Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
|
|
|
FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
|
|
|
o
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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
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|
23-0787699
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(State of
Incorporation)
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(I.R.S. Employer
I.D. No.)
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9000 State Road
Philadelphia, PA 19136
(215) 333-9000
(Address of principal executive offices and telephone
number)
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
x
No
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated filer
o
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Smaller
reporting company
x
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(Do not check if
a smaller reporting company)
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|
|
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted 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 and post such files). Yes
o
No
o
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12B-12
of the Exchange Act).
Yes
o
No
x
Indicate the
number of shares outstanding of each class of the registrants common stock, as
of the latest practical date.
Class
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Outstanding as of November 9, 2009
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Common stock,
par value $0.001 per share
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24,699,089
shares
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANNETT
COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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September 30, 2009
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June 30, 2009
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ASSETS
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Current Assets
|
|
|
|
|
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Cash and cash
equivalents
|
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$
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23,611,254
|
|
$
|
25,832,456
|
|
Investment securities -
available for sale
|
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747,448
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347,921
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Trade accounts
receivable (net of allowance of $132,000 and $132,000, respectively)
|
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30,891,483
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29,945,748
|
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Inventories, net
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17,010,224
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16,195,361
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Interest receivable
|
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92,770
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90,425
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Deferred tax assets
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4,346,311
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4,296,929
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Other current assets
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541,848
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602,335
|
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Total
Current Assets
|
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77,241,338
|
|
77,311,175
|
|
|
|
|
|
|
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Property, plant and
equipment
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41,771,570
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41,431,158
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Less accumulated
depreciation
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(19,242,024
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)
|
(18,533,773
|
)
|
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22,529,546
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22,897,385
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|
|
|
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Construction in
progress
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1,318,534
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591,685
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Investment securities -
available for sale
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398,470
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801,748
|
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Intangible assets
(product rights) - net of accumulated amortization
|
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9,160,357
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9,118,710
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Deferred tax assets
|
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13,321,236
|
|
13,757,545
|
|
Other assets
|
|
89,846
|
|
98,873
|
|
Total
Assets
|
|
$
|
124,059,327
|
|
$
|
124,577,121
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
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LIABILITIES
|
|
|
|
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Current Liabilities
|
|
|
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Accounts payable
|
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$
|
15,649,685
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$
|
16,805,468
|
|
Accrued expenses
|
|
2,132,314
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|
1,842,434
|
|
Accrued payroll and
payroll related
|
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2,954,609
|
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5,150,104
|
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Income taxes payable
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1,224,663
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711,073
|
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Current portion of
long-term debt
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357,806
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435,386
|
|
Rebates, chargebacks
and returns payable
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12,656,106
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13,734,540
|
|
Total
Current Liabilities
|
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34,975,183
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38,679,005
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|
|
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Long-term debt, less
current portion
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7,644,677
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7,703,382
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Unearned grant funds
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500,000
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500,000
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Other long-term
liabilities
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11,693
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47,111
|
|
Total
Liabilities
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43,131,553
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46,929,498
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Commitment and
Contingencies, See notes 10 and 11
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SHAREHOLDERS
EQUITY
|
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Common stock -
authorized 50,000,000 shares, par value $0.001;
|
|
|
|
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issued and outstanding,
24,587,281 and 24,517,696 shares, respectively
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|
24,587
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|
24,518
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|
Additional paid in
capital
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76,733,498
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76,250,309
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Retained earnings
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4,600,935
|
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1,743,565
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Noncontrolling interest
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104,548
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|
93,654
|
|
Accumulated other comprehensive
income
|
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22,500
|
|
24,751
|
|
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81,486,068
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78,136,797
|
|
Less: Treasury stock at
cost - 90,160 and 82,228 shares, respectively
|
|
(558,294
|
)
|
(489,174
|
)
|
TOTAL
SHAREHOLDERS EQUITY
|
|
80,927,774
|
|
77,647,623
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
124,059,327
|
|
$
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124,577,121
|
|
The accompanying notes to
consolidated financial statements are an integral part of these statements.
1
Table of Contents
LANNETT COMPANY, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended
September 30,
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2009
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2008
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|
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Net sales
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$
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31,434,989
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$
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25,567,653
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Cost of sales
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19,012,318
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16,120,195
|
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Amortization of
intangible assets
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448,667
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446,166
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Product royalties
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439,774
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Gross profit
|
|
11,534,230
|
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9,001,292
|
|
|
|
|
|
|
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Research and
development expenses
|
|
3,027,841
|
|
1,863,113
|
|
Selling, general, and
administrative expenses
|
|
3,763,161
|
|
4,949,144
|
|
Loss on sale of
investments
|
|
|
|
4,931
|
|
|
|
|
|
|
|
Operating income
|
|
4,743,228
|
|
2,184,104
|
|
|
|
|
|
|
|
Interest income
|
|
23,099
|
|
45,767
|
|
Interest expense
|
|
(70,413
|
)
|
(66,209
|
)
|
|
|
(47,314
|
)
|
(20,442
|
)
|
|
|
|
|
|
|
Income before income
tax expense
|
|
4,695,914
|
|
2,163,662
|
|
Income tax expense
|
|
1,827,650
|
|
919,990
|
|
Consolidated net income
|
|
2,868,264
|
|
1,243,672
|
|
Less net income from
noncontrolling interest
|
|
(10,894
|
)
|
(17,507
|
)
|
|
|
|
|
|
|
Net income attributable
to Lannett Company, Inc.
|
|
$
|
2,857,370
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$
|
1,226,165
|
|
|
|
|
|
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Basic income per common
share - Lannett Company, Inc.
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|
$
|
0.12
|
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$
|
0.05
|
|
Diluted income per
common share - Lannett Company, Inc.
|
|
$
|
0.11
|
|
$
|
0.05
|
|
|
|
|
|
|
|
Basic weighted average
number of shares
|
|
24,533,562
|
|
24,306,488
|
|
Diluted weighted
average number of shares
|
|
25,054,661
|
|
24,382,951
|
|
The accompanying notes to
consolidated financial statements are an integral part of these statements.
2
Table of Contents
LANNETT
COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
|
|
Common
Stock
|
|
Additional
|
|
|
|
|
|
|
|
Accum.
Other
|
|
|
|
|
|
Shares
|
|
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Noncontrolling
|
|
Comprehensive
|
|
Shareholders
|
|
|
|
Issued
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Interest
|
|
Income
(loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2009
|
|
24,517,696
|
|
$
|
24,518
|
|
$
|
76,250,309
|
|
$
|
1,743,565
|
|
$
|
(489,174
|
)
|
$
|
93,654
|
|
$
|
24,751
|
|
$
|
77,647,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
|
36,100
|
|
36
|
|
152,650
|
|
|
|
|
|
|
|
|
|
152,686
|
|
Shares issued in
connection with employee stock purchase plan
|
|
7,985
|
|
8
|
|
33,249
|
|
|
|
|
|
|
|
|
|
33,257
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
43,007
|
|
|
|
|
|
|
|
|
|
43,007
|
|
Stock options
|
|
|
|
|
|
232,868
|
|
|
|
|
|
|
|
|
|
232,868
|
|
Employee stock purchase
plan
|
|
|
|
|
|
21,440
|
|
|
|
|
|
|
|
|
|
21,440
|
|
Shares issued in
connection with restricted stock grant
|
|
25,500
|
|
25
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury
stock
|
|
|
|
|
|
|
|
|
|
(69,120
|
)
|
|
|
|
|
(69,120
|
)
|
Income from
noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
10,894
|
|
|
|
10,894
|
|
Other comprehensive
loss, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,251
|
)
|
(2,251
|
)
|
Net income
|
|
|
|
|
|
|
|
2,857,370
|
|
|
|
|
|
|
|
2,857,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2009
|
|
24,587,281
|
|
$
|
24,587
|
|
$
|
76,733,498
|
|
$
|
4,600,935
|
|
$
|
(558,294
|
)
|
$
|
104,548
|
|
$
|
22,500
|
|
$
|
80,927,774
|
|
The accompanying notes to
consolidated financial statements are an integral part of these statements.
3
Table of Contents
LANNETT
COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the three months ended September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income - Lannett
Company, Inc.
|
|
$
|
2,857,370
|
|
$
|
1,226,165
|
|
Adjustments to
reconcile net income to
net cash (used in) provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
1,166,604
|
|
1,283,617
|
|
Deferred tax expense
|
|
388,427
|
|
911,872
|
|
Stock compensation
expense
|
|
297,315
|
|
389,797
|
|
Other noncash (income)
expenses
|
|
(26,391
|
)
|
1,949
|
|
Income from
noncontrolling interest
|
|
10,894
|
|
17,506
|
|
Changes in assets and
liabilities which provided (used) cash:
|
|
|
|
|
|
Trade accounts
receivable
|
|
(1,152,466
|
)
|
5,341,230
|
|
Inventories
|
|
(814,863
|
)
|
294,571
|
|
Prepaid and income
taxes payable
|
|
513,590
|
|
784,009
|
|
Prepaid expenses and
other assets
|
|
58,142
|
|
(106,188
|
)
|
Accounts payable
|
|
(1,155,783
|
)
|
(1,259,114
|
)
|
Accrued expenses
|
|
289,880
|
|
157,703
|
|
Rebates, chargebacks
and returns payable
|
|
(871,703
|
)
|
20,132
|
|
Accrued payroll and
payroll related
|
|
(2,195,495
|
)
|
398,639
|
|
Deferred revenue
|
|
|
|
(258,283
|
)
|
Net cash (used in)
provided by operating activities
|
|
(634,479
|
)
|
9,203,605
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchases of property,
plant and equipment (including construction in progress)
|
|
(1,067,261
|
)
|
(209,210
|
)
|
Purchase of intangible
asset (product rights)
|
|
(500,000
|
)
|
|
|
Proceeds from sale of
investment securities - available for sale
|
|
|
|
316,099
|
|
Purchase of investment
securities - available for sale
|
|
|
|
(298,528
|
)
|
Net cash used in
investing activities
|
|
(1,567,261
|
)
|
(191,639
|
)
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Repayments of debt
|
|
(136,285
|
)
|
(147,583
|
)
|
Proceeds from issuance
of stock
|
|
185,943
|
|
31,281
|
|
Purchase of treasury
stock
|
|
(69,120
|
)
|
(19,950
|
)
|
Net cash used in
financing activities
|
|
(19,462
|
)
|
(136,252
|
)
|
|
|
|
|
|
|
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
(2,221,202
|
)
|
8,875,714
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVLAENTS, BEGINNING OF PERIOD
|
|
25,832,456
|
|
6,256,712
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
|
$
|
23,611,254
|
|
$
|
15,132,426
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION -
|
|
|
|
|
|
Interest paid
|
|
$
|
41,762
|
|
$
|
64,852
|
|
Income taxes paid
|
|
$
|
925,633
|
|
$
|
250,000
|
|
Lannett stock issued -
contingent consideration - Cody Labs acquistion
|
|
$
|
|
|
$
|
430,500
|
|
The accompanying notes to
consolidated financial statements are an integral part of these statements.
4
Table of Contents
LANNETT COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED
Note 1. Interim Financial
Information
The accompanying unaudited financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for presentation
of interim financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, the unaudited financial
statements do not include all the information and footnotes necessary for a
comprehensive presentation of the financial position, results of operations,
and cash flows for the periods presented. In the opinion of management, the
unaudited financial statements include all the normal recurring adjustments
that are necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. Operating results for the three months ended September 30,
2009 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2010. You should read these unaudited
financial statements in combination with the other Notes in this section; Managements
Discussion and Analysis of Financial Condition and Results of Operations
appearing in Item 2; and the Financial Statements, including the Notes to the
Financial Statements, included in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2009.
Note
2. Summary of Significant Accounting
Policies
Lannett Company, Inc.,
a Delaware corporation, and subsidiaries (the Company or Lannett), develop,
manufacture, package, market, and distribute active pharmaceutical ingredients
as well as pharmaceutical products sold under generic chemical names. The Company primarily manufactures solid
oral dosage forms, including tablets and capsules, and is pursuing partnerships
and research contracts for the development and production of other dosage
forms, including liquids and injectable products.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates. As applicable
to these consolidated financial statements, the most significant estimates and
assumptions relate to sales reserves and allowances, income taxes, inventories,
contingencies and valuation of intangible assets.
Principles of Consolidation
- The consolidated
financial statements include the accounts of the operating parent company,
Lannett Company, Inc., and its wholly owned subsidiaries, Lannett Holdings, Inc.
and Cody Laboratories, Inc. (Cody).
Cody includes the consolidation of Cody LCI Realty, LLC, a variable
interest entity. See Note 16 regarding the consolidation of this variable
interest entity. 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.
Revenue Recognition
- The Company recognizes
revenue when its products are shipped. At this point, title and risk of
loss have transferred to the customer and provisions for estimates, including
rebates, promotional adjustments, price adjustments, returns, chargebacks, and
other potential adjustments are reasonably
5
Table
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determinable. Accruals
for these provisions are presented in the consolidated financial statements as
rebates, chargebacks and returns payable and reductions to net sales. The
change in the reserves for various sales adjustments may not be proportionally
equal to the change in sales because of changes in both the product and the
customer mix. Increased sales to wholesalers will generally require additional
accruals as they are the primary recipient of chargebacks and rebates.
