NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in millions, except share data, per share data and where indicated)
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| 1. | Background and Basis of Presentation |
Background
Mallinckrodt plc (in examination under Part 10 of the Companies Act 2014 of Ireland) is a global business of multiple wholly owned subsidiaries (collectively, "Mallinckrodt" or the "Company") that develop, manufacture, market and distribute specialty pharmaceutical products and therapies. Areas of focus include autoimmune and rare diseases in specialty areas like neurology, rheumatology, hepatology, nephrology, pulmonology, ophthalmology and oncology; immunotherapy and neonatal respiratory critical care therapies; analgesics; cultured skin substitutes and gastrointestinal products.
The Company operates in two reportable segments, which are further described below:
•Specialty Brands includes innovative specialty pharmaceutical brands; and
•Specialty Generics includes niche specialty generic drugs and active pharmaceutical ingredients ("API(s)").
The Company owns or has rights to use the trademarks and trade names that are used in conjunction with the operation of its business. One of the more important trademarks that the Company owns or has rights to use that appears in this Quarterly Report on Form 10-Q is "Mallinckrodt," which is a registered trademark or the subject of pending trademark applications in the United States ("U.S.") and other jurisdictions. Solely for convenience, the Company only uses the ™ or ® symbols the first time any trademark or trade name is mentioned in the following notes. Such references are not intended to indicate in any way that the Company will not assert, to the fullest extent permitted under applicable law, its rights to its trademarks and trade names. Each trademark or trade name of any other company appearing in the following notes is, to the Company's knowledge, owned by such other company.
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and entities in which they own or control more than 50.0% of the voting shares, or have the ability to control through similar rights. In the opinion of management, all adjustments necessary for a fair statement of results of operations, cash flows and financial position have been made. All intercompany balances and transactions have been eliminated in consolidation and all normal recurring adjustments necessary for a fair presentation have been included in the results reported.
The results of entities disposed of are included in the unaudited condensed consolidated financial statements up to the date of disposal, and where appropriate, these operations have been reported in discontinued operations. Divestitures of product lines and businesses not meeting the criteria for discontinued operations have been reflected in operating loss.
The fiscal year-end balance sheet data was derived from audited consolidated financial statements, but does not include all of the annual disclosures required by GAAP; accordingly these unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 30, 2022 filed with the SEC on March 3, 2023 ("Annual Report on Form 10-K").
Voluntary Filing Under Chapter 11 and Going Concern
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
On August 28, 2023, Mallinckrodt plc and certain of its subsidiaries voluntarily initiated proceedings ("2023 Chapter 11 Cases") under the chapter 11 of title 11 ("Chapter 11") of the United States Code ("Bankruptcy Code") in the U.S. Bankruptcy Court for the District of Delaware ("Bankruptcy Court") with a prepackaged Chapter 11 plan of reorganization (as may be amended or supplemented from time to time in accordance with its terms, including the Amended 2023 Plan (as defined in Note 2), the "2023 Plan") as contemplated by the restructuring support agreement ("RSA") dated as of August 23, 2023, by and among the Company, certain of its subsidiaries, certain creditors and the Opioid Master Disbursement Trust II ("Trust"). As contemplated by the 2023 Plan
and the RSA, on September 20, 2023, the directors of Mallinckrodt plc initiated examinership proceedings with respect to Mallinckrodt plc ("Irish Examinership Proceedings") by presenting a petition ("Examinership Petition") to the High Court of Ireland pursuant to Section 510(1)(b) of the Companies Act 2014 of Ireland seeking the appointment of an examiner to Mallinckrodt plc ("Examiner"). The references to the 2023 Chapter 11 Cases included within this Quarterly Report on Form 10-Q shall include, where applicable, the Irish Examinership Proceedings.
See Note 2 for further information on the 2023 Chapter 11 Cases, the RSA, the 2023 Plan and the Irish Examinership Proceedings.
