206		13,077
Accrued payroll and payroll-related expenses		9,606		10,680
Rebates payable		25,205		19,025
Royalties payable		10,687		13,779
Restructuring liability		620		8
Current operating lease liabilities		2,054		2,045
Other current liabilities		3,885		2,270
Total current liabilities		89,251		90,469
Long-term debt, net		603,484		590,683
Long-term operating lease liabilities		10,554		11,047
Other liabilities		17,808		19,009
TOTAL LIABILITIES		721,097		711,208
Commitments and contingencies (Notes 11 and 12)

STOCKHOLDERS’ DEFICIT
Common stock ($0.001 par value, 100,000,000 shares authorized; 42,053,623 and 40,913,148 shares issued; 40,500,320 and 39,576,606 shares outstanding at December 31, 2021 and June 30, 2021, respectively)		42		41
Additional paid-in capital		360,765		355,239
Accumulated deficit		(468,193)		(364,766)
Accumulated other comprehensive loss		(519)		(548)
Treasury stock (1,553,303 and 1,336,542 shares at December 31, 2021 and June 30, 2021, respectively)		(18,255)		(17,437)
Total stockholders’ deficit		(126,160)		(27,471)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	594,937	$	683,737

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				Six Months Ended
	December 31,				December 31,
	2021		2020		2021		2020
Net sales	$	86,508	$	133,920	$	188,033	$	260,399
Cost of sales		76,990		124,488		157,998		216,675
Amortization of intangibles		3,808		8,657		7,804		17,246
Gross profit		5,710		775		22,231		26,478
Operating expenses:
Research and development expenses		4,747		5,644		10,511		12,183
Selling, general and administrative expenses		18,791		13,730		37,696		28,866
Restructuring expenses		891		—		891		4,043
Asset impairment charges		49,361		198,000		49,361		198,000
Total operating expenses		73,790		217,374		98,459		243,092
Operating loss		(68,080)		(216,599)		(76,228)		(216,614)
Other income (expense):
Investment income		46		43		80		88
Interest expense		(14,430)		(13,496)		(28,654)		(27,982)
Other		11		28		(51)		5
Total other expense		(14,373)		(13,425)		(28,625)		(27,889)
Loss before income tax		(82,453)		(230,024)		(104,853)		(244,503)
Income tax benefit		(1,368)		(58,076)		(1,426)		(66,056)
Net loss	$	(81,085)	$	(171,948)	$	(103,427)	$	(178,447)

Loss per common share (1):
Basic	$	(2.01)	$	(4.36)	$	(2.58)	$	(4.55)
Diluted	$	(2.01)	$	(4.36)	$	(2.58)	$	(4.55)

Weighted average common shares outstanding (1):
Basic		40,358,127		39,443,441		40,142,974		39,257,211
Diluted		40,358,127		39,443,441		40,142,974		39,257,211

(1)	See Note 15 “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 INCOME (LOSS)

(UNAUDITED)

(In thousands)


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2021		2020		2021		2020
Net loss	$	(81,085)	$	(171,948)	$	(103,427)	$	(178,447)
Other comprehensive income (loss):
Foreign currency translation gain (loss)		5		(47)		29		32
Total other comprehensive income (loss)		5		(47)		29		32
Comprehensive loss	$	(81,080)	$	(171,995)	$	(103,398)	$	(178,415)

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’ EQUITY (DEFICIT)

(UNAUDITED)

(In thousands)


	Three Months Ended December 31, 2021
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Accumulated		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Deficit		Loss		Stock		Deficit
Balance, September 30, 2021	41,787	$	42	$	358,361	$	(387,108)	$	(524)	$	(18,124)	$	(47,353)
Shares issued in connection with share-based compensation plans	266		—		95		—		—		—		95
Share-based compensation	—		—		2,309		—		—		—		2,309
Purchase of treasury stock	—		—		—		—		—		(131)		(131)
Other comprehensive income	—		—		—		—		5		—		5
Net loss	—		—		—		(81,085)		—		—		(81,085)
Balance, December 31, 2021	42,053	$	42	$	360,765	$	(468,193)	$	(519)	$	(18,255)	$	(126,160)


	Three Months Ended December 31, 2020
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Accumulated		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Deficit		Loss		Stock		Equity
Balance, September 30, 2020	40,687	$	41	$	324,788	$	(7,790)	$	(548)	$	(17,176)	$	299,315
Shares issued in connection with share-based compensation plans	145		—		160		—		—		—		160
Share-based compensation	—		—		1,991		—		—		—		1,991
Purchase of treasury stock	—		—		—		—		—		(213)		(213)
Other comprehensive loss	—		—		—		—		(47)		—		(47)
Net loss	—		—		—		(171,948)		—		—		(171,948)
Balance, December 31, 2020	40,832	$	41	$	326,939	$	(179,738)	$	(595)	$	(17,389)	$	129,258


	Six Months Ended December 31, 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	1,140		1		199		—		—		—		200
Share-based compensation	—		—		5,327		—		—		—		5,327
Purchase of treasury stock	—		—		—		—		—		(818)		(818)
Other comprehensive income	—		—		—		—		29		—		29
Net loss	—		—		—		(103,427)		—		—		(103,427)
Balance, December 31, 2021	42,053	$	42	$	360,765	$	(468,193)	$	(519)	$	(18,255)	$	(126,160)


	Six Months Ended December 31, 2020
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Earnings		Loss		Stock		Equity

Balance, June 30, 2020	39,963	$	40	$	321,164	$	(1,291)	$	(627)	$	(16,390)	$	302,896
Shares issued in connection with share-based compensation plans	869		1		442		—		—		—		443
Share-based compensation	—		—		5,333		—		—		—		5,333
Purchase of treasury stock	—		—		—		—		—		(999)		(999)
Other comprehensive income	—		—		—		—		32		—		32
Net loss	—		—		—		(178,447)		—		—		(178,447)
Balance, December 31, 2020	40,832	$	41	$	326,939	$	(179,738)	$	(595)	$	(17,389)	$	129,258

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)


	Six Months Ended
	December 31,
	2021		2020
OPERATING ACTIVITIES:
Net loss	$	(103,427)	$	(178,447)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		18,871		28,717
Deferred income tax benefit		—		(14,519)
Share-based compensation		5,327		5,333
Asset impairment charges		49,361		198,000
Loss (gain) on sale/disposal of assets		51		(24)
Accrual of payment-in-kind interest on Second Lien Credit Facility		10,024		—
Amortization of debt discount and other debt issuance costs		2,959		6,239
Provision for inventory write-downs		4,054		23,214
Other noncash expenses		393		635
Changes in assets and liabilities which provided (used) cash:
Accounts receivable, net		32,559		(34,443)
Inventories		(288)		(2,551)
Income taxes receivable/payable		(833)		(50,065)
Other assets		(2,255)		(7,248)
Rebates payable		6,180		5,616
Royalties payable		(3,092)		(81)
Restructuring liability		612		134
Operating lease assets/liabilities		(561)		407
Accounts payable		(3,597)		10,135
Accrued expenses		(1,871)		(10,870)
Accrued payroll and payroll-related expenses		(1,074)		(7,358)
Other liabilities		450		2,586
Net cash provided by (used in) operating activities		13,843		(24,590)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(6,758)		(5,129)
Proceeds from sale of property, plant and equipment		353		44
Purchases of intangible assets		(1,500)		(4,000)
Net cash used in investing activities		(7,905)		(9,085)
FINANCING ACTIVITIES:
Repayments of long-term debt		—		(68,516)
Proceeds from issuance of stock		200		443
Payment of debt issuance costs		—		(2,390)
Purchase of treasury stock		(818)		(999)
Net cash used in financing activities		(618)		(71,462)
Effect on cash and cash equivalents of changes in foreign exchange rates		29		32
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		5,349		(105,105)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD		98,286		144,329
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	103,635	$	39,224

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	15,131	$	21,844
Income taxes refunded	$	(592)	$	(1,473)
Purchases of property, plant and equipment included in accounts payable	$	999	$	994

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 and six months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022. 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, 2021. The Consolidated Balance Sheet as of June 30, 2021 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 pharmaceutical manufacturing plants in Carmel, New York and Seymour, Indiana. 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.