Incentives offered to secure sales vary from product to product. Provisions for
estimated rebates and promotional credits are estimated based upon contractual
terms. Provisions for other customer credits, such as price adjustments,
returns, and chargebacks, require management to make subjective judgments on
customer mix. Unlike branded innovator drug companies, Lannett does not use
information about product levels in distribution channels from third-party
sources, such as IMS and NDC Health, in estimating future returns and other
credits. Lannett calculates a chargeback/rebate rate based on contractual terms
with its customers and applies this rate to customer sales. The only
variable is customer mix, and this assumption is based on historical data and
sales expectations.
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. Lannett enters into agreements with its
indirect customers to establish pricing for certain products. The indirect customers then independently
select a wholesaler from which to actually purchase the products at these
agreed-upon prices. Lannett will provide
credit to the wholesaler for the difference between the agreed-upon price with
the indirect customer and the wholesalers invoice price if the price sold to
the indirect customer is lower than the direct price to the wholesaler. This credit is called a chargeback. The provision for chargebacks is based on
expected sell-through levels by the Companys 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, the reserve
for chargebacks will also generally increase.
However, the size of the increase depends on the product mix and the
amount of those sales that end up at 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 on actual sales may differ
from actual chargeback reserves.
Rebates
Rebates are offered to the Companys key chain drug
store, distributor and wholesaler customers to promote customer loyalty and
increase product sales. These rebate
programs provide customers with rebate 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.
At the time of shipment, the Company estimates reserves for rebates and
other promotional credit programs based on the specific terms in each
agreement. The reserve for rebates
increases as sales to certain wholesale and retail customers increase. However, since these rebate programs are not
identical for all customers, the size of the reserve will depend on the mix of
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 period prior to and subsequent to the products lot
expiration date in exchange for a credit to be applied to future
purchases. The Companys 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, and credit terms. While such
experience has allowed for reasonable estimations in the past, history may not
always be an accurate indicator of future returns. The Company continually monitors the
provisions for returns and makes adjustments when management believes that
actual product returns may differ from established reserves. Generally, the reserve for returns increases
as net sales increase. The reserve for
returns is included in the rebates, chargebacks and returns payable account on
the balance sheet.
6
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Other Adjustments
Other
adjustments consist primarily of price adjustments, also known as shelf stock
adjustments, which are credits issued to reflect decreases in the selling
prices of the Companys products that customers have remaining in their
inventories at the time of the price reduction.
Decreases in selling prices are discretionary decisions made by management
to reflect competitive market conditions.
Amounts recorded for estimated shelf stock adjustments are based upon
specified terms with direct customers, estimated declines 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 are included in the rebates
and chargebacks payable account on the balance sheet.
The following tables identify the reserves for each major category of
revenue allowance and a summary of the activity for the three months ended September 30,
2009 and 2008:
For the
three months ended September 30, 2009
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of
June 30, 2009
|
|
$
|
6,089,802
|
|
$
|
2,537,746
|
|
$
|
5,106,992
|
|
$
|
|
|
$
|
13,734,540
|
|
Actual credits issued
related to sales recorded in prior fiscal years
|
|
(4,767,581
|
)
|
(1,852,708
|
)
|
(1,147,720
|
)
|
|
|
(7,768,009
|
)
|
Reserves or (reversals)
charged during Fiscal 2010 related to sales in prior fiscal years
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net
sales during Fiscal 2010 related to sales recorded in Fiscal 2010
|
|
10,272,936
|
|
4,066,855
|
|
1,140,128
|
|
407,784
|
|
15,887,703
|
|
Actual credits issued
related to sales recorded in Fiscal 2010
|
|
(7,000,389
|
)
|
(1,789,955
|
)
|
|
|
(407,784
|
)
|
(9,198,128
|
)
|
Reserve Balance as of
September 30, 2009
|
|
$
|
4,594,768
|
|
$
|
2,961,938
|
|
$
|
5,099,400
|
|
$
|
|
|
$
|
12,656,106
|
|
For the
three months ended September 30, 2008
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of
June 30, 2008
|
|
$
|
4,049,407
|
|
$
|
632,314
|
|
$
|
13,642,589
|
|
$
|
2,107
|
|
$
|
18,326,417
|
|
Actual credits issued
related to sales recorded in prior fiscal years
|
|
(2,865,229
|
)
|
(255,126
|
)
|
(6,425,413
|
)
|
|
|
(9,545,768
|
)
|
Reserves or (reversals)
charged during Fiscal 2009 related to sales in prior fiscal years
|
|
|
|
|
|
2,107
|
|
(2,107
|
)
|
|
|
Reserves charged to net
sales during Fiscal 2009 related to sales recorded in Fiscal 2009
|
|
9,144,349
|
|
2,949,913
|
|
1,142,474
|
|
42,957
|
|
13,279,693
|
|
Actual credits issued
related to sales recorded in Fiscal 2009
|
|
(5,129,939
|
)
|
(1,537,556
|
)
|
|
|
(40,096
|
)
|
(6,707,591
|
)
|
Reserve Balance as of
September 30, 2008
|
|
$
|
5,198,588
|
|
$
|
1,789,545
|
|
$
|
8,361,757
|
|
$
|
2,861
|
|
$
|
15,352,751
|
|
The total reserve for chargebacks, rebates, returns and other
adjustments decreased from $13,734,540 at June 30, 2009 to $12,656,106 at September 30,
2009. As of September 30, 2009 approximately $9,924,000
of the original $10,545,000 return reserve recorded in Fiscal 2008 for Prenatal
Multivitamin was applied to accounts receivable for customers who had returned
the Prenatal Multivitamin product by that date, leaving a balance of
approximately $621,000 of Multivitamin returns reserve on the consolidated
balance sheet at September 30, 2009. The decrease in chargeback reserves
between June 30, 2009 and September 30, 2009 was due primarily to a
decrease in inventory levels at wholesaler distribution centers.
7
Table
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The Company ships its products to the warehouses of its wholesale and
retail chain customers. When the Company and a customer enter into an
agreement for the supply of a product, the customer will generally continue to
purchase the product, stock its warehouse(s), and resell the product to its own
customers. The Companys customer will reorder the product as its
warehouse is depleted. The Company generally has no minimum size orders
for its customers. Additionally, most warehousing customers prefer not to
stock excess inventory levels due to the additional carrying costs and
inefficiencies created by holding excess inventory. As such, the Companys
customers continually reorder the Companys products. It is common for
the Companys customers to order the same products on a monthly basis.
For generic pharmaceutical manufacturers, it is critical to ensure that
customers warehouses are adequately stocked with its products. This is
important due to the fact that several generic competitors compete for the
consumer demand for a given product. Availability of inventory ensures
that a manufacturers product is considered. Otherwise, retail
prescriptions would be filled with competitors products. For this
reason, the Company periodically offers incentives to its customers to purchase
its products. These incentives are generally up-front discounts off its
standard prices at the beginning of a generic campaign launch for a
newly-approved or newly-introduced product, or when a customer purchases a
Lannett product for the first time. Customers generally inform the
Company that such purchases represent an estimate of expected resale for a
period of time. This period of time is generally up to three
months. The Company records this revenue, net of any discounts offered
and accepted by its customers at the time of shipment. The Companys
products have either 24 months or 36 months of shelf-life at the time of
manufacture. The Company monitors its customers purchasing trends to
attempt to identify any significant lapses in purchasing activity. If the
Company observes a lack of recent activity, inquiries will be made to such
customer regarding the success of the customers resale efforts. The
Company attempts to minimize any potential return (or shelf life issues) by
maintaining an active dialogue with the customers.
The
products that the Company sells are generic versions of brand named
drugs. The consumer markets for such drugs are well-established markets
with many years of historically-confirmed consumer demand. Such consumer
demand may be affected by several factors, including alternative treatments and
costs, etc. However, the effects of changes in such consumer demand for
the Companys products, like generic products manufactured by other generic
companies, are gradual in nature. Any overall decrease in consumer demand
for generic products generally occurs over an extended period of time.
This is because there are thousands of doctors, prescribers, third-party
payers, institutional formularies and other buyers of drugs that must change
prescribing habits and medicinal practices before such a decrease would affect
a generic drug market. If the historical data the Company uses and the
assumptions management makes to calculate its estimates of future returns,
chargebacks, and other credits do not accurately approximate future activity,
its net sales, gross profit, net income and earnings per share could
change. However, management believes that these estimates are reasonable
based upon historical experience and current conditions.
Cash and cash equivalents
The Company considers all
highly liquid securities purchased with original maturities of 90 days or less
to be cash equivalents. Cash equivalents
are stated at cost, which approximates market value, and consist of
certificates of deposit that are readily converted to cash.
Accounts Receivable
- The Company performs
ongoing credit evaluations of its customers and adjusts credit limits based
upon payment history and the customers current credit worthiness, as
determined by a review of current credit information. The Company continuously
monitors collections and payments from its customers and maintains a provision
for estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified. While such credit losses
have historically been within both the Companys expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same credit loss rates that it has in the past.
Fair Value of Financial
Instruments
- The Companys financial instruments consist
primarily of cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and debt obligations. The carrying values of these assets and
liabilities approximate fair value based upon the short-term nature of these
instruments. The
8
Table
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Company has estimated that
the fair value of long-term debt associated with the 20 year mortgage on its
land and building in Cody, Wyoming approximates the discounted amount of future
payments to the mortgage-holder.
Investment Securities
- The Companys investment
securities consist of marketable debt securities, primarily in U.S. government
and agency obligations. All of the Companys marketable debt securities
are classified as available-for-sale and recorded at fair value, based on
quoted market prices. Unrealized holding gains and losses are recorded,
net of any tax effect, as a separate component of accumulated other
comprehensive income. No gains or losses on marketable debt securities
are realized until they are sold or a decline in fair value is determined to be
other-than-temporary. The Company reviews its marketable securities and
determines whether the investments are other-than-temporarily impaired. If the
investments are deemed to be other-than-temporarily impaired, the investments
are written down to their then current fair market value with a new cost basis
being established. There were no securities determined by management to be
other-than-temporarily impaired during the three months ended September 30,
2009, or the fiscal year ended June 30, 2009.
Shipping and Handling Costs
The cost of shipping products to customers is recognized at the time the products are shipped, and is included in cost of sales.
Research and Development
Research and development
expenses are charged to operations as incurred.
Intangible Assets
In March 2004,
the Company entered into an agreement with Jerome Stevens
Pharmaceuticals, Inc. (JSP) for the exclusive marketing and distribution
rights in the United States to the current line of JSP products in exchange for
four million (4,000,000) shares of the Companys common stock. As a result of the JSP agreement, the Company
recorded an intangible asset of $67,040,000 for the exclusive marketing and
distribution rights obtained from JSP.
The intangible asset was recorded based upon the fair value of the four
million (4,000,000) shares at the time of issuance to JSP. During the quarter ended March 31,
2005, the Company recorded a non-cash impairment loss of approximately
$46,093,000 to reduce the carrying value of the intangible asset to its fair
value of approximately $16,062,000 as of the date of the impairment. As of September 30, 2009 and June 30,
2009, management concluded the carrying value of the intangible asset was less
than its fair value and, therefore, no further impairment was required. The Company will incur annual amortization
expense of approximately $1,785,000 for the JSP intangible asset over the
remaining term of the agreement.
On April 10, 2007, the Company entered into a Stock Purchase
Agreement to acquire Cody by purchasing all of the remaining shares of common
stock of Cody. The consideration for the April 10, 2007 acquisition was
approximately $4,438,000, which represented the fair value of the tangible net
assets acquired. The agreement also required Lannett to issue to the sellers up
to 120,000 shares of unregistered common stock of the Company contingent upon
the receipt of a license from a regulatory agency. This license was subsequently received in July 2008
and triggered the payment of 105,000 shares (87.5% of the 120,000 shares as the
Company already owned 12.5%) of Lannett stock to the former owners of Cody
Labs, which was completed in October 2008.
Therefore, the Company recorded an intangible asset related to the
acquisition of a drug import license in the original amount of $581,175 and
recorded a corresponding deferred tax liability of approximately $150,700 due
to the non-deductibility of the amortization for tax purposes. The Company has assigned a 15 year life to
this intangible asset based on average life cycles of Lannett products.
In January 2005, Lannett Holdings, Inc. entered
into an agreement in which the Company purchased for $100,000 and future
royalty payments the proprietary rights to manufacture and distribute a product
for which Pharmeral, Inc. owned the ANDA.
In May 2008, the Company and Pharmeral waived their rights to any
royalty payments on the sales of the drug by Lannett, under Lannetts current
ownership structure. Should Lannett
undergo a change in control transaction with a third party, this royalty will
be reinstated. In Fiscal 2008, the
Company obtained FDA approval to use these proprietary rights. Accordingly, the Company originally
capitalized these purchased product rights as an indefinite lived intangible
asset and tested this asset for impairment at least on an annual basis. During the fourth quarter of fiscal 2009, it
was determined that this intangible asset no longer has an indefinite
life. No impairment
9
Table
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existed because the estimated fair value exceeded the
carrying amount on that date. Accordingly, the $100,000 carrying amount of this
intangible asset is being amortized on a straight line basis prospectively over
its 10 year remaining estimated useful life.
In
August 2009, the Company acquired eight new ANDAs covering three separate
product lines from another generic drug manufacturer for a purchase price of
$500,000. It is expected that the
Company will be able to produce these products by the third quarter of this
fiscal year. The Company has assigned a
15 year life to this intangible asset based on average life cycles of Lannett
products. Amortization will begin when
the Company starts shipping these products.
For
the three months ended September 30, 2009 and 2008, the Company incurred
amortization expense of approximately $458,000 and $446,000, respectively. As
of September 30, 2009 and June 30, 2009, accumulated amortization
totaled approximately $8,083,000 and $7,624,000, respectively.
Future
annual amortization expense consists of the following as of September 30,
2009:
Fiscal Year Ending
June 30,
|
|
Annual Amortization
Expense
|
|
2010
|
|
$
|
1,375,059
|
|
2011
|
|
1,833,412
|
|
2012
|
|
1,833,412
|
|
2013
|
|
1,833,412
|
|
2014
|
|
1,387,245
|
|
Thereafter
|
|
397,817
|
|
|
|
$
|
8,660,357
|
|
The
amounts above do not include the ANDAs purchased in August 2009 for
$500,000 as amortization will begin when the Company starts shipping these
products.
Advertising Costs
-
The Company charges
advertising costs to operations as incurred.
Advertising expense for the three months ended September 30, 2009
and 2008 was approximately $10,000 and $13,000, respectively.
Income Taxes
-
The Company uses the liability method to account for 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. 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 standards issued by the FASB also
provide guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
Segment Information
- The Company
operates one business segment - generic pharmaceuticals; accordingly the
Company has one reporting segment. The
Company aggregates its financial information for all products and reports as
one operating segment. The following
table identifies the Companys approximate net product sales by medical
indication for the three months ended September 30, 2009 and 2008:
10
Table
of Contents
|
|
For the Three Months Ended
September 30,
|
|
Medical Indication
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Migraine Headache
|
|
$
|
2,663,000
|
|
$
|
2,319,000
|
|
Epilepsy
|
|
611,000
|
|
680,000
|
|
Prescription Vitamin
|
|
1,489,000
|
|
|
|
Heart Failure
|
|
4,852,000
|
|
6,348,000
|
|
Thyroid Deficiency
|
|
13,024,000
|
|
11,466,000
|
|
Antibiotic
|
|
1,661,000
|
|
1,496,000
|
|
Pain Management
|
|
2,880,000
|
|
276,000
|
|
Other
|
|
4,255,000
|
|
2,983,000
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,435,000
|
|
$
|
25,568,000
|
|
Concentration of Market and Credit Risk
- Five of the
Companys products, defined as generics containing the same active ingredient
or combination of ingredients, accounted for approximately 41%, 15%, 9%, 8% and
5%, respectively of net sales for the three months ended September 30,
2009. Those same products accounted for
45%, 25%, 1%, 9% and 0% respectively, of net sales for the three months ended September 30,
2008.
Four
of the Companys customers accounted for 26%, 14%, 9%, and 8%, respectively, of
net sales for the three months ended September 30, 2009, and 29%, 5%, 3%,
and 8%, respectively, of net sales for the three months ended September 30,
2008. At September 30, 2009, these
four customers accounted for 60% of the Companys accounts receivable
balances. At June 30, 2009, these
four customers accounted for 54% of the Companys accounts receivable balances.
Share-based Compensation -
The Company
recognizes compensation cost for share-based compensation issued to or
purchased by employees, net of estimated forfeitures, under share-based
compensation plans using a fair value method.
At
September 30, 2009, the Company had three stock-based employee
compensation plans (the Old Plan, the 2003 Plan, and the Long-term
Incentive Plan, or LTIP).
During
the three months ended September 30, 2008, the Company awarded 30,000
shares of restricted stock under the LTIP which vested immediately. Stock compensation expense of $101,400 was
recognized during the three months ended September 30, 2008, related to
these shares of restricted stock.
During
the fiscal year ended June 30, 2008, the Company awarded 209,264 shares of
restricted stock under the LTIP of which, 74,464 of these shares vested 100% on
January 1, 2008. The remainder
vests in equal portions on September 18, 2008, 2009 and 2010. Stock
compensation expense of $43,007 and $43,007 was recognized during the three
months ended September 30, 2009 and 2008, respectively, related to the
vesting of these shares of restricted stock.
The
Company measures the fair value of share-based compensation cost for options
using the Black-Scholes option pricing model.
The following table presents the weighted average assumptions used to
estimate fair values of the stock options granted and the estimated forfeiture
rates during the three months ended September 30:
11
Table of Contents
|
|
Incentive Stock
Options
|
|
Non-qualified
Stock Options
|
|
Incentive Stock
Options
|
|
Non-qualified
Stock Options
|
|
|
|
FY 2010
|
|
FY 2010
|
|
FY 2009
|
|
FY 2009
|
|
Risk-free
interest rate
|
|
2.4
|
%
|
|
%
|
2.5
|
%
|
2.5
|
%
|
Expected
volatility
|
|
67.1
|
%
|
|
%
|
56.5
|
%
|
56.5
|
%
|
Expected
dividend yield
|
|
0.0
|
%
|
|
%
|
0.0
|
%
|
0.0
|
%
|
Forfeiture
rate
|
|
5.0
|
%
|
|
%
|
5.0
|
%
|
5.0
|
%
|
Expected
term
|
|
5.0 years
|
|
n/a
|
|
5.0 years
|
|
5.0 years
|
|
Weighted
average fair value at date of grant
|
|
$
|
4.86
|
|
$
|
|
|
$
|
1.41
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no options issued under the LTIP during the three months ended September 30,
2009. Approximately 100,000 options were
issued under the LTIP during the three months ended September 30,
2008. There were 36,100 and zero shares
under option that were exercised in the three months ended September 30,
2009 and 2008, respectively. At September 30,
2009, there were 1,563,181 options outstanding.
Of those, 571,800 were options issued under the LTIP, 780,148 were
issued under the 2003 Plan, and 211,233 under the Old Plan. There are no further shares authorized to be
issued under the Old Plan. 1,125,000
shares were authorized to be issued under the 2003 Plan, with 20,490 shares
under option having already been exercised under that plan. 2,500,000 shares were authorized to be issued
under the LTIP, with 34,100 shares under option having already been exercised
under that plan.
Expected
volatility is based on the historical volatility of the price of our common
shares since the date we commenced trading on the NYSE-Amex, April 2002,
or a historical period equal to the expected term of the option, whichever is
shorter. We use historical information
to estimate expected term within the valuation model. The expected term
of awards represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the expected life of
the option is based on the U.S. Treasury yield curve in effect at the time of
grant. Compensation cost is recognized using the straight-line method
over the vesting or service period and is net of estimated forfeitures.
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 historical forfeiture rate. Periodically, management will
assess whether it is necessary to adjust the estimated rate to reflect changes
in actual forfeitures or changes in expectations. For example, adjustments may
be needed if forfeitures were affected by turnover that resulted from a
business restructuring that is not expected to recur. The Company will incur additional expense if
the actual forfeiture rate is lower than originally estimated. A recovery of
prior expense will be recorded if the actual rate is higher than originally
estimated.
The
following table presents all share-based compensation costs recognized in our
statements of operations, substantially all of which is reflected in the
selling, general and administrative expense line:
|
|
Three
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Share
based compensation
|
|
|
|
|
|
Stock
options
|
|
$
|
232,868
|
|
$
|
218,799
|
|
Employee
stock purchase plan
|
|
21,440
|
|
26,591
|
|
Restricted
stock
|
|
43,007
|
|
144,407
|
|
Tax
benefit at effective rate
|
|
27,604
|
|
22,180
|
|
|
|
|
|
|
|
|
|
Options
outstanding that have vested and are expected to vest as of September 30,
2009 are as follows:
12
Table of Contents
|
|
Awards
|
|
Weighted -
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Options vested
|
|
1,149,641
|
|
$
|
8.73
|
|
$
|
1,575,149
|
|
5.7
|
|
Options expected to vest
|
|
392,863
|
|
$
|
4.62
|
|
$
|
1,143,046
|
|
8.5
|
|
Total vested and expected to vest
|
|
1,542,504
|
|
$
|
7.68
|
|
$
|
2,718,195
|
|
6.4
|
|
A
summary of nonvested restricted stock award activity as of September 30,
2009 and changes during the three months then ended, is presented below:
|
|
Awards
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
Nonvested at July 1, 2009
|
|
77,198
|
|
$
|
311,108
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Vested
|
|
(25,500
|
)
|
(102,765
|
)
|
|
|
|
|
Forfeited
|
|
(6,200
|
)
|
(24,986
|
)
|
|
|
|
|
Nonvested at September 30, 2009
|
|
45,498
|
|
$
|
183,357
|
|
|
|
|
|
13
Table of Contents
A
summary of award activity under the Plans as of September 30, 2009 and
2008, and changes during the three months then ended, is presented below:
|
|
Incentive
Stock Options
|
|
Nonqualified
Stock Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
July 1, 2009
|
|
958,909
|
|
$
|
5.60
|
|
|
|
|
|
626,772
|
|
$
|
10.52
|
|
|
|
|
|
Granted
|
|
20,000
|
|
$
|
8.48
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Exercised
|
|
(36,100
|
)
|
$
|
4.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited, expired or
repurchased
|
|
(6,400
|
)
|
$
|
5.38
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Outstanding at
September 30, 2009
|
|
936,409
|
|
$
|
5.71
|
|
$
|
2,217,739
|
|
7.2
|
|
626,772
|
|
$
|
10.52
|
|
$
|
551,242
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2009 and not yet vested
|
|
350,474
|
|
$
|
4.64
|
|
$
|
1,015,723
|
|
8.6
|
|
63,067
|
|
$
|
4.51
|
|
$
|
187,483
|
|
8.1
|
|
Exercisable at
September 30, 2009
|
|
585,935
|
|
$
|
6.36
|
|
$
|
1,202,016
|
|
6.3
|
|
563,705
|
|
$
|
11.19
|
|
$
|
373,133
|
|
4.9
|
|
|
|
Incentive
Stock Options
|
|
Nonqualified
Stock Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
July 1, 2008
|
|
991,267
|
|
$
|
5.76
|
|
|
|
|
|
703,064
|
|
$
|
10.16
|
|
|
|
|
|
Granted
|
|
62,002
|
|
$
|
2.80
|
|
|
|
|
|
37,998
|
|
$
|
2.80
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(42,000
|
)
|
$
|
4.89
|
|
|
|
|
|
(25,000
|
)
|
$
|
5.02
|
|
|
|
|
|
Outstanding at
September 30, 2008
|
|
1,011,269
|
|
$
|
5.62
|
|
$
|
3,000
|
|
7.9
|
|
716,062
|
|
$
|
9.95
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2008 and not yet vested
|
|
521,180
|
|
$
|
4.45
|
|
|
|
8.9
|
|
163,288
|
|
$
|
4.75
|
|
|
|
8.8
|
|
Exercisable at
September 30, 2008
|
|
490,089
|
|
$
|
6.86
|
|
$
|
3,000
|
|
6.8
|
|
552,774
|
|
$
|
11.48
|
|
|
|
5.7
|
|
Options
with a fair value of $421,281 vested during the three months ended September 30,
2009. As of September 30,
2009, there was $946,124 of total unrecognized compensation cost related to
nonvested share-based compensation awards granted under the Plans. That
cost is expected to be recognized over a weighted average period of 1.4
years. As of September 30, 2008, there was approximately $1,663,000
of total unrecognized compensation cost related to nonvested share-based
compensation awards granted under the Plans.
The Company issues new shares when stock options are exercised.
Unearned
Grant Funds
The Company records all grant funds received as a liability until the Company
fulfills all the requirements of the grant funding program.
14
Table
of Contents
Earnings per Common Share
A dual
presentation of basic and diluted earnings per share is required on the face of
the Companys consolidated statement of operations as well as a reconciliation
of the computation of basic earnings per share to diluted earnings per
share. Basic earnings per share excludes
the dilutive impact of common stock equivalents and is computed by dividing net
income by the weighted-average number of shares of common stock outstanding for
the period. Diluted earnings per share
include the effect of potential dilution from the exercise of outstanding
common stock equivalents into common stock using the treasury stock
method. A reconciliation of the Companys
basic and diluted income per share follows:
|
|
2009
|
|
2008
|
|
|
|
Net
Income
|
|
Shares
|
|
Net
Loss
|
|
Shares
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
(Numerator)
|
|
(Denominator)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share factors
|
|
$
|
2,857,370
|
|
24,533,562
|
|
$
|
1,226,165
|
|
24,306,488
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of potentially dilutive option and restricted stock plans
|
|
|
|
521,099
|
|
|
|
76,463
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share factors
|
|
$
|
2,857,370
|
|
25,054,661
|
|
$
|
1,226,165
|
|
24,382,951
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.12
|
|
|
|
$
|
0.05
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.11
|
|
|
|
$
|
0.05
|
|
|
|
The number of anti-dilutive shares that have been excluded in the
computation of diluted earnings per share for the three months ended September 30,
2009 and 2008 were 352,845 and 1,807,529, respectively.