COVID-19 Update

The COVID-19 pandemic continues to have an impact on the global economy and the way companies operate. In light of the economic impacts of COVID-19, the Company reviewed the assets on our Consolidated Balance Sheet as of December 31, 2021, including intangible and other long-lived assets. Based on our review, the Company determined that no impairments or other write-downs specifically related to COVID-19 were necessary during the first six months of Fiscal 2022 and during Fiscal 2021. Our assessment is based on information currently available and is highly reliant on various assumptions. Changes in market conditions could impact the Company’s future outlook and may lead to impairments in the future.

While COVID-19 has thus far not had a material impact on the Company’s operations, the total volume of drug prescriptions written in the country decreased at the start of the pandemic causing less demand for our products. Recently, prescription volumes have begun to increase back to pre-pandemic levels. However, we cannot reasonably predict the ultimate impact of COVID-19 on our future results of operations and cash flows due to the continued uncertainty around the duration and severity of the pandemic.

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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.

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 million in a deposit account at all times, subject to control by the Second Lien Collateral Agent. At December 31, 2021, the Company classified this balance as restricted cash, which is included in other assets.

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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 December 31, 2021 and 2020.


	December 31, 2021		December 31, 2020
Cash and cash equivalents	$	98,635	$	34,224
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	$	103,635	$	39,224

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 commences upon shipment of the product. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. 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 and indefinite-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. Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of each fiscal year or more frequently if events or triggering events indicate that the asset might be impaired.

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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.

Segment Information

The Company operates in one reportable segment, generic pharmaceuticals. As such, the Company aggregates its financial information for all products. The table below identifies the Company’s net sales by medical indication for the three and six months ended December 31, 2021 and 2020.


	Three Months Ended				Six Months Ended
(In thousands)	December 31,				December 31,
Medical Indication	2021		2020		2021		2020
Analgesic	$	3,919	$	3,572	$	9,233	$	6,692
Anti-Psychosis		2,095		13,317		5,810		26,345
Cardiovascular		9,753		16,336		23,853		36,050
Central Nervous System		22,340		24,614		45,125		47,139
Endocrinology		8,297		9,496		16,142		12,729
Gastrointestinal		14,023		18,575		29,263		35,675
Infectious Disease		6,520		23,044		19,035		44,976
Migraine		4,446		6,083		9,131		15,773
Respiratory/Allergy/Cough/Cold		1,868		2,267		4,982		3,693
Urinary		1,164		1,361		2,340		2,819
Other		9,111		8,410		18,287		16,044
Contract manufacturing revenue		2,972		6,845		4,832		12,464
Total net sales	$	86,508	$	133,920	$	188,033	$	260,399

Customer, Supplier and Product Concentration

The following table presents the percentage of total net sales, for the three and six months ended December 31, 2021 and 2020, 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 net sales in any of those periods:


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2021		2020		2021		2020
Product 1	5	%	15	%	8	%	15	%

The following table presents the percentage of total net sales, for the three and six months ended December 31, 2021 and 2020, for certain of the Company’s customers which accounted for at least 10% of net sales in any of those periods:


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2021		2020		2021		2020
Customer A	26	%	26	%	28	%	26	%
Customer B	15	%	21	%	17	%	22	%
Customer C	14	%	12	%	14	%	11	%

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Revenue Recognition

The Company complies with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Under ASC 606, 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. The revenue standard impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time.” However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position.

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.

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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.

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

The Company complies with ASC Topic 842, Leases, which states that 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.

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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.

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. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.

The Company has elected, as an accounting policy, not to apply the recognition requirements in ASC 842 to short-term leases. Short-term leases are leases that have a term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company recognizes the lease payments for short-term leases on a straight-line basis over the lease term and the lease cost is not recorded on the Consolidated Balance Sheets.

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.

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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 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.

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 $1.8 million and $0.8 million as of December 31, 2021 and June 30, 2021, 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.

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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 14 “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.

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 4.50% Convertible Senior 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 ASU requires adoption using either the retrospective basis or the modified retrospective basis. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements.

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Note 4. Restructuring Charges

2021 Restructuring Plan

On November 1, 2021, the Board of Directors authorized a restructuring and cost savings plan (the “2021 Restructuring Plan”) to further optimize its operations, improve efficiencies and reduce costs. Under the 2021 Restructuring Plan, the Company will consolidate its manufacturing footprint by transferring certain liquid drug production from its Silarx Pharmaceuticals, Inc. (“Silarx”) facility in Carmel, New York to the Company’s main plant in Seymour, Indiana. Following the transition, which is expected to take 12 to 18 months, the Company intends to shut down operations at Silarx. The Company is also currently pursuing the sale of the facility, which is anticipated within one year and may result in accelerated timing for the shutdown of operations at Silarx. Several products manufactured by Silarx and Kremers Urban Pharmaceuticals, Inc. will be scaled back or discontinued over time. Particularly, the Company will scale back or phase out some small low-margin over-the-counter medicines from Carmel and two low-margin prescription products as part of the restructuring program. During the transition of products from Carmel, New York to the Seymour, Indiana facility, the Company will continue to assess its portfolio and may introduce or discontinue additional products. As part of the 2021 Restructuring Plan, the Company will also scale back its research and development operations and eliminate certain administrative positions that primarily support the Silarx and research and development operations. The total reduction in headcount, and the basis of the estimated severance costs, for the 2021 Restructuring Plan is expected to be approximately 165 positions, which includes additional positions identified at the Seymour, Indiana facility in January 2022. The Company initiated the plan on November 3, 2021 and expects that the actions contemplated under the 2021 Restructuring Plan will be substantially complete by June 30, 2023. The plan is expected to generate cost savings of $20 million, annually.

The Company estimates that it will incur approximately $6.0 million to $7.0 million of total costs to implement the 2021 Restructuring Plan, comprised primarily of approximately $5.0 million of severance and employee-related costs and approximately $1.0 million to $2.0 million of tech transfer costs. The Company also expects to incur approximately $2.0 million to $3.0 million in capital expenditures to build out the liquid manufacturing business at the Kremers Urban Pharmaceuticals, Inc. facility.

The Company incurred $0.9 million in severance-related costs during the second quarter of Fiscal 2022 in connection with the 2021 Restructuring Plan. A reconciliation of the charges in restructuring liabilities associated with the 2021 Restructuring Plan from June 30, 2021 through December 31, 2021 is set forth in the following table:


	Employee		Tech Transfer
(In thousands)	Separation Costs		Costs		Total
Balance at June 30, 2021	$	—	$	—	$	—
Restructuring charges		864		27		891
Payments		(244)		(27)		(271)
Balance at December 31, 2021	$	620		—	$	620

The Company has incurred $48.9 million in non-cash impairment charges in connection with the 2021 Restructuring Plan related to certain long-lived intangible assets as well as certain facility, equipment and other plant-related assets currently utilized by the Company. Refer to Note 7 “Property, Plant and Equipment,” Note 9 “Intangible Assets” and Note 20 “Assets Held for Sale” for further details on the impairment charges incurred as of December 31, 2021 in connection with the 2021 Restructuring Plan.

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Note 5. Accounts Receivable, net

Accounts receivable, net consisted of the following components at December 31, 2021 and June 30, 2021:


	December 31,		June 30,
(In thousands)	2021		2021
Gross accounts receivable	$	204,746	$	239,271
Less: Chargebacks reserve		(66,833)		(69,564)
Less: Rebates reserve		(18,497)		(16,272)
Less: Returns reserve		(36,770)		(38,395)
Less: Other deductions		(15,298)		(15,505)
Less: Allowance for doubtful accounts		(1,073)		(701)
Accounts receivable, net	$	66,275	$	98,834

For the three months ended December 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $114.7 million, $26.5 million, $7.4 million and $7.8 million, respectively. For the three months ended December 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $191.5 million, $43.4 million, $5.2 million and $20.8 million, respectively.

For the six months ended December 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $245.9 million, $55.3 million, $13.3 million and $26.8 million, respectively. For the six months ended December 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $379.8 million, $77.7 million, $10.7 million and $36.6 million, respectively.