Note 3. New Accounting Standards
In June 2009, the
Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the Codification), which establishes the Codification
as the source of authoritative accounting guidance to be applied in the
preparation of financial statements in conformity with generally accepted
accounting principles (GAAP). The
Codification, which changes the referencing of financial standards, became
effective for interim and annual periods ending on or after September 15,
2009. The Codification is now the single
official source of authoritative U.S. GAAP (other than guidance issued by the
Securities and Exchange Commission), superseding existing FASB, American
Institute of Certified Public Accountants, Emerging Issues Task Force and
related literature. Only one level of authoritative
U.S. GAAP now exists. All other
literature is considered non-authoritative.
The Codification does not change U.S. GAAP. We adopted the Codification during the
first quarter of fiscal year 2010.
In December 2007,
the FASB issued authoritative guidance which significantly changes the
accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
in-process research and development and restructuring costs. In addition, under
the guidance, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income tax expense. In April 2009, updated guidance was issued
to address application issues regarding the accounting and disclosure
provisions for contingencies. The authoritative guidance applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the fiscal year beginning July 1, 2009. Early
application is not permitted. The effect of this authoritative guidance on our
consolidated financial statements will depend on the nature and terms of any
business combinations that occur after the effective date.
15
Table of Contents
In December 2007,
the FASB issued authoritative guidance to establish accounting and reporting
standards for the noncontrolling (minority) interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements and
establishes a single method of accounting for changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation. We adopted this
authoritative guidance effective July 1, 2009. As a result of the
adoption, the Company presents noncontrolling interests as a component of
equity on its consolidated balance sheets.
Minority interest expense is now shown below net income under the
heading net income from noncontrolling interest. Prior year financial statements have been
reclassified to reflect the adoption of this guidance. The adoption of this guidance did not have
any other significant impact on our consolidated financial statements.
In April 2008, the
FASB issued authoritative guidance which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The guidance is intended to
improve the consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the fair value of
the asset. We adopted this authoritative guidance effective July 1,
2009. The adoption of this guidance did
not have a significant impact on our consolidated financial statements.
In June 2009, the
FASB issued authoritative guidance for determining whether an entity is a
variable interest entity and modifies the methods allowed for determining the
primary beneficiary of a variable interest entity. This guidance requires an
enterprise to perform an analysis to determine whether the enterprises
variable interest or interests give it a controlling financial interest in a
variable interest entity. It also requires ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. The authoritative guidance is effective for
the annual reporting period that begins after November 15, 2009. We do not
expect the adoption of this authoritative guidance to have a significant impact
on our consolidated financial statements.
Note
4. Inventories
The
Company values its inventory at the lower of cost (determined by the first-in,
first-out method) or market, regularly reviews inventory quantities on hand,
and records a provision for excess and obsolete inventory based primarily on
estimated forecasts of product demand.
The Companys estimates of future product demand may fluctuate, in which
case estimated required reserves for excess and obsolete inventory may increase
or decrease. If the Companys inventory
is determined to be overvalued, the Company recognizes such costs in cost of
goods sold at the time of such determination. Likewise, if inventory is
determined to be undervalued, the Company may have recognized excess cost of
goods sold in previous periods and would recognize such additional operating
income at the time of sale.
Inventories
consist of the following:
|
|
September 30, 2009
|
|
June 30, 2009
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
5,023,930
|
|
$
|
5,755,982
|
|
Work-in-process
|
|
3,328,786
|
|
2,846,600
|
|
Finished
goods
|
|
7,688,876
|
|
6,664,193
|
|
Packaging
supplies
|
|
968,632
|
|
928,586
|
|
|
|
$
|
17,010,224
|
|
$
|
16,195,361
|
|
16
Table of Contents
The preceding amounts are net of inventory reserves of $2,792,384 and
$2,744,305 at September 30, 2009 and June 30, 2009, respectively.
Note 5. Property, Plant and
Equipment
Property,
plant and equipment are stated at cost.
Depreciation is provided for by the straight-line method for financial
reporting purposes over the estimated useful lives of the assets. Depreciation expense for the three months
ended September 30, 2009 and 2008 was approximately $708,000 and $837,000,
respectively.
Property,
plant and equipment consist of the following:
|
|
|
|
September 30,
|
|
June 30,
|
|
|
|
Useful Lives
|
|
2009
|
|
2009
|
|
Land
|
|
|
|
$
|
918,314
|
|
$
|
918,314
|
|
Building
and improvements
|
|
10
- 39 years
|
|
17,084,701
|
|
17,048,351
|
|
Machinery
and equipment
|
|
5
- 10 years
|
|
22,871,684
|
|
22,573,324
|
|
Furniture
and fixtures
|
|
5
- 7 years
|
|
896,871
|
|
891,169
|
|
|
|
|
|
|
41,771,570
|
|
|
41,431,158
|
|
Accumulated
depreciation
|
|
|
|
(19,242,024
|
)
|
(18,533,773
|
)
|
|
|
|
|
$
|
22,529,546
|
|
$
|
22,897,385
|
|
Note
6. Investment Securities -
Available-for-Sale
On July 1,
2008, the Company adopted the authoritative guidance which clarifies the
definition of fair value, establishes a framework for measuring fair value, and
expands the disclosures on fair value measurements. 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. Three levels
of inputs were established that may be used to measure fair value:
Level 1 Quoted prices in active markets for
identical assets or liabilities. The
Company does not have any level 1 available-for-sale securities as of September 30,
2009 or June 30, 2009.
Level 2 Observable inputs other than
Level 1 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. The Companys Level 2 assets and
liabilities primarily include debt securities with quoted prices that are
traded less frequently than exchange-traded instruments, corporate bonds,
U.S. government and agency securities and certain mortgage-backed and
asset-backed securities whose values are determined using pricing models with
inputs that are observable in the market or can be derived principally from or
corroborated by observable market data.
The fair value of the Companys available-for-sale securities in the
table below are derived solely from level 2 inputs.
Level 3 Unobservable inputs that are supported
by little or no market activity and that are 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. The Company does not have
any level 3 available-for-sale securities as of September 30, 2009 or June 30,
2009.
17
Table
of Contents
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.
The amortized
cost, gross unrealized gains and losses, and fair value of the Companys
available-for-sale securities are summarized as follows:
September 30,
2009
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency
|
|
$
|
928,910
|
|
$
|
35,035
|
|
$
|
|
|
$
|
963,945
|
|
Corporate Bonds
|
|
179,507
|
|
2,466
|
|
|
|
181,973
|
|
|
|
$
|
1,108,417
|
|
$
|
37,501
|
|
$
|
|
|
$
|
1,145,918
|
|
June 30,
2009
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency
|
|
$
|
928,910
|
|
$
|
40,352
|
|
$
|
|
|
$
|
969,262
|
|
Asset-Backed Securities
|
|
179,507
|
|
900
|
|
|
|
180,407
|
|
|
|
$
|
1,108,417
|
|
$
|
41,252
|
|
$
|
|
|
$
|
1,149,669
|
|
The amortized cost
and fair value of the Companys current available-for-sale securities by
contractual maturity at September 30, 2009 and June 30, 2009 are
summarized as follows:
|
|
September 30,
2009
Available for Sale
|
|
June 30,
2009
Available for Sale
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Due in one year or less
|
|
$
|
720,238
|
|
$
|
747,448
|
|
$
|
338,159
|
|
$
|
347,921
|
|
Due after one year
through five years
|
|
388,179
|
|
398,470
|
|
770,258
|
|
801,748
|
|
Due after five years
through ten years
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
1,108,417
|
|
1,145,918
|
|
1,108,417
|
|
1,149,669
|
|
Less current portion
|
|
720,238
|
|
747,448
|
|
338,159
|
|
347,921
|
|
|
|
|
|
|
|
|
|
|
|
Long term available-for-sale
securites
|
|
$
|
388,179
|
|
$
|
398,470
|
|
$
|
770,258
|
|
$
|
801,748
|
|
18
Table of Contents
The
Company uses the specific identification method to determine the cost of
securities sold. For the three months ended September 30, 2009, the
Company had no realized gains or losses, whereas for the three months ended September 30,
2008, the Company had realized losses of $4,931.
As
of September 30 and June 30, 2009, there were no securities held from
a single issuer that represented more than 10% of shareholders equity. As of September 30, 2009, there were no
individual securities in a continuous unrealized loss position.
Note
7. Bank Line of Credit
The Company has a $3,000,000 line of credit from
Wachovia Bank, N.A. (Wachovia) that bears interest at the prime interest rate
less 0.25% (2.75% and 3.00% at September 30 and June 30, 2009,
respectively). As of September 30 and June 30, 2009, the Company had
$3,000,000 of availability under this line of credit. The line of credit is collateralized by
substantially all of the Companys assets. The agreement contains
covenants with respect to working capital, net worth and certain ratios, as
well as other covenants. As of September 30,
2009, the Company was in compliance with all financial covenants under the agreement.
The
Company is required to maintain and comply with a debt service coverage ratio
of not less than 2 to 1 (to be measured annually). Debt service coverage
is defined as the ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA) to the sum of interest expenses plus scheduled current
maturities of long-term debt and current capitalized lease obligations.
Previously, the terms of the existing agreement required the Company to at all
times maintain deposit balances in excess of $3,500,000 with Wachovia Bank for
the balance of the arrangement. Additionally, the Company was required to
pay Wachovia an availability fee equal to 0.50% per annum calculated daily, on
the available but unused balance of the line of credit.
The
existing line of credit, which was scheduled to expire on November 30,
2009, was renewed and extended during the first quarter of Fiscal 2010 to November 30,
2010. As part of the renewal agreement, the Company is no
longer required to maintain any minimum deposit balances with Wachovia, and the
availability fee on the unused balance of the line of credit was reduced to
0.375%.
Note
8. Unearned Grant Funds
In
July 2004, the Company received $500,000 of grant funding from the
Commonwealth of Pennsylvania, acting through the Department of Community and
Economic Development. The grant funding program requires the Company to
use the funds for machinery and equipment located at their Pennsylvania
locations, hire an additional 100 full-time employees by June 30, 2006,
operate its Pennsylvania locations a minimum of five years and meet certain
matching investment requirements. If the Company fails to comply with any
of the requirements above, the Company would be liable to repay the full amount
of the grant funding ($500,000). The Company has recorded the unearned
grant funds as a liability until the Company complies with all of the
requirements of the grant funding program As of September 30, 2009,
the Company has had preliminary discussions with the Commonwealth of
Pennsylvania to determine whether it will be required to repay any of the funds
provided under the grant funding program. Based on information available
at September 30, 2009, the Company has recorded the grant funding as a
long-term liability under the caption of Unearned Grant Funds.
19
Table of Contents
Note
9. Long-Term Debt
Long-term debt consists
of the following:
|
|
September 30,
|
|
June 30,
|
|
|
|
2009
|
|
2009
|
|
PIDC
Regional Center, LP III loan
|
|
$
|
4,500,000
|
|
$
|
4,500,000
|
|
Pennsylvania
Industrial Development Authority loan
|
|
984,007
|
|
1,002,607
|
|
Pennsylvania
Department of Community & Economic Development loan
|
|
157,243
|
|
182,831
|
|
Tax-exempt
bond loan (PAID)
|
|
680,000
|
|
680,000
|
|
Equipment
loan
|
|
|
|
80,130
|
|
First
National Bank of Cody mortgage
|
|
1,681,233
|
|
1,693,200
|
|
|
|
|
|
|
|
Total
debt
|
|
8,002,483
|
|
8,138,768
|
|
Less
current portion
|
|
357,806
|
|
435,386
|
|
|
|
|
|
|
|
Long
term debt
|
|
$
|
7,644,677
|
|
$
|
7,703,382
|
|
|
|
September 30,
|
|
June 30,
|
|
|
|
2009
|
|
2009
|
|
Current
Portion of Long Term Debt
|
|
|
|
|
|
PIDC
Regional Center, LP III loan
|
|
$
|
|
|
$
|
|
|
Pennsylvania
Industrial Development Authority loan
|
|
75,580
|
|
75,017
|
|
Pennsylvania
Department of Community & Economic Development loan
|
|
104,130
|
|
103,100
|
|
Tax-exempt
bond loan (PAID)
|
|
125,000
|
|
125,000
|
|
Equipment
loan
|
|
|
|
80,130
|
|
First
National Bank of Cody mortgage
|
|
53,096
|
|
52,139
|
|
|
|
|
|
|
|
Total
current portion of long term debt
|
|
$
|
357,806
|
|
$
|
435,386
|
|
The Company financed $4,500,000 through the Philadelphia Industrial
Development Corporation (PIDC). The Company pays a bi-annual interest payment
at a rate equal to two and one-half percent per annum. The outstanding
principal balance is due and payable on January 1, 2011.
The Company financed $1,250,000 through the Pennsylvania Industrial
Development Authority (PIDA). The Company is required to make equal
payments each month for 180 months starting February 1, 2006 with interest
of two and three-quarter percent per annum.
An additional $500,000 was financed through the Pennsylvania Department
of Community and Economic Development Machinery and Equipment Loan Fund.
The Company is required to make equal payments for 60 months starting May 1,
2006 with interest of two and three quarter percent per annum.