The following table identifies the activity and ending balances of each major category of revenue-related reserve for the six months ended December 31, 2021 and 2020:


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		245,900		55,262		13,305		26,761		341,228
Credits issued during the period		(248,631)		(46,857)		(14,930)		(26,968)		(337,386)
Balance at December 31, 2021	$	66,833	$	43,702	$	36,770	$	15,298	$	162,603


Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2020	$	61,877	$	62,711	$	40,796	$	17,557	$	182,941
Current period provision		379,821		77,657		10,652		36,624		504,754
Credits issued during the period		(360,242)		(77,536)		(12,181)		(34,833)		(484,792)
Balance at December 31, 2020	$	81,456	$	62,832	$	39,267	$	19,348	$	202,903

For the three months ended December 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 47.8% and 49.3%, the provision for rebates was 11.1% and 11.2%, the provision for returns was 3.1% and 1.3% and the provision for other adjustments was 3.2% and 5.4%, respectively.

For the six months ended December 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 46.9% and 50.5%, the provision for rebates was 10.5% and 10.3%, the provision for returns was 2.5% and 1.4% and the provision for other adjustments was 5.1% and 4.9%, respectively.

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The decreases in the reserves for chargebacks, rebates and returns from June 30, 2021 to December 31, 2021 was primarily attributable to lower net sales in the three months ended December 31, 2021 as compared to the three months ended June 30, 2021. The rebates reserve was also impacted by the lower net sales in the three months ended December 31, 2021; however, the reserve increased due to the timing of payments in Fiscal 2022. We have not recorded any material amounts in the current period related to reversals or additions of prior period reserves.

Note 6. Inventories

Inventories at December 31, 2021 and June 30, 2021 consisted of the following:


	December 31,		June 30,
(In thousands)	2021		2021
Raw Materials	$	49,042	$	45,370
Work-in-process		4,927		12,685
Finished Goods		51,810		51,490
Total	$	105,779	$	109,545

During the three months ended December 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $1.2 million and $20.6 million, respectively. During the six months ended December 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $4.1 million and $23.2 million. The decrease in write-downs for excess and obsolete inventory was primarily related to the discontinuation of certain product lines during the second quarter of Fiscal 2021, which resulted in a significant write-down in the prior-year period.

Note 7. Property, Plant and Equipment, net

Property, plant and equipment, net at December 31, 2021 and June 30, 2021 consisted of the following:


		December 31,		June 30,
(In thousands)	Useful Lives	2021		2021
Land	—	$	533	$	1,783
Building and improvements	10 - 39 years		93,401		103,082
Machinery and equipment	5 - 10 years		163,352		166,617
Furniture and fixtures	5 - 7 years		3,367		3,399
Less accumulated depreciation			(129,529)		(123,294)
			131,124		151,587
Construction in progress			11,980		15,087
Property, plant and equipment, net		$	143,104	$	166,674

As a result of the 2021 Restructuring Plan, the Company performed a fair value analysis of the Silarx facility and certain equipment at the facility, which resulted in an $8.4 million impairment charge in the second quarter of Fiscal 2022. The land, facility and equipment identified for sale, totaling $10.5 million, was reclassified to the assets held for sale caption in the Consolidated Balance Sheet as of December 31, 2021.

Depreciation expense for the three months ended December 31, 2021 and 2020 was $5.5 million and $5.7 million, respectively. Depreciation expense for the six months ended December 31, 2021 and 2020 was $11.1 million and $11.5 million, respectively.

Property, plant and equipment, net included amounts held in foreign countries in the amount of $0.6 million at December 31, 2021 and June 30, 2021.

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Note 8. 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 Company’s financial assets and liabilities measured at fair value are entirely within Level 1 of the hierarchy as defined below:

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.

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 4.50% Convertible Senior Notes (“Convertible Senior Notes”) using market quotations for debt that have quoted prices in active markets (Level 1). Since our Second Lien Secured Loan Facility (“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 December 31, 2021 and June 30, 2021 was approximately $266 million and $347 million, respectively. The estimated fair value of the Second Lien Facility as of December 31, 2021 and June 30, 2021 was approximately $144 million and $189 million, respectively. The estimated fair value of the Convertible Senior Notes was approximately $27 million and $53 million as of December 31, 2021 and June 30, 2021, respectively. The fair value of the Convertible Senior Notes as of December 31, 2021 was lower than the carrying value primarily due to the Company’s stock price at December 31, 2021 as compared to the $15.29 conversion price.

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Note 9. Intangible Assets

Intangible assets, net as of December 31, 2021 and June 30, 2021 consisted of the following:


	Weighted	Gross Carrying Amount				Accumulated Amortization				Intangible Assets, Net
	Avg. Life	December 31,		June 30,		December 31,		June 30,		December 31,		June 30,
(In thousands)	(Yrs.)	2021		2021		2021		2021		2021		2021
Definite-lived:
KUPI product rights	15	$	35,000	$	83,955	$	—	$	(4,198)	$	35,000	$	79,757
KUPI trade name	2		2,920		2,920		(2,920)		(2,920)		—		—
KUPI other intangible assets	15		19,000		19,000		(7,728)		(7,095)		11,272		11,905
Silarx product rights	15		20,000		20,000		(5,556)		(4,889)		14,444		15,111
Other product rights	10		37,417		35,918		(11,161)		(8,856)		26,256		27,062
Total definite-lived		$	114,337	$	161,793	$	(27,365)	$	(27,958)	$	86,972	$	133,835

Indefinite-lived:
KUPI in-process research and development	—	$	4,000	$	4,000	$	—	$	—	$	4,000	$	4,000
Total indefinite-lived			4,000		4,000		—		—		4,000		4,000
Total intangible assets, net		$	118,337	$	165,793	$	(27,365)	$	(27,958)	$	90,972	$	137,835

For the three months ended December 31, 2021 and 2020, the Company recorded amortization expense of $3.8 million and $8.7 million, respectively. For the six months ended December 31, 2021 and 2020, the Company recorded amortization expense of $7.8 million and $17.2 million, respectively.

In November 2021, the Company announced the 2021 Restructuring Plan, which includes the phase out of two low-margin prescription products at Kremers Urban Pharmaceuticals, Inc. The Company determined that the decision to discontinue these products along with continued competitive pressures in the market represent a “triggering event” and, therefore, performed an analysis to determine the potential impairment of certain long-lived assets, including its intangible assets. Based on the analysis, the Company recorded an impairment charge of $40.6 million related to the KUPI product rights intangible assets. The impairment charge is primarily a result of the decline in net sales and gross margin of certain product lines acquired in connection with the KUPI acquisition.

Future annual amortization expense consisted of the following as of December 31, 2021:


(In thousands)	Amortization
Fiscal Year Ending June 30,	Expense
2022	$	5,127
2023		10,295
2024		10,021
2025		9,827
2026		9,173
Thereafter		42,529
	$	86,972

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Note 10. Long-Term Debt

Long-term debt, net consisted of the following:


	December 31,		June 30,
(In thousands)	2021		2021
7.75% Senior Secured Notes due 2026	$	350,000	$	350,000
Unamortized discount and other debt issuance costs		(5,106)		(5,594)
7.75% Senior Secured Notes due 2026, net		344,894		344,406
Second Lien Secured Loan Facility due 2026 ($190.0M Principal, $5.7M Exit Fee, and $13.7M and $3.6M accrued PIK interest at December 31, 2021 and June 30, 2021 respectively)		209,366		199,342
Unamortized discount and other debt issuance costs		(34,663)		(36,701)
Second Lien Secured Loan Facility due 2026, net		174,703		162,641
4.50% Convertible Senior Notes due 2026		86,250		86,250
Unamortized discount and other debt issuance costs		(2,363)		(2,614)
4.50% Convertible Senior Notes, net		83,887		83,636
$45 million Amended ABL Credit Facility		—		—
Total debt, net		603,484		590,683
Less short-term borrowings and current portion of long-term debt		—		—
Total long-term debt, net	$	603,484	$	590,683

The weighted average interest rate for the three months ended December 31, 2021 and 2020 was 8.9% and 7.8%, respectively. The weighted average interest rate for the six months ended December 31, 2021 and 2020 was 8.9% and 7.9%, respectively.

Long-term debt amounts due, for the twelve-month periods ending December 31 are as follows:


	Amounts Payable
(In thousands)	to Institutions
2022	$	—
2023		—
2024		—
2025		—
2026		645,616
Total	$	645,616

The long-term debt amounts due above include accrued PIK interest on the Second Lien Facility as of December 31, 2021. Following the one-year anniversary of the closing date of the Second Lien Facility, the Company may elect to pay in cash any interest required to be paid in the form of PIK interest.

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.

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Note 11. Legal, Regulatory Matters and Contingencies

State Attorneys General Inquiry into the Generic Pharmaceutical Industry

In July 2014, the Company received interrogatories and a subpoena from the State of Connecticut Office of the Attorney General concerning its investigation into the pricing of digoxin. According to the subpoena, the Connecticut Attorney General is investigating whether anyone engaged in any activities that resulted in (a) fixing, maintaining or controlling prices of digoxin or (b) allocating and dividing customers or territories relating to the sale of digoxin in violation of Connecticut antitrust law. In June 2016, the Connecticut Attorney General issued interrogatories and a subpoena to an employee of the Company in order to gain access to documents and responses previously supplied to the Department of Justice pursuant to the federal investigation described below. Beginning in December 2016, the Connecticut Attorney General and numerous other State Attorneys General have filed civil complaints against the Company and numerous other companies and individuals relating to alleged anti-competitive behavior as more fully described below.

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

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 Kremers Urban Pharmaceuticals (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 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.

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 position. 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.

Genus Life Sciences

In December 2018, Genus Lifesciences, Inc. (“Genus”) sued the Company, Cody Labs, and others in California federal court, alleging violations of the Lanham Act, Sherman Act, and California false advertising law. Genus received FDA approval for a cocaine hydrochloride product in December 2018, and its claims are premised in part on allegations that the Company falsely advertises its unapproved cocaine hydrochloride solution product. The Company denied that it is falsely advertising its cocaine hydrochloride solution product and continued to market its unapproved product relying on the Guidance for FDA Staff and Industry, Marketed Unapproved Drugs — Compliance Policy Guide, pending approval of its Section 505(b)(2) application (until August 15, 2019, when it agreed to a request by the FDA to cease marketing its unapproved product as a result of the approval of a competitor’s product). In January 2019, the Company filed a motion to dismiss the complaint. On May 3, 2019, the Court issued a written decision granting in part and denying in part the motion to dismiss. On June 6, 2019, Genus filed an Amended Complaint. On June 27, 2019, the Company filed a motion to dismiss the amended complaint. By Order dated September 3, 2019, the Court granted in part and denied in part the Company's motion to dismiss. On November 20, 2019, Genus filed a second amended complaint. On December 17, 2019, the Company filed an answer to the second amended complaint. The Company believes it acted in compliance with all applicable laws and regulations and plans to vigorously defend itself from these claims. On August 16, 2021, the Company and Genus reached an agreement in principle to amicably resolve this case, along with three other cases involving the Company’s approved cocaine hydrochloride product. The parties memorialized the settlement in a series of settlement documents which were signed on October 15, 2021. The terms of the settlement are confidential and include, among other things, a non-exclusive patent license granted by Genus, which allows the Company to continue marketing its approved cocaine hydrochloride product, a payment of $1.5 million by the Company and transfer by the Company of certain ANDAs and an NDA to Genus, and the stipulation that all cases shall be dismissed with prejudice. All cases against the Company have been dismissed with prejudice.

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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. The Company denies that it tortiously interfered with Sandoz’s contract or that it converted any of Sandoz’s alleged confidential information. The Company cannot reasonably predict the outcome of this suit at this time.

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. The complaint is consolidated in a multidistrict litigation (“MDL”) pending in the United States District Court for the Southern District of Florida. Similar complaints were filed in state court in New Mexico and state court in Maryland and served upon the Company. Subsequently, a number of similar complaints were served on the Company. 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. Separately, the New Mexico case 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 ground. The motion was denied on August 17, 2021; however, the Company is currently evaluating options for interlocutory appeal. Since the Company, based upon the information received to date, did not sell Ranitidine in New Mexico, it is pursuing its options for dismissal. It is in the process of negotiating a voluntary dismissal with attorneys for the State and simultaneously moving for dismissal on jurisdiction grounds. Separately, the Company filed a notice to remove and transfer the Maryland case to the MDL which the plaintiff has opposed. On April 1, 2021, the case was remanded back to the state court. Recently, two separate complaints were filed against the Company and others in Philadelphia Court of Common Pleas by parents on behalf of minor children alleging personal injury as a result of using the Company’s Ranitidine products. The Company has filed its preliminary objections to both of the complaints, seeking dismissal on the basis of preemption, legal insufficiency, learned intermediary defense and lack of specificity. The Company has placed its insurance carrier on notice of the claim and the carrier has appointed counsel to defend the Company.

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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.

Note 12. Commitments

Leases

At December 31, 2021 and June 30, 2021, the Company had a ROU lease asset of $10.2 million and $10.6 million, respectively, and an operating lease liability of $12.6 million and $13.1 million, respectively. The current balance of the operating lease liability at December 31, 2021 and June 30, 2021was $2.1 million and $2.0 million, respectively.

Components of lease cost are as follows:


	Three Months Ended				Six Months Ended
	December 31,				December 31,
(In thousands)	2021		2020		2021		2020
Operating lease cost	$	444	$	477	$	905	$	879
Variable lease cost		16		43		57		82
Short-term lease cost		83		108		152		226
Total	$	543	$	628	$	1,114	$	1,187

Supplemental cash flow information related to our operating leases is as follows:

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

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


(In thousands)	Amounts Due
2022	$	1,045
2023		2,064
2024		2,083
2025		2,103
2026		2,124
Thereafter		8,513
Total lease payments		17,932
Less: Imputed interest		5,324
Present value of lease liabilities	$	12,608

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 million of the development costs and split 50/50 any development costs in excess thereof. As of December 31, 2021, the Company has incurred approximately $6.0 million of development costs towards the $32 million commitment made by the Company. 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. To date, the COVID-19 pandemic has not had a material impact on the development of the insulin glargine product. Although, as a result of stricter procedures required during the pandemic, there is expected to be a several month delay in completing our upcoming clinical trial. The timing of the product development and approval could be further delayed as the COVID-19 pandemic continues.

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 million of the development costs, provided that if total development and other costs paid by Lannett are less than $32 million then the difference will be paid to Sunshine over the first year of commercialization. As of December 31, 2021, the Company has not yet incurred material costs towards the $32 million commitment made by the Company. The parties shall negotiate the sharing of any development costs in excess of $32 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.

Note 13. Accumulated Other Comprehensive Loss

The Company’s Accumulated Other Comprehensive Loss was comprised of the following components as of December 31, 2021 and 2020:


	December 31,
(In thousands)	2021		2020
Foreign Currency Translation
Beginning Balance, June 30	$	(548)	$	(627)
Net income on foreign currency translation (net of tax of $0 and $0)		29		32
Other comprehensive income, net of tax		29		32
Total Accumulated Other Comprehensive Loss	$	(519)	$	(595)

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Note 14. 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 15 “Loss Per Common Share” for further details of the two-class method and the Company’s calculation of earnings (loss) per share.

Note 15. Loss Per Common Share

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


	Three Months Ended
	December 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(81,085)	$	(171,948)
Interest expense 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	$	(81,085)	$	(171,948)

Denominator:
Basic weighted average common shares outstanding		40,358,127		39,443,441
Effect of potentially dilutive options, restricted stock awards and performance-based shares		—		—
Effect of conversion of the Convertible Notes		—		—
Diluted weighted average common shares outstanding		40,358,127		39,443,441

Loss per common share:
Basic	$	(2.01)	$	(4.36)
Diluted	$	(2.01)	$	(4.36)

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	Six Months Ended
	December 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(103,427)	$	(178,447)
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	$	(103,427)	$	(178,447)

Denominator:
Basic weighted average common shares outstanding		40,142,974		39,257,211
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		40,142,974		39,257,211

Loss per common share:
Basic	$	(2.58)	$	(4.55)
Diluted	$	(2.58)	$	(4.55)

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 and six months ended December 31, 2021.