In April 1999, the Company entered into a loan agreement (the Agreement)
with a governmental authority, the Philadelphia Authority for Industrial
Development (the Authority or PAID), to finance future construction and
growth projects of the Company. The Authority issued $3,700,000 in tax-exempt
variable rate demand and fixed rate revenue bonds to provide the funds to
finance such growth projects pursuant to a trust indenture (the Trust
Indenture). A portion of the Companys proceeds from the bonds was used
to pay for bond issuance costs of approximately $170,000. The Trust
Indenture requires that the Company repay the Authority loan through
installment payments beginning in May 2003 and continuing through May 2014,
the year the bonds mature. The
20
Table
of Contents
bonds bear interest at the floating variable rate determined by the
organization responsible for selling the bonds (the remarketing agent).
The interest rate fluctuates on a weekly basis. The effective interest
rate at September 30, 2009 and June 30, 2009 was 0.69% and 0.62%,
respectively.
The
Company entered into agreements (the 2003 Loan Financing) with Wachovia to
finance the purchase of the Torresdale Avenue facility, the renovation and
setup of the building, and other anticipated capital expenditures. The
Company, as part of the 2003 Loan Financing agreement, is required to make
equal payments of principal and interest. The only portion of the loan
that remained outstanding at June 30, 2009 was the Equipment Loan, which
had an outstanding balance of $80,130 at June 30, 2009. This loan
was fully repaid as of September 30, 2009.
The
Company is required to maintain and comply with a debt service coverage ratio
of not less than 2 to 1 (to be measured annually). Debt service coverage
is defined as the ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA) to the sum of interest expenses plus scheduled current
maturities of long-term debt and current capitalized lease obligations.
Previously, the terms of the existing agreement required the Company to at all
times maintain deposit balances in excess of $3,500,000 with Wachovia Bank for
the balance of the arrangement. Additionally, the Company was required to
pay Wachovia an availability fee equal to 0.50% per annum calculated daily, on
the available but unused balance of the line of credit.
The
existing line of credit, which was scheduled to expire on November 30,
2009, was renewed and extended during the first quarter of Fiscal 2010 to November 30,
2010. As part of the renewal agreement, the Company is no
longer required to maintain any minimum deposit balances with Wachovia, and the
availability fee on the unused balance of the line of credit was reduced to
0.375%.
The Company has executed Security Agreements with Wachovia, PIDA and
PIDC in which the Company has agreed to pledge substantially all of its assets
to collateralize the amounts due.
As
part of the Cody acquisition, the Company became primary beneficiary to a
variable interest entity (VIE) called Cody LCI Realty, LLC. See Note
16, Consolidation of Variable Interest Entity for additional description.
The VIE owns land and a building which is being leased to Cody. A
mortgage loan with First National Bank of Cody has been consolidated in the
Companys financial statements, along with the related land and building.
Principal and interest payments of $14,782, at a fixed interest rate of 7.5%,
are being made on a monthly basis through June 2026. The mortgage
loan is collateralized by the land and building.
Long-term
debt amounts due, for the twelve month periods ended September 30 are as
follows:
Twelve
|
|
Amounts Payable
|
|
Month Periods
|
|
to Institutions
|
|
|
|
|
|
2010
|
|
$
|
357,806
|
|
2011
|
|
4,818,102
|
|
2012
|
|
274,802
|
|
2013
|
|
283,934
|
|
2014
|
|
279,293
|
|
Thereafter
|
|
1,988,546
|
|
|
|
|
|
|
|
$
|
8,002,483
|
|
21
Table of Contents
Note
10. Contingencies
In early June 2008, the
Company filed a declaratory judgment suit in the Federal District
Court of Delaware (Civil Action No. 08-338 (JJF)) against KV
Pharmaceuticals, DrugTech Corp., and Ther-Rx Corp (collectively KV).
The complaint sought declaratory judgment for non-infringement and
invalidity of certain patents owned by KV. The complaint further sought
declaratory judgment of anti-trust violations and federal and state unfair
competition violations for actions taken by KV in securing and enforcing these
patents. After the complaint was filed, KV countered with a
motion for a Temporary Restraining Order (TRO) to prevent the Company from
launching its Multivitamin with Mineral Capsules (MMCs), due to alleged
patent and trademark infringement issues. The TRO was heard and,
ultimately, resulted in a conclusion by the court that the Companys product
label on the MMCs should be modified. KV also countered with claims
of infringement by the Company of KVs patents seeking the Companys profits
for sales of MMCs or other monetary relief, preliminary and permanent
injunctive relief, attorneys fees and a finding of willful infringement.
On March 17, 2009 the Company and KV settled the litigation. In light of the withdrawal of KVs innovator
prenatal product, and the resulting anticipated decline in sales and declining
market for written prescription, the Company decided it was pointless to
continue the litigation and entered into the settlement arrangement with
KV. Pursuant to the settlement, the
Company will receive a license from KV and will become an authorized generic
provider. During the terms of the
license, the Company will pay KV a royalty on all future sales of its Prenatal
vitamin product. Lannett will cease
offering its Prenatal vitamin product if and when the brand is restored to the
marketplace.
In or about July 2008,
Albion International and Albion, Inc. filed suit in the United States
District Court, District of Utah (Case No. 2:08cv00515) against Lannett
asserting claims for patent and trademark infringement, as well as unfair
competition, arising out of Lannetts use of product that it purchased from
Albion and used as an ingredient in its MMC. Lannett filed a motion to
dismiss the complaint on the basis that it purchased the product from Albion
and, as such, was authorized to use the product in its MMC. The
Court granted the motion and dismissed the complaint but gave Albion leave
to file an amended complaint. On January 20, 2009, Albion filed an
amended complaint. Lannett filed an answer to the complaint
and counterclaim, asserting, among other things, that
Albion tortuously interfered with Lannetts contracts. Subsequent to
the filing of the answer and counterclaim, Lannett and
Albion reached an agreement in principal to settle the case.
Under terms of the settlement, the parties would each dismiss their claims against
each other and provide releases. On July 6, 2009, the
settlement agreement was signed and on July 13, 2009 the case was
dismissed.
Note
11. Commitments
Leases
In June 2006, Lannett signed a lease agreement on a
66,000 square foot facility located on seven acres in Philadelphia. The Company purchased this building in October 2009
for approximately $3.8 million plus the cost of fit out. A significant portion of the purchase price
and fit out costs are expected to be financed through a series of loans with a
bank and a Pennsylvania state run development agency by the third quarter of
Fiscal 2010. This new facility is
initially going to be used for warehouse space with the expectation of making
this facility the Companys headquarters and possibly additional manufacturing
space. The other Philadelphia locations
will continue to be utilized for manufacturing, packaging, and research.
Lannetts subsidiary, Cody leases a 73,000 square foot
facility in Cody, Wyoming. This location
houses Codys manufacturing and production facilities. Cody leases the facility
from Cody LCI Realty, LLC, a Wyoming limited liability company which is 50%
owned by Lannett. See Note 16.
Rental and lease expense for the three months ended September 30,
2009 and 2008 was approximately $82,000 and $110,000, respectively.
22
Table of
Contents
Employment Agreements
The
Company has entered into employment agreements with Arthur P. Bedrosian,
President and Chief Executive Officer, Keith R. Ruck, Vice President of Finance
and Chief Financial Officer, Kevin Smith, Vice President of Sales and
Marketing, William Schreck, Senior Vice President and General Manager, Ernest
Sabo, Vice President of Regulatory Affairs and Chief Compliance Officer, and
Stephen Kovary, Vice President of Operations. Each of the agreements
provide for an annual base salary and eligibility to receive a bonus. The
bonus amounts of these executives are determined by the Board of
Directors. Additionally, these executives are eligible to receive stock
options and restricted stock awards, which are granted at the discretion of the
Board of Directors, and in accordance with the Companys policies regarding
stock option and restricted stock grants.
Under the agreements, these executive employees may be terminated at any
time with or without cause, or by reason of death or disability. In
certain termination situations, the Company is liable to pay severance
compensation to these executives of between 18 months and three years.
During
the third quarter of Fiscal Year 2009, the Companys former Vice President of
Finance, Treasurer, Secretary and Chief Financial Officer resigned. As part of his separation agreement, the Company
is obligated to pay to him approximately $670,000 to settle any outstanding
obligations from his employment agreement, including any salary, bonus,
vacation, stock options and medical benefits.
Of this amount, $300,440 was paid in Fiscal 2009 with $165,000
designated for the payment of pro rated bonus, and $11,440 was designated for
the payment of accrued but unused paid time off. As part of the settlement, $124,000 was
designated as the portion of the settlement related to the repurchase of his
outstanding stock options. The Company therefore charged this amount to
Additional Paid in Capital, as it represents the fair value of the options
repurchased on the repurchase date.
Additional payments totaling approximately $369,000 for severance and
benefits will be paid in Fiscal 2010 and Fiscal 2011 pursuant to the separation
agreement.
Note
12. Comprehensive Income
The Companys
other comprehensive income (loss) is comprised of unrealized gains (losses) on
investment securities classified as available-for-sale. The components of comprehensive income and
related taxes consisted of the following as of September 30, 2009 and
2008:
|
|
For the Three Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss):
|
|
|
|
|
|
Net
Income
|
|
$
|
2,857,370
|
|
$
|
1,226,165
|
|
Unrealized
Holding (Loss) Gain on Securities
|
|
(3,751
|
)
|
7,793
|
|
Add:
Tax savings at statutory rate
|
|
1,500
|
|
(3,117
|
)
|
|
|
|
|
|
|
Total
Other Comprehensive (Loss) Income
|
|
(2,251
|
)
|
4,676
|
|
|
|
|
|
|
|
Total
Comprehensive Income
|
|
$
|
2,855,119
|
|
$
|
1,230,841
|
|
23
Table of Contents
Note
13. Employee Benefit Plan
The
Company has a defined contribution 401k plan (the Plan) covering
substantially all employees. Pursuant to the Plan provisions, the Company
is required to make matching contributions equal to 50% of each employees
contribution, but not to exceed 4% of the employees compensation for the Plan
year. Contributions to the Plan during the three months ended September 30,
2009 and 2008 were $153,000 and $88,000, respectively.
Note
14. Employee Stock Purchase Plan
In
February 2003, the Companys shareholders approved an Employee Stock
Purchase Plan (ESPP). Employees eligible to participate in the ESPP may
purchase shares of the Companys 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 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
1,125,000 shares of the Companys common stock for issuance under the
ESPP. As of September 30, 2009, 183,576 shares have been issued
under the ESPP. Compensation expense of $21,440 and $26,591 has been
recognized for the three months ended September 30, 2009 and 2008,
respectively, relating to the ESPP.
Note
15. Income Taxes
The
Company uses the liability method to account for 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.
The provision for
federal, state and local income taxes for the three months ended September 30,
2009 and 2008 was tax expense of approximately $1,828,000 and $920,000,
respectively, with effective tax rates of 39% and 43%, respectively. The
effective tax rate for the three months ended September 30, 2009 was a
lower effective tax rate compared to September 30, 2008 due primarily to a
change in the Federal rate from the 35% statutory rate to an estimated 34%
actual rate, apportionment of income to Wyoming which has no state income tax,
and federal income tax credits.
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 standards issued by the
FASB also provide guidance on de-recognition, classification, interest and
penalties on income taxes, accounting in interim periods and requires increased
disclosures.
As
of September 30, 2009 and June 30, 2009, the Company reported total
unrecognized benefits of $297,663, all of which would affect the Companys
effective tax rate if recognized. As a
result of the positions taken during the period, the Company has not recorded
any interest and penalties for the period ended September 30, 2009 in the
statement of operations and no cumulative interest and penalties have been
recorded either in the Companys statement of financial position as of September 30,
2009 and June 30, 2009. The Company will recognize interest accrued on
unrecognized tax benefits in interest expense and any related penalties in
operating expenses. The Company does not
believe that the total unrecognized tax benefits will significantly increase or
decrease in the next twelve months.
The Company files tax returns in the United
States federal jurisdiction, Pennsylvania, New Jersey and California. The
Companys tax returns for Fiscal 2005 and prior generally are no longer subject
to review as such years generally are closed. The Company has been notified
that its federal income tax return for Fiscal 2008 will be reviewed by the IRS
during Fiscal 2010. The Company believes that an unfavorable resolution
for open tax years would not be material to the financial position of the
Company.
24
Table of Contents
Note 16.
Consolidation of Variable Interest Entity
Lannett
consolidates any Variable Interest Entity (VIE) of which it is the primary
beneficiary. The liabilities recognized as a result of consolidating a VIE do
not represent additional claims on our general assets; rather, they represent
claims against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating a VIE do not represent additional
assets that could be used to satisfy claims against our general assets.
Reflected in the September 30, 2009 and June 30, 2009 balance sheets are
consolidated VIE assets of approximately $1.9 million and $1.9 million, which
are comprised mainly of land and building. VIE liabilities consist of a
mortgage on that property in the amount of approximately $1.7 and $1.7 million
at September 30, 2009 and June 30, 2009, respectively.
Cody
LCI Realty LLC (Realty) is the only VIE that is consolidated. Realty
has been consolidated by Cody prior to its acquisition by Lannett. Realty
is a 50/50 joint venture with a former shareholder of Cody. Its purpose
was to acquire the facility used by Cody. Until the acquisition of
Cody in April 2007, Lannett had not consolidated the VIE because Cody
Labs had been the primary beneficiary of the VIE. The risks associated
with our interests in this VIE is limited to a decline in the value of the land
and building as compared to the balance of the mortgage note on that property,
up to Lannetts 50% share of the venture. Realty owns the land and
building, and Cody leases the building and property from Realty for $15,000 per
month. All intercompany rent expense is eliminated upon consolidation
with Cody.