The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share was 8.1 million for each of the three and six months ended December 31, 2021 and 2020. The effect of potentially dilutive shares was excluded from the calculation of diluted loss per share in the three and six months ended December 31, 2021 and 2020 because the effect of including such securities would be anti-dilutive.

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Note 16. Share-based Compensation

At December 31, 2021, 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 December 31, 2021, the plans have a total of 1.4 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 December 31, 2021, there was $12.0 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 2.0 years.

Stock Options

The Company measures share-based compensation cost for options using the Black-Scholes option pricing model. There were no stock options granted during the six months ended December 31, 2021. The following table presents the weighted average assumptions used to estimate fair values of the stock options granted, the estimated annual forfeiture rates used to recognize the associated compensation expense and the weighted average fair value of the options granted during the six months ended December 31, 2020:


	Six Months Ended
	December 31, 2020
Risk-free interest rate		0.2	%
Expected volatility		82.5	%
Expected dividend yield		—	%
Forfeiture rate		—	%
Expected term		5.0	years
Weighted average fair value	$	3.86

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 equal to zero, as the Company has not historically issued and has no immediate plans to issue a dividend.

A stock option summary as of December 31, 2021 and changes during the six months then ended, is presented below:


						Weighted
		Weighted-				Average
		Average		Aggregate		Remaining
		Exercise		Intrinsic		Contractual
(In thousands, except for weighted average price and life data)	Awards	Price		Value		Life (yrs.)
Outstanding at June 30, 2021	1,046	$	9.51	$	25	7.2
Exercised	(3)	$	3.55	$	2
Forfeited, expired or repurchased	(11)	$	7.62
Outstanding at December 31, 2021	1,032	$	9.55	$	—	6.8

Vested and expected to vest at December 31, 2021	1,032	$	9.55	$	—	6.8
Exercisable at December 31, 2021	626	$	11.67	$	—	5.9

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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 six months ended December 31, 2021 and 2020.

A summary of restricted stock awards as of December 31, 2021 and changes during the six months then ended, is presented below:


		Weighted
		Average Grant -		Aggregate
(In thousands, except for weighted average price data)	Awards	date Fair Value		Intrinsic Value
Non-vested at June 30, 2021	1,350	$	6.75
Granted	1,110		4.14
Vested	(973)		5.98	$	3,765
Forfeited	(83)		5.72
Non-vested at December 31, 2021	1,404	$	5.28

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. 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. 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.

A summary of performance-based share awards as of December 31, 2021 and changes during the current fiscal year, is presented below:


		Weighted
		Average Grant -
(In thousands, except for weighted average price and life data)	Awards	date Fair Value
Non-vested at June 30, 2021	531	$	10.29
Granted	617	$	6.04
Performance adjustment (1)	(40)	$	17.69
Vested	(58)	$	7.72
Non-vested at December 31, 2021	1,050	$	7.65

(1)	Represents the adjustment based on the performance of the July 2018 awards, which was below the Threshold goal level at the end of the three-year performance period.

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Employee Stock Purchase Plan

In February 2003, the Company’s stockholders approved an Employee Stock Purchase Plan (“2003 ESPP”). The 2003 ESPP was implemented on April 1, 2003 and is qualified under Section 423 of the Internal Revenue Code. The Board of Directors authorized an aggregate total of 1.1 million shares of the Company’s common stock for issuance under the 2003 ESPP. During the six months ended December 31, 2021 and 2020, 107 thousand shares and 56 thousand shares were issued under the 2003 ESPP, respectively. As of December 31, 2021, 1.1 million total cumulative shares have been issued under the 2003 ESPP. 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 an additional 1.5 million shares of the Company’s common stock for issuance under the 2022 ESPP, which is qualified under Section 423 of the Internal Revenue Code. 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				Six Months Ended
	December 31,				December 31,
(In thousands)	2021		2020		2021		2020
Selling, general and administrative expenses	$	2,115	$	1,507	$	4,812	$	4,221
Research and development expenses		27		132		122		287
Cost of sales		167		352		393		825
Total	$	2,309	$	1,991	$	5,327	$	5,333

Tax benefit at statutory rate	$	519	$	448	$	1,199	$	1,200

Note 17. Employee Benefit Plan

The Company has a 401k 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. Beginning January 1, 2021, the Company reduced the matching contribution to 50% of each employee’s contribution, not to exceed 2% of the employee’s compensation for the Plan year. Contributions to the Plan were $0.2 million and $0.5 million during the three months ended December 31, 2021 and 2020, respectively. Contributions to the Plan were $0.5 million and $1.1 million during the six months ended December 31, 2021 and 2020, 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 and six months ended December 31, 2021 were not material.

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Note 18. Income Taxes

The federal, state and local income tax benefit for the three months ended December 31, 2021 was $1.4 million compared to $58.1 million for the three months ended December 31, 2020. The effective tax rates for the three months ended December 30, 2021 and 2020 were 1.7% and 25.2%, respectively. The effective tax rate for the three months ended December 31, 2021 was lower compared to the three months ended December 31, 2020 primarily due to the valuation allowance recorded in Fiscal 2021.

The federal, state and local income tax benefit for the six months ended December 31, 2021 was $1.4 million compared to $66.1 million for the six months ended December 31, 2020. The effective tax rates for the six months ended December 31, 2021 and 2020 were 1.4% and 27.0%, respectively. The effective tax rate for the six months ended December 31, 2021 was lower compared to the six months ended December 31, 2020 primarily due to the valuation allowance recorded in Fiscal 2021.

As of December 31, 2021 and June 30, 2021, the Company has total unrecognized tax benefits of $4.5 million, of which $4.4 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 December 31, 2021 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 December 31, 2021 and June 30, 2021. 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 and 2020 federal returns are currently under examination by the Internal Revenue Service (“IRS”). The Company has received preliminary assessments from the IRS, which are not considered material to Company’s Consolidated Statements of Operations; however, we cannot reasonably predict the final outcome of the examinations at this time. In October 2018, the Company was notified that the Commonwealth of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns. In March 2021, the Company received a preliminary assessment from the Commonwealth of Pennsylvania, which is not considered material to the Company’s Consolidated Statement of Operations. 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. The Company cannot currently predict the outcome of the audit.

Note 19. Related Party Transactions

The Company had sales of $0.4 million and $0.8 million during the three months ended December 31, 2021 and 2020, respectively, to a generic distributor, Auburn Pharmaceutical Company (“Auburn”), which is a member of the Premier Buying Group. Sales to Auburn for the six months ended December 31, 2021 and 2020 were $0.6 million and $1.5 million, respectively. Jeffrey Farber, a current board member, is the owner of Auburn. Accounts receivable includes amounts due from Auburn of $0.3 million and $0.4 million at December 31, 2021 and June 30, 2021, respectively.

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Note 20. Assets Held for Sale

Cody API Real Estate

In Fiscal 2020, the Company ceased operations at Cody Labs, leased a portion of the real estate to a third party and intends to sell the remaining real estate. In November 2021, the Company entered into an agreement for the sale of real estate associated with the Cody API business. The Company adjusted the carrying value to fair value based on the signed agreement and estimated proceeds of the sale, which resulted in a $0.5 million impairment charge. As of December 31, 2021, the remaining real estate associated with the Cody API business, totaling $2.2 million, was recorded in the assets held for sale caption in the Consolidated Balance Sheets. The financial results of the Cody API business for the three and six months ended December 31, 2021 and 2020 were not material to the Company’s Consolidated Statements of Operations.

Silarx Pharmaceuticals, Inc. Facility in Carmel, New York

In November 2021, the Company announced the 2021 Restructuring Plan, which includes consolidating its manufacturing footprint by transferring certain liquid drug production from its Silarx Pharmaceuticals, Inc. (“Silarx”) facility in Carmel, New York to the Company’s main plant in Seymour, Indiana. Following the transition, which is expected to take 12 to 18 months, the Company intends to shut down operations at the Silarx facility. The Company is also currently pursuing the sale of the facility, which is anticipated to occur within one year and may result in accelerated timing for the shutdown of operations at Silarx. As such, the facility and certain equipment identified for sale are considered held for sale as of December 31, 2021. The Company subsequently performed a fair value analysis which resulted in an $8.4 million impairment charge of the Silarx facility and certain equipment at the facility in the second quarter of Fiscal 2022. As of December 31, 2021, the facility and equipment identified for sale, totaling $10.5 million, was recorded in the assets held for sale caption in the Consolidated Balance Sheet.

Note 21. Subsequent Events

On January 31, 2022, the Company completed the sale of certain real estate associated with the former Cody API business for total consideration of $2.2 million, after fees and selling costs. The carrying value of the real estate was included within the assets held for sale caption in the Consolidated Balance Sheets as of December 31, 2021.

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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, 2021. All references to “Fiscal 2022” shall mean the fiscal year ending June 30, 2022 and all references to “Fiscal 2021” shall mean the fiscal year ended June 30, 2021.

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.

Impact of COVID-19 Pandemic

In response to the COVID-19 pandemic, the Company has developed a comprehensive plan that enables it to maintain operational continuity with an emphasis on manufacturing, distribution and R&D facilities during this crisis, and to date, has not encountered any significant obstacles implementing its business continuity plans. However, the Company continually assesses COVID-19 related developments and adjusts its risk mitigation planning and business continuity activities as needed.

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In March 2020, the Company instituted a work from home process for all employees, other than employees in our manufacturing plants, distribution center, and R&D facilities which support manufacturing. For employees who cannot perform their job remotely, the Company has implemented enhanced cleaning and sanitizing procedures that are in line with Centers for Disease Control and Preventions (“CDC”) recommendations. Employees are required to adhere to the CDC guidelines, social distancing and any employee experiencing any symptoms of COVID-19 is required to stay home and seek medical attention. The Company has experienced an increase in absenteeism arising from intermittent spikes in cases across the country, which has caused an increase in overtime and cost to produce the products, but to date the rate of employee absenteeism has not had any material effect on the Company’s business or its ability to manufacture and distribute products and plants continue to operate at normal capacity. As the pandemic continues to linger due to variants or other causes, there is a continuing risk of employee absenteeism which could materially impact the Company’s operations. To date, the Company’s work from home process has not materially impacted the Company’s financial reporting systems or controls over financial reporting and disclosures nor do we expect that the ongoing remote work arrangement will have a material impact in the future.

Currently and as anticipated for the near future, the supply chain supporting the Company’s products remains intact, enabling the Company to receive sufficient inventory of the key materials needed across the Company’s network. The Company is experiencing some delays and allocations for certain API and other raw materials of higher demand, which, to date, have not had a material impact on its 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 interruption to its supply chain, and such an interruption could materially affect its business, including but not limited to, our ability to timely manufacture and distribute its products as well as unfavorably impact our results of operations. Subsequent to an initial stocking up of supplies at the start of the pandemic, the total volume of drug prescriptions written during the pandemic decreased causing less demand for our products. Specifically, the pandemic has resulted in fewer elective surgeries being performed, causing less demand for our Numbrino cocaine hydrochloride product. Recently, however, prescription volumes have begun to increase back to pre-pandemic levels.

As a result of the pandemic, certain clinical trials which were underway or scheduled to begin were temporarily placed on hold, although all such clinical trials were resumed and have been completed. Such delays impacted the Company’s timing for filing applications for product approvals with the FDA as well as related timing of FDA approval of such filings. Additionally, the pandemic has slowed down the Company’s efforts to expand its product portfolio through acquisitions and distribution opportunities, impacting the speed with which the Company is able to bring additional products to market.

In light of the economic impacts of COVID-19, the Company reviewed the assets on our Consolidated Balance Sheet as of December 31, 2021, including intangible and other long-lived assets. Based on our review, the Company determined that no impairments or other write-downs specifically related to COVID-19 were necessary during the first six months of Fiscal 2022 and during Fiscal 2021. Our assessment is based on information currently available and is highly reliant on various assumptions. Changes in market conditions could impact the Company’s future outlook and may lead to impairments in the future.

Based on the foregoing, the Company cannot reasonably predict the ultimate impact of COVID-19 on our future results of operations due to the continued uncertainty around the duration and severity of the pandemic.

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Climate Change

The Company believes in a more sustainable future with a reduced environmental footprint, effective use of natural resources and a multi-pronged approach to 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. Commitment to this belief, however, may come at 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 continues 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 changes and strives to address these risks in a timely manner.

Results of Operations - Three months ended December 31, 2021 compared with the three months ended December 31, 2020

Net sales decreased 35% to $86.5 million for the three months ended December 31, 2021. The table below identifies the Company’s net product sales by medical indication for the three months ended December 31, 2021 and 2020.


(In thousands)	December 31,
Medical Indication	2021		2020
Analgesic	$	3,919	$	3,572
Anti-Psychosis		2,095		13,317
Cardiovascular		9,753		16,336
Central Nervous System		22,340		24,614
Endocrinology		8,297		9,496
Gastrointestinal		14,023		18,575
Infectious Disease		6,520		23,044
Migraine		4,446		6,083
Respiratory/Allergy/Cough/Cold		1,868		2,267
Urinary		1,164		1,361
Other		9,111		8,410
Contract manufacturing revenue		2,972		6,845
Total net sales	$	86,508	$	133,920

The decrease in net sales was driven by a decrease in the selling price of products of $24.0 million and a decrease in volume of $23.4 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, Levothyroxine Tablets and Capsules, which are included in the Endocrinology medical indication, Fluphenazine, which is included within the Anti-Psychosis medical indication and Dexmethylphenidate, which is 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, Fluphenazine and Verapamil, which is included within the Cardiovascular medical indication, were also negatively impacted by the competitive environment.

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 $3.2 million and $4.6 million during the three months ended December 31, 2021 and 2020, respectively.

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


	Sales volume		Sales price
Medical indication	change %		change %
Analgesic	32	%	(22)	%
Anti-Psychosis	(50)	%	(34)	%
Cardiovascular	(30)	%	(10)	%
Central Nervous System	3	%	(12)	%
Endocrinology	17	%	(30)	%
Gastrointestinal	(11)	%	(14)	%
Infectious Disease	(37)	%	(35)	%
Migraine	(21)	%	(6)	%
Respiratory/Allergy/Cough/Cold	26	%	(44)	%
Urinary	(8)	%	(6)	%

The Company sells its products to customers in various distribution channels. The table below presents the Company’s net sales to each distribution channel for the three months ended:


(In thousands)	December 31,		December 31,
Customer Distribution Channel	2021		2020
Wholesaler/Distributor	$	65,682	$	108,115
Retail Chain		15,209		16,217
Mail-Order Pharmacy		2,645		2,743
Contract manufacturing revenue		2,972		6,845
Total net sales	$	86,508	$	133,920

The overall decrease in sales was primarily driven by lower sales of certain key products due to new competitors entering the market. The Company has also seen increased competitive market pressure among the existing competitor base in recent years, which has resulted in overall decrease in sales to the distribution channels above. We will continue to seek opportunities for additional launches to offset these competitive pressures.

Cocaine Hydrochloride Solution

In December 2017, a competitor received approval from the FDA to market and sell a cocaine hydrochloride topical product. In March 2018, in accordance with FDA guidance, the FDA requested that the Company cease manufacturing and distributing its unapproved cocaine hydrochloride solution product due to there being an approved product on the market. The Company committed to not manufacturing or distributing cocaine hydrochloride 10% solution, which was not sold during Fiscal 2019. The Company also ceased manufacturing its unapproved cocaine hydrochloride 4% solution on June 15, 2019 and ceased distributing the product on August 15, 2019.