The
Company is not involved in any other VIE of which Lannett is the primary
beneficiary.
Note
17. Related Party Transactions
The
Company had sales of approximately $213,000 and $167,000 during the three
months ended September 30, 2009 and 2008, respectively, to a generic
distributor, Auburn Pharmaceutical Company. Jeffrey Farber (the related party),
who is a current board member and the son of the Chairman of the Board of
Directors and principal shareholder of the Company, William Farber, is the
owner of Auburn Pharmaceutical Company.
Accounts receivable includes amounts due from the related party of
approximately $133,000 and $125,000 at September 30, 2009 and June 30,
2009, respectively. In the Companys
opinion, the terms of these transactions were not more favorable to the related
party than would have been to a non-related party.
In January 2005, Lannett Holdings, Inc. entered
into an agreement in which the Company purchased for $100,000 and future
royalty payments the proprietary rights to manufacture and distribute a product
for which Pharmeral, Inc. owned the ANDA.
In Fiscal 2008, the Company obtained FDA approval to use the proprietary
rights. Accordingly, the Company
originally capitalized these rights as an indefinite lived intangible asset and
tested this asset for impairment at least on an annual basis. During the fourth quarter of Fiscal 2009, it
was determined that this intangible asset no longer has an indefinite
life. No impairment existed because the
estimated fair value exceeded the carrying amount on that date. Accordingly,
the $100,000 carrying amount of this intangible asset is being amortized on a straight
line basis prospectively over its 10 year remaining estimated useful life.
Arthur Bedrosian, President and Chief Executive Officer,
currently owns 100% of Pharmeral, Inc.
This transaction was approved by the Board of Directors of the Company
and in their opinion the terms were not more favorable to the related party
than they would have been to a non-related party. In May 2008, Mr. Bedrosian
and Pharmeral waived their rights to any royalty payments on the sales of the
drug by Lannett under Lannetts current ownership structure. Should Lannett undergo a change in control
transaction with a third party, this royalty would be reinstated.
25
Table of Contents
Provell
Pharmaceuticals, LLC (Provell) is a joint venture to distribute
pharmaceutical products through mail order outlets. In exchange for access to Lannetts drug
providers, Lannett initially received a 33% ownership interest in this
venture. Lannetts ownership interest
subsequently decreased to 25% due to the additional issuance of shares by
Provell in which Lannett did not participate.
The investment is valued at zero, due to losses incurred to date by
Provell. During June 2009, the
Company terminated its participation in this joint venture. In connection with
the termination agreement, the Company is required to pay Provell ten percent
of net sales of certain products for a
period of up to twenty four months.
Accounts
receivable includes amounts due from Provell of approximately zero and $55,000
at September 30, 2009 and June 30, 2009, respectively. The Company
recognized revenues from Provell of approximately $75,000 during the three
months ended September 30, 2008.
Note 18. Material Contract with
Supplier
Jerome
Stevens Pharmaceuticals agreement:
The
Companys primary finished product inventory supplier is Jerome Stevens
Pharmaceuticals, Inc. (JSP), in Bohemia, New York. Purchases of finished goods inventory from
JSP accounted for approximately 67% and 75% of the Companys inventory
purchases during the three month periods ended September 30, 2009 and
2008, respectively. On March 23,
2004,
the Company entered into an agreement
with JSP for the exclusive distribution rights in the United States to the
current line of JSP products, in exchange for four million (4,000,000) shares
of the Companys common stock. The JSP
products covered under the agreement included Butalbital, Aspirin, Caffeine
with Codeine Phosphate capsules, Digoxin tablets and Levothyroxine Sodium
tablets, sold generically and under the brand name Unithroid®. The term of the agreement is ten years,
beginning on March 23, 2004 and continuing through March 22,
2014. Both Lannett and JSP have the
right to terminate the contract if one of the parties does not cure a material
breach of the contract within thirty (30) days of notice from the non-breaching
party.
During
the term of the agreement, the Company is required to use commercially
reasonable efforts to purchase minimum dollar quantities of JSPs products
being distributed by the Company. The
minimum quantity to be purchased in the first year of the agreement is $15
million. Thereafter, the minimum
quantity to be purchased increases by $1 million per year up to $24 million for
the last year of the ten-year contract.
The Company has met the minimum purchase requirement for the first five
years of the contract, but there is no guarantee that the Company will be able
to continue to do so in the future. If the Company does not meet the minimum
purchase requirements, JSPs sole remedy is to terminate the agreement.
Under
the agreement, JSP is entitled to nominate one person to serve on the Companys
Board of Directors (the Board) provided, however, that the Board shall have
the right to reasonably approve any such nominee in order to fulfill its
fiduciary duty by ascertaining that such person is suitable for membership on
the board of a publicly traded corporation. Suitability is determined by, but
not limited to, the requirements of the Securities and Exchange Commission, the
American Stock Exchange, and other applicable laws, including the
Sarbanes-Oxley Act of 2002. As of September 30,
2009, JSP has not exercised the nomination provision of the agreement.
The
Companys financial condition, as well as its liquidity resources, are very
dependent on an uninterrupted supply of product from Jerome Stevens. Should there be an interruption in the supply
of product from Jerome Stevens for any reason, this event would have a material
impact to the financial condition of Lannett.
Note 19. Subsequent Events
In May 2009,
the FASB issued authoritative guidance which defines the period after the
balance sheet date during which a reporting entitys management should evaluate
events or transactions that may occur for potential recognition or disclosure
in the financial statements. The Company
adopted this authoritative guidance effective with its financial statements as
of and for the year ended June 30, 2009. In preparing these financial
statements, the Company has evaluated events and transactions for potential
recognition or disclosure through November 12, 2009, the date the
financial statements were issued.
26
Table
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Introduction
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 Managements
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 2009.
This
Report on Form 10-Q and certain information incorporated herein by
reference contain 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, the regulatory environment, including without limitation,
reliance on key strategic alliances, availability of raw materials,
fluctuations in operating results and other risks detailed from time to time in
the Companys filings with the Securities and Exchange Commission. These
statements are based on managements 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.
Critical Accounting Policies
The
discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions. We believe that our critical accounting
policies include those described below.
Consolidation of Variable Interest Entity
The Company
consolidates any Variable Interest Entity (VIE) of which we are the primary
beneficiary. The liabilities recognized as a result of consolidating a VIE do
not represent additional claims on our general assets; rather, they represent
claims against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating a VIE do not represent additional
assets that could be used to satisfy claims against our general assets. Reflected in the September 30, 2009 and June 30,
2009 balance sheets are consolidated VIE assets of approximately $1.9 million
and $1.9 million, respectively, which is comprised mainly of land and a
building. VIE liabilities consist of a mortgage on that property in the amount
of approximately $1.7 and $1.7 million at September 30, 2009 and June 30,
2009,
27
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respectively.
This VIE was initially consolidated by Cody, as Cody has been the primary
beneficiary. Cody has then been consolidated within Lannetts financial
statements since its acquisition in April 2007.
Revenue Recognition
The Company recognizes
revenue when its products are shipped. At this point, title and risk of
loss have transferred to the customer and provisions for rebates, promotional
adjustments, price adjustments, returns, chargebacks, and other potential adjustments
are reasonably determinable. Accruals for these provisions are presented
in the consolidated financial statements as rebates, chargebacks and returns
payable and as reductions to net sales. The change in the reserves for various
sales adjustments may not be proportionally equal to the change in sales
because of changes in both the product and the customer mix. Increased sales to
wholesalers will generally require additional accruals as they are the primary
recipient of chargebacks and rebates. Incentives offered to secure sales vary
from product to product. Provisions for estimated rebates and promotional
credits are estimated based upon contractual terms. Provisions for other
customer credits, such as price adjustments, returns, and chargebacks, require management
to make subjective judgments on customer mix. Unlike branded innovator drug
companies, Lannett does not use information about product levels in
distribution channels from third-party sources, such as IMS and Wolters Kluwer,
in estimating future returns and other credits. Lannett calculates a
chargeback/rebate rate based on contractual terms with its customers and
applies this rate to customer sales. The only variable is customer mix,
and this assumption is based on historical data and sales expectations.
The chargeback/rebate reserve is reviewed on a monthly basis by management
using several ratios and calculated metrics. As we continue to obtain
additional information about our historical experience for chargebacks, rebates
and returns, we also update our estimates of the required reserves.
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. Lannett enters into agreements with
its indirect customers to establish pricing for certain products. The
indirect customers then independently select a wholesaler from which to
actually purchase the products at these agreed-upon prices. Lannett will
provide credit to the wholesaler for the difference between the agreed-upon
price with the indirect customer and the wholesalers invoice price if the
price sold to the indirect customer is lower than the direct price to the
wholesaler. This credit is called a chargeback. The provision for
chargebacks is based on expected sell-through levels by the Companys wholesale
customers to the indirect customers and estimated wholesaler inventory
levels. As sales by the Company to the large wholesale customers, such as
Cardinal Health, AmerisourceBergen, and McKesson, increase, the reserve for
chargebacks will also generally increase. However, the size of the
increase depends on the expected mix of product sales to the indirect
customers. The Company continually monitors the reserve for chargebacks and
makes adjustments when management believes that expected chargebacks on actual
sales may differ from the amounts that were assumed in the establishment of the
chargeback reserves.
Rebates
Rebates are
offered to the Companys key chain drug store and wholesaler customers to
promote customer loyalty and increase product sales. These rebate
programs provide customers with rebate 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. At the time of shipment, the Company estimates reserves for
rebates and other promotional credit programs based on the specific terms in
each agreement. The reserve for rebates increases as sales to
rebate-eligible customers are recognized and decreases when actual rebate
payments are made. However, since 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 certain
customers to return product within a specified period prior to and subsequent
to the products lot expiration date
28
Table
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in exchange for a credit to be applied to future
purchases. The Companys 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, adjusted
for any changes in business practices or conditions that would cause management
to believe that future product returns may differ from those returns assumed in
the establishment of reserves. Generally, the reserve for returns
increases as sales increase and decrease when credits are issued or payments
are made for actual returns received. The reserve for returns is included
in the rebates, chargebacks and returns payable account on the balance sheet.
Other Adjustments
Other adjustments consist primarily of
price adjustments, also known as shelf stock adjustments, which are credits
issued to reflect decreases in the selling prices of the Companys products
that customers have remaining in their inventories at the time of a price
reduction. Decreases in selling prices are discretionary decisions made
by management to reflect competitive market conditions. Amounts recorded
for estimated shelf stock adjustments are based upon specified terms with
direct customers, estimated declines 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 are included in the rebates and chargebacks
payable account on the balance sheet. When competitors enter the market
for existing products, shelf stock adjustments may be issued to maintain price
competitiveness.
The following tables identify the reserves for each
major category of revenue allowance and a summary of the activity for the three
months ended September 30, 2009 and 2008:
For the three months ended September 30,
2009
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of
June 30, 2009
|
|
$
|
6,089,802
|
|
$
|
2,537,746
|
|
$
|
5,106,992
|
|
$
|
|
|
$
|
13,734,540
|
|
Actual credits issued
related to sales recorded in prior fiscal years
|
|
(4,767,581
|
)
|
(1,852,708
|
)
|
(1,147,720
|
)
|
|
|
(7,768,009
|
)
|
Reserves or (reversals)
charged during Fiscal 2010 related to sales in prior fiscal years
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net
sales during Fiscal 2010 related to sales recorded in Fiscal 2010
|
|
10,272,936
|
|
4,066,855
|
|
1,140,128
|
|
407,784
|
|
15,887,703
|
|
Actual credits issued
related to sales recorded in Fiscal 2010
|
|
(7,000,389
|
)
|
(1,789,955
|
)
|
|
|
(407,784
|
)
|
(9,198,128
|
)
|
Reserve Balance as of
September 30, 2009
|
|
$
|
4,594,768
|
|
$
|
2,961,938
|
|
$
|
5,099,400
|
|
$
|
|
|
$
|
12,656,106
|
|
For the three months ended
September 30, 2008
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of
June 30, 2008
|
|
$
|
4,049,407
|
|
$
|
632,314
|
|
$
|
13,642,589
|
|
$
|
2,107
|
|
$
|
18,326,417
|
|
Actual credits issued
related to sales recorded in prior fiscal years
|
|
(2,865,229
|
)
|
(255,126
|
)
|
(6,425,413
|
)
|
|
|
(9,545,768
|
)
|
Reserves or (reversals)
charged during Fiscal 2009 related to sales in prior fiscal years
|
|
|
|
|
|
2,107
|
|
(2,107
|
)
|
|
|
Reserves charged to net
sales during Fiscal 2009 related to sales recorded in Fiscal 2009
|
|
9,144,349
|
|
2,949,913
|
|
1,142,474
|
|
42,957
|
|
13,279,693
|
|
Actual credits issued
related to sales recorded in Fiscal 2009
|
|
(5,129,939
|
)
|
(1,537,556
|
)
|
|
|
(40,096
|
)
|
(6,707,591
|
)
|
Reserve Balance as of
September 30, 2008
|
|
$
|
5,198,588
|
|
$
|
1,789,545
|
|
$
|
8,361,757
|
|
$
|
2,861
|
|
$
|
15,352,751
|
|
The total reserve for chargebacks, rebates, returns and other
adjustments decreased from $13,734,540 at June 30, 2009 to $12,656,106 at September 30,
2009. As of September 30, 2009 approximately $9,924,000
of the
29
Table
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original $10,545,000 return reserve recorded in Fiscal 2008 for
Prenatal Multivitamin was applied to accounts receivable for customers who had
returned the Prenatal Multivitamin product by that date, leaving a balance of
approximately $621,000 of Multivitamin returns reserve on the books at September 30,
2009. The decrease in chargeback reserves between June 30, 2009 and September 30,
2009 was due primarily to a decrease in inventory levels at wholesaler
distribution centers.