The competitor filed a series of Citizen Petitions beginning in 2019, seeking to block approval of the Company’s Section 505(b)(2) NDA for its cocaine hydrochloride solution product by claiming that the grant of the New Chemical Entity (“NCE”) exclusivity issued to the competitor blocks the approval of the Company’s application for five years. Following the FDA’s rejection of the competitor’s argument and approval of the Company’s Section 505(b)(2) NDA, the competitor filed two lawsuits against the FDA (one in federal court in the District of Columbia and one in federal court in the District of Maryland) seeking a court order in two different federal courts directing the FDA to withdraw approval of the Section 505(b)(2) NDA. To date, neither court has directed the FDA to withdraw the NDA. The Company has intervened in both lawsuits and there are currently cross motions for summary judgment pending in the case filed in federal court for the District of Columbia and a motion to dismiss the complaint filed in the federal court for the District of Maryland.

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Separately, on June 6, 2020, the competitor filed a patent infringement complaint, since amended, in the United States District Court for the District of Delaware, asserting that the Company’s approved cocaine hydrochloride product infringes six patents issued to the competitor. The Company filed an answer and counterclaim, alleging that the Company either does not infringe or that the six asserted patents and three additional unasserted patents are invalid. The competitor filed a motion to partially dismiss a portion of the counterclaim as to the unasserted patents.

On August 16, 2021, the Company and the competitor reached an agreement in principle to amicably resolve all pending cases, including the cases in the federal courts in the District of Columbia, District of Maryland and District of Delaware. The parties executed settlement documents on October 15, 2021 and all cases against the Company have been dismissed with prejudice. The Company continues to market its approved cocaine hydrochloride solution product.

Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the second quarter of Fiscal 2022 decreased 39% to $80.8 million from $133.1 million in the same prior-year period. 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. A decrease in amortization of intangibles as a result of intangible asset impairment charges incurred in Fiscal 2021 also contributed to lower cost of sales in the second quarter of Fiscal 2022. In addition, in the second quarter of Fiscal Year 2021, the Company recorded $17.2 million in write-downs for excess and obsolete inventory as a result of the decision to discontinue 23 lower margin product lines as well as $5.0 million in consideration to renew the Company’s distribution agreement with Recro Gainesville, LLC (“Recro”), which resulted in increased cost of sales in the prior-year period.

Gross Profit. Gross profit for the second quarter of Fiscal 2022 increased 637% to $5.7 million or 7% of net sales. In comparison, gross profit for the second quarter of Fiscal 2021 was $0.8 million or 1% of net sales. The increase in gross profit percentage was primarily due to a $17.2 million write-down for excess and obsolete inventory as well as $5.0 million in consideration to renew the Company’s distribution agreement with Recro Gainesville, LLC (“Recro”) recorded in the second quarter of Fiscal 2021. The increase was partially offset by decreases in the selling prices of our products due to increased competitive pressure.

Research and Development Expenses. Research and development expenses for the second quarter of Fiscal 2022 decreased 16% to $4.7 million from $5.6 million in Fiscal 2021. The decrease was primarily due to the timing of spend related to product development projects.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 37% to $18.8 million in the second quarter of Fiscal 2022 compared with $13.7 million in Fiscal 2021. The increase was primarily driven by higher expenses related to the reimbursement of legal costs associated with a distribution agreement.

Asset impairment charges. In November 2021, the Company announced the 2021 Restructuring Plan, which includes the phase out of two low-margin prescription products at Kremers Urban Pharmaceuticals, Inc. Based on the impairment analysis performed as a result of this decision and continued competitive pressures in the market, the Company recorded an impairment charge of $40.6 million related to the KUPI product rights intangible assets. The impairment charge is primarily a result of the decline in net sales and gross margin of certain product lines acquired in connection with the KUPI acquisition.

The 2021 Restructuring Plan also includes consolidating the Company’s manufacturing footprint by transferring certain liquid drug production from its Silarx Pharmaceuticals, Inc. (“Silarx”) facility in Carmel, New York to the Company’s main plant in Seymour, Indiana. Following the transition, which is expected to take 12 to 18 months, the Company intends to shut down operations at the Silarx facility. The Company performed a fair value analysis to adjust the carrying value of the facility and certain equipment identified for sale to the fair value, which resulted in an $8.4 million impairment charge.

In November 2021, the Company entered into an agreement for the sale of real estate associated with the Cody API business. The Company adjusted the carrying value to fair value based on the signed agreement and estimated proceeds of the sale, which resulted in a $0.5 million impairment charge.

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Other Loss. Interest expense for the three months ended December 31, 2021 totaled $14.4 million compared to $13.5 million for the three months ended December 31, 2020. The weighted average interest rate for the second quarter of Fiscal 2022 and 2021 was 8.9% and 7.8%, respectively. Interest expense was higher for the three months ended December 31, 2021 as a result of the higher weighted-average interest rate, which is attributable to higher interest rates on the Notes and the Second Lien Facility discussed further below.

Income Tax. The Company recorded an income tax benefit of $1.4 million in the second quarter of Fiscal 2022 as compared to an income tax benefit of $58.1 million in the second quarter of Fiscal 2021. The effective tax rate for the three months ended December 31, 2021 was 1.7%, compared to 25.2% for the three months ended December 31, 2020. The effective tax rate for the three months ended December 31, 2021 was lower compared to the three months ended December 31, 2020 primarily due to the valuation allowance recorded in Fiscal 2021.

Net Loss. For the three months ended December 31, 2021, the Company reported net loss of $81.1 million, or $(2.01) per diluted share. Comparatively, net loss in the corresponding prior-year period was $171.9 million, or $(4.36) per diluted share.

Results of Operations - Six months ended December 31, 2021 compared with the six months ended December 31, 2020

Net sales decreased to $188.0 million for the six months ended December 31, 2021. The table below identifies the Company's net product sales by medical indication for the six months ended December 31, 2021 and 2020.


(In thousands)	December 31,
Medical Indication	2021		2020
Analgesic	$	9,233	$	6,692
Anti-Psychosis		5,810		26,345
Cardiovascular		23,853		36,050
Central Nervous System		45,125		47,139
Endocrinology		16,142		12,729
Gastrointestinal		29,263		35,675
Infectious Disease		19,035		44,976
Migraine		9,131		15,773
Respiratory/Allergy/Cough/Cold		4,982		3,693
Urinary		2,340		2,819
Other		18,287		16,044
Contract manufacturing revenue		4,832		12,464
Total net sales	$	188,033	$	260,399

The decrease in net sales was driven by a decrease in the selling price of products of $48.6 million and a decrease in volume of $23.8 million. The decrease in the selling price of products was primarily driven by lower sales prices of Posaconazole, Levothyroxine Tablets and Capsules, Fluphenazine and Dexmethylphenidate. 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, Fluphenazine, Verapamil and Sumatriptan, which is included within the Migraine medical indication, were also negatively impacted by the competitive environment; however, the pressure was partially offset by increased volumes related to certain new product launches such as Levothyroxine Capsules.

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 $6.8 million and $8.9 million during the six months ended December 31, 2021 and 2020, respectively.

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


	Sales volume		Sales price
Medical indication	change %		change %
Analgesic	58	%	(20)	%
Anti-Psychosis	(44)	%	(34)	%
Cardiovascular	(23)	%	(11)	%
Central Nervous System	2	%	(6)	%
Endocrinology	99	%	(72)	%
Gastrointestinal	(7)	%	(11)	%
Infectious Disease	(19)	%	(39)	%
Migraine	(29)	%	(13)	%
Respiratory/Allergy/Cough/Cold	56	%	(21)	%
Urinary	(4)	%	(13)	%

The Company sells its products to customers in various distribution channels. The table below presents the Company’s net sales to each distribution channel for the six months ended:


(In thousands)	December 31,		December 31,
Customer Distribution Channel	2021		2020
Wholesaler/Distributor	$	150,526	$	208,695
Retail Chain		27,935		33,362
Mail-Order Pharmacy		4,740		5,878
Contract manufacturing revenue		4,832		12,464
Total net sales	$	188,033	$	260,399

Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the first six months of Fiscal Year 2022 decreased 29% to $165.8 million from $233.9 million in the same prior-year period. Product royalties expense included in cost of sales totaled $22.6 million for the first six months of Fiscal Year 2022 and $37.0 million for the first six months of Fiscal Year 2021. Amortization expense included in cost of sales totaled $7.8 million for the first six months of Fiscal 2022 and $17.2 million for the first six months of Fiscal 2021. 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. A decrease in amortization of intangibles as a result of intangible asset impairment charges incurred in Fiscal 2021 also contributed to lower cost of sales in the first six months of Fiscal 2022. In addition, in the second quarter of Fiscal Year 2021, the Company recorded $17.2 million in write-downs for excess and obsolete inventory as a result of the decision to discontinue 23 lower margin product lines as well as $5.0 million in consideration to renew the Company’s distribution agreement with Recro Gainesville, LLC (“Recro”), which resulted in increased cost of sales in the prior-year period.