Credits issued during the quarter that relate to prior year sales are
charged against the opening balance. In
aggregate, additional reserves or reversals of reserves have historically
offset each other. The table above shows
the effects of reversals within the rebates, returns and other categories. It is the Companys intention that all
reserves be charged to sales in the period that the sale is recognized,
however, due to the nature of this estimate, it is possible that the Company
may sometimes need to increase or decrease the reserve based on prior period sales. If that were to occur, management would
disclose that information at that time.
If the historical data the Company uses and the assumptions management
makes to calculate its estimates of future returns, chargebacks, and other
credits do not accurately approximate future activity, its net sales, gross
profit, net income and earnings per share could change. However, management believes that these
estimates are reasonable based upon historical experience and current
conditions.
The rates of reserves will vary, as well as the category under which
the credit falls. This variability comes
about when the Company is working with indirect customers to compete with the
pricing of other generic companies. The
Company has improved its computer systems in order to improve the accuracy of
tracking and processing chargebacks and rebates and will continue to look at
ways for further improvements.
Improvements to automate calculation of reserves will not only reduce
the potential for human error, but also will result in more in-depth analysis
and improved customer interaction for resolution of open credits.
The rate of credits issued is monitored by the Company at least on a
quarterly basis. The Company may change
the estimate of future reserves based on the amount of credits processed, or
the rate of sales made to indirect customers.
The decrease of reserves to $12,656,106 at September 30, 2009 from
$13,734,540 at June 30, 2009 is due to the timing of credits being
processed by the customers and by the Company.
Approximately $7,768,000 or 57% of the reserve balance from June 30,
2009 has been processed through the first three months of Fiscal 2010. Approximately $207,000 of that amount relates
to credits issued due to the return by customers of the Prenatal Multivitamin
product through September 30, 2009.
Management estimates reserves based on sales mix. A comparison to wholesaler inventory reports
is performed quarterly, in order to justify the balance of unclaimed chargebacks
and rebates. The Company has historically
found a direct correlation between the calculation of the reserve based on
sales mix, and the wholesaler inventory analysis.
30
Table of Contents
Accounts Receivable
The Company performs ongoing
credit evaluations of its customers and adjusts credit limits based upon
payment history and the customers current credit worthiness, as determined by
a review of current credit information. The Company continuously monitors
collections and payments from its customers and maintains a provision for
estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified. While such credit losses
have historically been within both the Companys expectations and the
provisions established, the Company cannot guarantee that it will continue to
experience the same credit loss rates that it has in the past.
The Company also regularly
monitors accounts receivable (AR) balances by reviewing both net and gross
days sales outstanding (DSO). Net DSO
is calculated by dividing gross accounts receivable less the reserve for
rebates, chargebacks, returns and other adjustments by the average daily net
sales for the period. Gross DSO shows
the result of the same calculation without regard to rebates, chargebacks,
returns and other adjustments.
The Company monitors both net DSO
and gross DSO as an overall check on collections and to assess the
reasonableness of the reserves. Gross DSO provides management with an
understanding of the frequency of customer payments, and the ability to process
customer payments and deductions. The
net DSO calculation provides management with an understanding of the
relationship of the AR balance net of the reserve liability compared to net
sales after charges to the reserves during the period. Standard payment terms offered to customers
are consistent with industry practice at 60 days. Net eliminates the effect of timing of
processing, which is inherent in the gross DSO calculation.
The following table shows the
results of these calculations as of the relevant periods:
|
|
9/30/09
|
|
6/30/09
|
|
9/30/08
|
|
Net DSO (in days)
|
|
68
|
|
55
|
|
38
|
|
Gross DSO (in days)
|
|
62
|
|
53
|
|
61
|
|
The level of both net and gross DSO at September 30,
2009 is within the Companys expectation that DSO will be in the 60 to 70 day
range based on 60 day payment terms for most customers.
Inventories
The Company values its inventory at the lower of cost (determined by the
first-in, first-out method) or market, regularly reviews inventory quantities
on hand, and records a provision for excess and obsolete inventory based
primarily on estimated forecasts of product demand and production requirements. The Companys estimates of future product
demand may prove to be inaccurate, in which case it may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if the Companys inventory is determined to be overvalued, the Company
would be required to recognize such costs in cost of goods sold at the time of
such determination. Likewise, if inventory is determined to be undervalued, the
Company may have recognized excess cost of goods sold in previous periods and
would be required to recognize such additional operating income at the time of
sale.
Results
of Operations - Three months ended September 30, 2009 compared with three
months ended September 30, 2008
Net sales for the three
months ended September 30, 2009 (Fiscal 2010) increased 23% to
$31,435,000 from $25,568,000 for the three months ended September 30, 2008
(Fiscal 2009). The increase
was primarily due to sales of drugs used for
pain management totaling $2,880,000 as well as sales of $1,489,000 of our prescription
31
Table of Contents
vitamins
during the first quarter of Fiscal 2010.
The following factors also contributed to the $5,867,000 increase in
sales:
Medical indication
|
|
Sales volume
change %
|
|
Sales price
change %
|
|
Heart Failure
|
|
-30
|
%
|
11
|
%
|
Antibiotics
|
|
24
|
%
|
-8
|
%
|
Epilepsy
|
|
-16
|
%
|
17
|
%
|
Thyroid Deficiency
|
|
15
|
%
|
- 1
|
%
|
Pain Management
|
|
480
|
%
|
37
|
%
|
Migraine Headache
|
|
|
%
|
15
|
%
|
The
increase in product sales can be attributed primarily to four products. Sales
of drugs used for pain management increased by approximately $2,604,000 in the
first quarter of Fiscal 2010 compared to the first quarter of Fiscal 2009 due
to a market withdrawal by one of our major competitors. Sales of drugs used in the treatment of
thyroid deficiency increased by approximately $1,558,000 as a result of a
continued shift away from branded drugs towards generic prescriptions. Partially offsetting these increases was a
decrease in sales of drugs for the treatment of congestive heart failure by
approximately $1,496,000 in the first quarter of Fiscal 2010 compared to the
first quarter of Fiscal 2009. This decrease
was due to a product recall by several of our major competitors which increased
our first quarter of Fiscal 2009 revenues.
The increase in sales can also be attributed to the continued sales of
our prescription vitamins discussed above.
The Company expects to continue increasing the number
of products available for sale to its customers, which will require additional
FDA approvals. The Companys receipt of several approvals by the FDA to offer
new products has resulted in more sales of new products in Fiscal 2010 compared
to Fiscal 2009.
The
Company sells its products to customers in various categories. The table below identifies the Companys
approximate net sales to each category for the three months ended September 30,
2009 and 2008:
Customer Category
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Wholesaler/ Distributor
|
|
$
|
15,169,000
|
|
$
|
11,841,000
|
|
Retail Chain
|
|
14,732,000
|
|
11,975,000
|
|
Mail-Order Pharmacy
|
|
1,534,000
|
|
1,636,000
|
|
Private Label
|
|
|
|
116,000
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,435,000
|
|
$
|
25,568,000
|
|
The
sales to wholesaler/distributor and retail chain customer categories increased
significantly as a result of an increase in the demand for products for which
the Company is the major supplier and also an increase in the number of
products available for sale.
Cost
of sales for the first quarter increased 20% to $19,901,000 in Fiscal 2010 from
$16,566,000 in Fiscal 2009. The increase
reflected the impact of the 23% increase in sales and royalties of
approximately $440,000 primarily related to the prescription vitamins. The increase in cost of sales was less than
the increase in sales, however, due to the fixed nature of some production
costs.
Amortization expense
primarily relates to the JSP Distribution Agreement.
For the remaining five years of the
JSP
Distribution Agreement
,
the Company will incur annual amortization expense of approximately $1,785,000.
32
Table
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Gross profit margins for the first quarter of Fiscal
2010 and Fiscal 2009 were 37% and 35%, respectively. Gross profit percentage
increased due to strong profit margins on the pain management products and
prescription vitamins, as well as the fixed nature of some production
costs. While the Company is continuously
striving to keep product costs low, there can be no guarantee that profit
margins will not fluctuate in future periods.
Pricing pressure from competitors and costs of producing or purchasing
new drugs may also fluctuate in the future. Changes in the future sales product mix may also occur. These changes may
affect the gross profit percentage in future periods.
Research
and development (R&D) expenses in the first quarter increased 63% to
$3,028,000 for Fiscal 2010 from $1,863,000 for Fiscal 2009. The increase is primarily due to an increase
in production of drugs in development and preparation for submission to the FDA
as well as increased costs for biostudies.
The Company expenses all production costs as R&D until the drug is
approved by the FDA. R&D expenses
may fluctuate from period to period, based on R&D plans for submission to
the FDA.
Selling
,
general and administrative expenses in the first quarter
decreased 24% to $3,763,000 in Fiscal 2010 from $4,949,000 in Fiscal 2009. The decrease is primarily due to litigation
expenses in Fiscal 2009 related to the patent challenge with KV Pharmaceuticals
of approximately $800,000 which were not incurred in Fiscal 2010. While the
Company is focused on controlling costs, increases in personnel costs may have
an ongoing and longer lasting impact on the administrative cost structure. Other costs are being incurred to facilitate
improvements in the Companys infrastructure.
These costs are expected to be temporary investments in the future of
the Company and may not continue at the same level.
Interest
expense was flat with $70,000 recorded in the first quarter of Fiscal 2010
compared to $66,000 in Fiscal 2009.
Interest income in the first quarter decreased to $23,000 in Fiscal 2010
from $46,000 in Fiscal 2009 due to lower interest earned on investment
securities.
The
Company recorded income tax expense in the first quarter of 2010 of $1,828,000
compared to $920,000 in the first quarter of Fiscal 2009. The effective tax
rate for the three months ended September 30, 2009 was 39%, compared to
43% for the three months ended September 30, 2008.
The effective tax rate for the three months ended September 30,
2009 was a lower effective tax rate compared to September 30, 2008 due
primarily to a change in the Federal rate from the 35% statutory rate to an
estimated 34% actual rate, apportionment of income to Wyoming which has no
state income tax, and federal income tax credits.
The Company reported net
income of approximately $2,857,000 in the first quarter of Fiscal 2010, or
$0.12 basic and $0.11 diluted earnings per share, as compared to $1,226,000 in
the first quarter Fiscal 2009, or $0.05 basic and diluted earnings per share.
Liquidity
and Capital Resources
The
Company has historically financed its operations with cash flow generated from
operations, supplemented with borrowings from various government agencies and
financial institutions. At September 30,
2009, working capital was $42,266,000, as compared to $38,632,000 at June 30,
2009, an increase of $3,634,000.
Net cash
used in operating activities of $634,000 in the first three months of Fiscal
2010 reflected net income of $2,857,000, after adjusting for non-cash items of
$1,837,000, as well as cash used by changes in operating assets and liabilities
of $5,328,000. Significant changes in
operating assets and liabilities are comprised of:
·
An increase in trade
accounts receivable of $1,152,000 primarily as a result of increased sales in
Fiscal 2010. The change in the accounts
receivable balance from June 30, 2009 to September 30, 2009 includes
a non-cash decrease of approximately $207,000 related to the issuance of
credits for the returns of the multivitamin product received by the Company
through September 30, 2009.
·
An increase in inventories
of $815,000 due to increased stocking levels at both Lannett and Cody Labs for
several products as of September 30, 2009 that are being carried in order
to respond to the increased order volume we are currently experiencing.
33
Table
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·
An increase in income taxes
payable of $514,000 related to Fiscal 2010 taxable income.
·
A decrease in accounts
payable of $1,156,000 due to the timing of payments at the end of the month.
·
A decrease in rebates,
chargebacks and returns payable of $872,000 primarily as a result of a decrease
in the chargeback reserve due to lower inventory levels at wholesaler
distribution centers offset by a non-cash decrease of approximately $207,000
related to the issuance of credits for the returns of the multivitamin product
received by the Company through September 30, 2009.
·
A decrease in accrued payroll and payroll related costs of $2,195,000
primarily related to the partial payment of the Fiscal 2009 accrued incentive
compensation costs totaling approximately $3,000,000.
Net cash used in investing activities of $1,567,000 for the
three months ended September 30, 2009 reflected the purchase of property,
plant and equipment of $1,067,000 as well as the purchase of an intangible
asset (product rights) for $500,000.
Net cash used in financing activities of $19,000 for the
three months ended September 30, 2009 was primarily due to scheduled debt
repayments of $136,000. Proceeds from
the issuance of stock of $186,000 were partially offset by the purchase of
treasury stock totaling $69,000.