Gross Profit. Gross profit for the first six months of Fiscal 2022 decreased 16% to $22.2 million or 12% of net sales. In comparison, gross profit for the first six months of Fiscal 2021 was $26.5 million or 10% of net sales. The increase in gross profit percentage was primarily a result of higher cost of sales in the prior period. In the second quarter of Fiscal Year 2021, the Company recorded $17.2 million in write-downs for excess and obsolete inventory as a result of the decision to discontinue 23 lower margin product lines as well as $5.0 million in consideration to renew the Company’s distribution agreement with Recro Gainesville, LLC (“Recro”), which resulted in a lower gross profit percentage in the prior-year period. The increase was partially offset by decreases in the selling prices of our products due to increased competitive pressure.

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Research and Development Expenses. Research and development expenses for the first six months of Fiscal 2022 decreased 14% to $10.5 million from $12.2 million in Fiscal Year 2021. The decrease was primarily due to the timing of spend related to product development projects.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 31% to $37.7 million in the first six months of Fiscal Year 2022 compared with $28.9 million in Fiscal Year 2021. The increase was primarily driven by higher expenses related to the reimbursement of legal costs associated with a distribution agreement as well as a non-income tax credit received in the first quarter of Fiscal 2021.

Other Income (Loss). Interest expense for the six months ended December 31, 2021 totaled $28.7 million compared to $28.0 million for the six months ended December 31, 2020. The average debt balance was lower in the first six months of Fiscal 2022 as compared to the prior-year due to the full repayment of the outstanding Term Loan A in November 2020. However, the interest expense was consistent between the two periods as a result of the higher weighted-average interest rate, which is attributable to higher interest rates on the Notes and the Second Lien Facility discussed further below. The weighted average interest rate for the first six months of Fiscal 2022 and 2021 was 8.9% and 7.9%, respectively.

Income Tax. The Company recorded an income tax benefit of $1.4 million in the first six months of Fiscal Year 2022 as compared to an income tax benefit of $66.1 million in the first six months of Fiscal Year 2021. The effective tax rate for the six months ended December 31, 2021 was 1.4%, compared to 27.0% for the six months ended December 31, 2020. The effective tax rate for the six months ended December 31, 2021 was lower compared to the six months ended December 31, 2021 primarily due to the valuation allowance recorded in Fiscal 2021.

Net Loss. For the six months ended December 31, 2021, the Company reported net loss of $103.4 million, or $(2.58) per diluted share. Comparatively, net loss in the corresponding prior-year period was $178.4 million, or $(4.55) 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 $45.0 million available to draw upon under the Amended ABL Credit Facility, which is discussed further below. At December 31, 2021, working capital was $245.4 million as compared to $263.1 million at June 30, 2021, a decrease of $17.7 million.

Net cash provided by operating activities of $13.8 million for the six months ended December 31, 2021 reflected net loss of $103.4 million, adjustments for non-cash items of $91.0 million, as well as cash provided by through changes in operating assets and liabilities of $26.2 million. In comparison, net cash used in operating activities of $24.6 million for the six months ended December 31, 2020 reflected net loss of $178.4 million, adjustments for non-cash items of $247.6 million, as well as cash used through changes in operating assets and liabilities of $93.8 million.

Significant changes in operating assets and liabilities from June 30, 2021 to December 31, 2021 were comprised of:

●

A decrease in accounts receivable of $32.6 million mainly due to lower gross sales in the three months ended December 31, 2021 compared to the three months ended June 30, 2021. The Company’s days sales outstanding (“DSO”) at December 31, 2021, based on gross sales for the six months ended December 31, 2021 and gross accounts receivable at December 31, 2021, was 71 days. The level of DSO at December 31, 2021 was comparable to the Company’s expectation that DSO will be in the 70 to 85-day range based on customer payment terms.

●

An increase in rebates payable of $6.2 million mainly due to the timing of payments in Fiscal 2022.

Significant changes in operating assets and liabilities from June 30, 2020 to December 31, 2020 were comprised of:

●

An increase in accounts receivable of $34.3 million mainly due to the timing of sales and cash receipts. The Company’s days sales outstanding (“DSO”) at December 31, 2020, based on gross sales for the six months ended December 31, 2020 and gross accounts receivable at December 31, 2020, was 76 days. The level of DSO at December 31, 2020 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 income taxes receivable totaling $50.1 million primarily due to additional estimated tax refunds related to provisions of the CARES Act as well as an anticipated Fiscal 2021 taxable loss.

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A decrease in accrued expenses totaling $10.9 million primarily due to the payment of the branded prescription drug fee in October 2020.

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An increase in accounts payable totaling $10.1 million primarily due to the timing of vendor invoices and payments.

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A decrease in accrued payroll and payroll-related costs of $7.4 million primarily related to payments made in August 2020 in connection with incentive-based compensation accrued in Fiscal Year 2020 as well as the timing of payroll payments.

Net cash used in investing activities of $7.9 million for the six months ended December 31, 2021 was mainly the result of purchases of property, plant and equipment of $6.8 million and purchases of intangible assets of $1.5 million. Net cash used in investing activities of $9.1 million for the six months ended December 31, 2020 was mainly the result of purchases of property, plant and equipment of $5.1 million and purchases of intangible assets of $4.0 million.

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Net cash used in financing activities of $0.6 million for the six months ended December 31, 2021 was due to purchases of treasury stock totaling $0.8 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of $0.2 million. Net cash used in financing activities of $71.5 million for the six months ended December 31, 2020 was due to debt repayments of $68.5 million, payment of debt issuance costs of $2.4 million, and purchases of treasury stock totaling $1.0 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of $0.4 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 December 31, 2021 are as follows:

7.750% Senior Secured Notes due 2026

On April 22, 2021, the Company issued $350.0 million aggregate principal amount of 7.750% Senior Secured Notes due 2026 (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. 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 (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 holders of the Warrants are entitled to receive dividends or distributions of any kind made to the common stockholders to the same extent as if the holder had exercised the Warrant into common stock. The Warrants are considered participating securities under ASC 260, Earnings per share.

In connection with the Second Lien Facility, the Company is required to maintain at least $5.0 million in a deposit account at all times subject to control by the Second Lien Collateral Agent, and a minimum cash balance of $15.0 million as of the last day of each month. At December 31, 2021, 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.

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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 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).

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 4.50% Convertible Senior Notes (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 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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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 competive 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.

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.

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.

Revenue Recognition

The Company complies with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when title and risk of loss of promised goods or services have transferred to the 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. The new revenue standard also impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time.” However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position. The Company adopted ASC 606 using the modified retrospective method.

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Chargebacks

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 new cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their FDA approval was granted under a NDA or 505(b) NDA versus an 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

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.

Refer to the Company’s Form 10-K for the fiscal year ended June 30, 2021 for a description of our remaining Critical Accounting Policies.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the fiscal year ended June 30, 2021, the Company paid off our outstanding, variable-rate Senior Secured Credit Facility with cash and the proceeds from new fixed-rate debt. 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 six months ended December 31, 2021 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 11 “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

There have been no material changes from the risk factors disclosed in Lannett Company, Inc’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021.

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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 2002	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: February 4, 2022	By:	/s/ Timothy Crew
		Timothy Crew
		Chief Executive Officer


Dated: February 4, 2022	By:	/s/ John Kozlowski
		John Kozlowski
		Vice President of Finance, Chief Financial Officer and Principal Accounting Officer