Long-term
debt amounts due, for the twelve month periods ended September 30 are as
follows:
Twelve
|
|
Amounts Payable
|
|
Month Periods
|
|
to Institutions
|
|
|
|
|
|
2010
|
|
$
|
357,806
|
|
2011
|
|
4,818,102
|
|
2012
|
|
274,802
|
|
2013
|
|
283,934
|
|
2014
|
|
279,293
|
|
Thereafter
|
|
1,988,546
|
|
|
|
|
|
|
|
$
|
8,002,483
|
|
The Company has a $3,000,000 line of credit from
Wachovia Bank, N.A. (Wachovia) that bears interest at the prime interest rate
less 0.25% (2.75% and 3.00% at September 30 and June 30, 2009,
respectively). As of September 30 and June 30, 2009, the Company has
$3,000,000 of availability under this line of credit. The line of credit is collateralized by
substantially all of the Companys assets.
The
existing line of credit which was scheduled to expire on November 30,
2009, was renewed and extended during the first quarter of Fiscal 2010 to November 30,
2010. As part of the renewal agreement, the Company is no
longer required to maintain any minimum deposit balances with Wachovia, and the
availability fee on the unused balance of the line of credit was reduced to
0.375%.
34
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The terms of the line of credit, the loan agreement and the
related letter of credit require that the Company meet certain financial
covenants and reporting standards, including the attainment of standard
financial liquidity and net worth ratios.
As of September 30, 2009, the Company is in compliance with all
financial covenants under the agreement.
In
July 2004, the Company received $500,000 of grant funding from the
Commonwealth of Pennsylvania, acting through the Department of Community and
Economic Development. The grant funding program requires the Company to
use the funds for machinery and equipment located at their Pennsylvania
locations, hire an additional 100 full-time employees by June 30, 2006,
operate its Pennsylvania locations a minimum of five years and meet certain
matching investment requirements. If the Company fails to comply with any
of the requirements above, the Company would be liable to repay the full amount
of the grant funding ($500,000). The Company has recorded the unearned
grant funds as a liability until the Company complies with all of the
requirements of the grant funding program. Through September 30,
2009, the Company has had preliminary discussions with the Commonwealth of
Pennsylvania to determine whether it will be required to repay any of the funds
provided under the grant fund. Based on information available at September 30,
2009, the Company has recorded the grant funding as a long-term liability under
the caption of Unearned Grant Funds.
Except as set forth in this report, the Company is not aware of any
trends, events or uncertainties that have or are reasonably likely to have a
material adverse impact on the Companys short-term or long-term liquidity or
financial condition.
Prospects for the Future
The
Company has several generic products under development. These products are all orally-administered,
topical and parenteral products designed to be generic equivalents to brand
named innovator drugs. The Companys
developmental drug products are intended to treat a diverse range of
indications. As one of the oldest
generic drug manufacturers in the country, formed in 1942, Lannett currently
owns several ANDAs for products which it does not manufacture and market. These ANDAs are dormant on the Companys
records. Occasionally, the Company
reviews such ANDAs to determine if the market potential for any of these older
drugs has recently changed, so as to make it attractive for Lannett to
reconsider manufacturing and selling it.
If the Company makes the determination to introduce one of these
products into the consumer marketplace, it must review the ANDA and related
documentation to ensure that the approved product specifications, formulation
and other factors meet current FDA requirements for the marketing of that
drug. The Company would then redevelop
the product and submit it to the FDA for supplemental approval. The FDAs approval process for ANDA
supplements is similar to that of a new ANDA.
Generally, in these situations, the Company must file a supplement to
the FDA for the applicable ANDA, informing the FDA of any significant changes
in the manufacturing process, the formulation, or the raw material supplier of
the previously-approved ANDA.
A
majority of the products in development represent either previously approved
ANDAs that the Company is planning to reintroduce (ANDA supplements), or new
formulations (new ANDAs). The products
under development are at various stages in the development cycleformulation,
scale-up, and/or clinical testing.
Depending on the complexity of the active ingredients chemical
characteristics, the cost of the raw material, the FDA-mandated requirement of
bioequivalence studies, the cost of such studies and other developmental
factors, the cost to develop a new generic product varies and can range from
$100,000 to $1.5 million. Some of
Lannetts developmental products will require bioequivalence studies, while
others will notdepending on the FDAs Orange Book classification. Since the Company has no control over the FDA
review process, management is unable to anticipate whether or when it will be
able to begin producing and shipping additional products.
The
Company views its April 2007 acquisition of Cody Laboratories, Inc. (Cody
Labs or Cody) as an important step in becoming a vertically integrated
narcotics manufacturer and distributor by allowing it to concentrate on
developing and completing its dosage form manufacturing in order to reduce
narcotic API costs.
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In
July 2008, the DEA granted Cody Labs a license to directly import raw
poppy straw for conversion into API and/or various pharmaceutical
products. Only six other companies in
the U.S. have been granted this license to date. This license allows the Company to avoid
increased costs associated with buying narcotic API from other
manufacturers. The Company anticipates
that it can use this license to become a vertically integrated manufacturer of
narcotic products, as well as a supplier of API to the pharmaceutical industry. The Company believes that the aging domestic
population may result in a higher demand for pain management pharmaceutical
products and that it will be well-positioned to take advantage of this
increased demand.
Cody
Labs manufacturing expertise in narcotic APIs will allow Lannett to build a
market with limited domestic competition.
The Company anticipates that the demand for narcotics and controlled
drugs will continue to grow with the Baby Boomer generation demographics and
that it is well-positioned to take advantage of these opportunities by
concentrating additional resources in the narcotic area.
In
addition to the efforts of its internal product development group, Lannett has
contracted with several outside firms for the formulation and development of
several new generic drug products. These
outsourced R&D products are at various stages in the development cycle
formulation, analytical method development and testing and manufacturing
scale-up. These products are
orally-administered solid dosage products, topical or parenterals intended to
treat a diverse range of medical indications.
We intend to ultimately transfer the formulation technology and
manufacturing process for all of these R&D products to our own commercial
manufacturing sites. The Company
initiated these outsourced R&D efforts to complement the progress of its
own internal R&D efforts.
Occasionally,
the Company will work on developing a drug product that does not require FDA
approval. Certain prescription drugs do
not require prior FDA approval before marketing. They include, for instance, drugs listed as
DESI drugs (Drug Efficacy Study implementation) which are under evaluation by
FDA, Grandfathered Drugs, and prescription multivitamin drugs. A generic
manufacturer may sell products which are chemically equivalent to innovator drugs,
under FDA rules by simply performing and internally documenting the normal
research and development involved in bringing a new product to market. Under this scenario, a generic company can
forego the time required for FDA approval.
More
specifically, certain products, marketed prior to the Federal Food, Drug and
Cosmetic Act may be considered GRASE or
Grandfathered. GRASE products are those old
drugs that do not require prior approval from FDA in order to be marketed
because they are generally recognized as safe and effective based on published
scientific literature. Similarly,
Grandfathered products are those which entered the market before the passage
of the 1938 act or the 1962 amendments to the act. Under the grandfather clause, such a product
is exempted from the effectiveness requirements [of the act] if its
composition and labeling have not changed since 1962 and if, on the day before
the 1962 amendments became effective, it was (1) used or sold commercially
in the United States, (2) not a new drug as defined by the act at that
time, and (3) not covered by an effective application.
The
Company has entered supply and development agreements with certain
international companies, including Wintac of India, Orion Pharma of Finland,
Azad Pharma AG and Swiss Caps of Switzerland, Pharma 2B (formerly Pharmaseed)
of Israel, as well as certain domestic companies, including Banner Pharmacaps,
Cerovene and Inverness. The Company is
currently in negotiations on similar agreements with other international
companies, through which Lannett will market and distribute products
manufactured by Lannett or by third parties.
Lannett intends to use its strong customer relationships to build its
market share for such products, and increase future revenues and income.
The
majority of the Companys R&D projects are being developed in-house under
Lannetts direct supervision and with Company personnel. Hence, the Company does not believe that its
outside contracts for product
36
Table of Contents
development
and manufacturing supply are material in nature, nor is the Company
substantially dependent on the services rendered by such outside firms.
Lannett
may increase its focus on certain specialty markets in the generic
pharmaceutical industry. Such a focus is
intended to provide Lannett customers with increased product alternatives in
categories with relatively few market participants. While there is no guarantee that Lannett has
the market expertise or financial resources necessary to succeed in such a
market specialty, management is confident that such future focus will be well
received by Lannett customers and increase shareholder value in the long run.
The
Company plans to enhance relationships with strategic business partners,
including providers of product development research, raw materials, active
pharmaceutical ingredients as well as finished goods. Management believes that mutually beneficial
strategic relationships in such areas, including potential financing
arrangements, partnerships, joint ventures or acquisitions, could allow for
potential competitive advantages in the generic pharmaceutical market. The Company plans to continue to explore such
areas for potential opportunities to enhance shareholder value.
37
Table of Contents
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has debt instruments
with variable interest rates. The
Company has a $3,000,000 line of credit from Wachovia Bank, N.A. (Wachovia)
that bears interest at the prime interest rate less 0.25% (2.75% and 3.00% at September 30
and June 30, 2009, respectively). As of September 30 and June 30,
2009, the Company has $3,000,000 of availability under this line of
credit. The line of credit is
collateralized by substantially all of the Companys assets. The agreement
contains covenants with respect to working capital, net worth and certain
ratios, as well as other covenants. The
existing line of credit which was to expire on November 30, 2009, was
renewed and extended to November 30, 2010.
The
Company invests in U.S. treasury notes, and government asset-backed securities,
all of which are exposed to interest rate fluctuations. The interest earned on these investments may
vary based on fluctuations in the interest rate.
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 SECs 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 the
Companys 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
the Companys internal control over financial reporting during the three months
ended September 30, 2009 that has materially affected, or reasonably
likely to materially affect, our internal control over financial reporting.
38
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In early June 2008, the
Company filed a declaratory judgment suit in the Federal District
Court of Delaware (Civil Action No. 08-338 (JJF)) against KV
Pharmaceuticals, DrugTech Corp., and Ther-Rx Corp (collectively KV).
The complaint sought declaratory judgment for non-infringement and
invalidity of certain patents owned by KV. The complaint further sought
declaratory judgment of anti-trust violations and federal and state unfair
competition violations for actions taken by KV in securing and enforcing these
patents. After the complaint was filed, KV countered with a
motion for a Temporary Restraining Order (TRO) to prevent the Company from
launching its Multivitamin with Mineral Capsules (MMCs), due to alleged
patent and trademark infringement issues. The TRO was heard and,
ultimately, resulted in a conclusion by the court that the Companys product
label on the MMCs should be modified. KV also countered with claims
of infringement by the Company of KVs patents seeking the Companys profits
for sales of MMCs or other monetary relief, preliminary and permanent
injunctive relief, attorneys fees and a finding of willful infringement.
On March 17, 2009 the Company and KV settled the litigation. In light of the withdrawal of KVs innovator
prenatal product, and the resulting anticipated decline in sales and declining
market for written prescription, the Company decided it was pointless to
continue the litigation and entered into the settlement arrangement with
KV. Pursuant to the settlement, the
Company will receive a license from KV and will become an authorized generic
provider. During the terms of the
license, the Company will pay KV a royalty on all future sales of its Prenatal
vitamin product. Lannett will cease
offering its Prenatal vitamin product if and when the brand is restored to the
marketplace.
In or about July 2008,
Albion International and Albion, Inc. filed suit in the United States
District Court, District of Utah (Case No. 2:08cv00515) against Lannett
asserting claims for patent and trademark infringement, as well as unfair
competition, arising out of Lannetts use of product that it purchased from
Albion and used as an ingredient in its MMC. Lannett filed a motion to
dismiss the complaint on the basis that it purchased the product from Albion
and, as such, was authorized to use the product in its MMC. The
Court granted the motion and dismissed the complaint but gave Albion leave
to file an amended complaint. On January 20, 2009, Albion filed an
amended complaint. Lannett filed an answer to the complaint
and counterclaim, asserting, among other things, that
Albion tortuously interfered with Lannetts contracts. Subsequent to
the filing of the answer and counterclaim, Lannett and
Albion reached an agreement in principal to settle the case.
Under terms of the settlement, the parties would each dismiss their claims
against each other and provide releases. On July 6, 2009, the
settlement agreement was signed and on July 13, 2009 the case was
dismissed.
Regulatory
Proceedings
The Company is engaged in
an industry which is subject to considerable government regulation relating to
the development, manufacturing and marketing of pharmaceutical products. Accordingly, incidental to its business, the
Company periodically responds to inquiries or engages in administrative and
judicial proceedings involving regulatory authorities, particularly the FDA and
the Drug Enforcement Agency.
39
Table of
Contents
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters have been submitted to a vote of the Companys security holders during
the quarter ended September 30,
2009.
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.
40
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
LANNETT
COMPANY, INC.
|
|
|
|
Dated: November 12,
2009
|
By:
|
/s/ Keith R. Ruck
|
|
|
Keith
R. Ruck
|
|
|
Vice
President of Finance and Chief Financial Officer
|
|
|
|
|
|
|
Dated: November 12,
2009
|
By:
|
/s/ Arthur P. Bedrosian
|
|
|
Arthur
P. Bedrosian
|
|
|
President and Chief Executive Officer
|
41
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Contents
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
|
42
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