Substantial doubt about the Company's ability to continue as a going concern exists in light of its 2023 Chapter 11 Cases. The Company's ability to continue as a going concern is contingent upon, among other things, its ability to implement the 2023 Plan and the 2023 Scheme of Arrangement (as defined below), emerge from the 2023 Chapter 11 Cases and generate sufficient liquidity following the reorganization to meet its obligations, most notably its restructured debt obligations, and operating needs.
Although management believes that the reorganization of the Company through the 2023 Chapter 11 Cases will appropriately position the Company upon emergence, the commencement of the 2023 Chapter 11 Cases constituted an event of default under certain of the Company's debt agreements, enforcement of any remedies in respect of which is automatically stayed as a result of the 2023 Chapter 11 Cases. There are a number of risks and uncertainties associated with the 2023 Chapter 11 Cases, including, among others that: (a) the 2023 Plan may never become effective, (b) the RSA may be terminated by one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (d) the 2023 Chapter 11 Cases may be converted into cases under chapter 7 of the Bankruptcy Code.
Although the Bankruptcy Court has entered an order ("Confirmation Order") confirming the Amended 2023 Plan proposed by the 2023 Debtors (as defined in Note 2), consummation of the 2023 Plan and the transactions contemplated thereby and emergence from the 2023 Chapter 11 Cases remains subject to the satisfaction of various conditions, including that the High Court of Ireland will make an order in the Irish Examinership Proceedings pursuant to Section 541 of the Companies Act 2014 of Ireland confirming the scheme of arrangement between Mallinckrodt, its shareholders and certain of its creditors that is currently being formulated by the Examiner based on and consistent in all respects with the 2023 Plan ("2023 Scheme of Arrangement"), and that the 2023 Scheme of Arrangement will become effective in accordance with its terms (or will become effective concurrently with the effectiveness of the 2023 Plan). Accordingly, no assurance can be given that the 2023 Plan or the transactions contemplated thereby will be consummated or that the Company will successfully emerge from the 2023 Chapter 11 Cases. As a result, the Company has concluded that management's plans at this stage do not alleviate substantial doubt about the Company's ability to continue as a going concern.
The unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.
Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, the 2023 Debtors retain control of their assets and are authorized to operate their business as debtors-in-possession while being subject to the jurisdiction of the Bankruptcy Court. While operating as debtors-in-possession under Chapter 11, the 2023 Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to applicable orders of the Bankruptcy Court, for amounts other than those reflected in the accompanying unaudited condensed consolidated financial statements. Any such actions occurring during the 2023 Chapter 11 Cases authorized by the Bankruptcy Court could materially impact the amounts and classifications of assets and liabilities reported in the Company's unaudited condensed consolidated financial statements. For more information regarding the 2023 Chapter 11 Cases, see Note 2.
Previous Chapter 11 Cases
On October 12, 2020, Mallinckrodt plc and substantially all of its U.S. subsidiaries, including certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business and the Specialty Brands business, and certain of its international subsidiaries (collectively, the "2020 Debtors") voluntarily initiated proceedings ("2020 Chapter 11 Cases") under Chapter 11 the Bankruptcy Code. On March 2, 2022, the Bankruptcy Court entered an order confirming the fourth amended plan of reorganization (with technical modifications) ("2020 Plan"). Subsequent to the filing of the 2020 Chapter 11 Cases, Chapter 11 proceedings commenced by a limited subset of the 2020 Debtors were recognized and given effect in Canada, and separately the High Court of Ireland made an order confirming a scheme of arrangement on April 27, 2022, which was based on and consistent in all respects with the 2020 Plan ("2020 Scheme of Arrangement"). On June 8, 2022, the Bankruptcy Court entered an order approving a minor modification to the 2020 Plan. The 2020 Plan became effective on June 16, 2022 ("Effective Date of the 2020 Chapter 11 Cases"), and on such date the Company emerged from the Chapter 11 and the 2020 Scheme of Arrangement became effective concurrently.
Upon emergence from the 2020 Chapter 11 Cases, the Company adopted fresh-start accounting in accordance with the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 852 - Reorganizations, and became a new entity for financial reporting purposes as of the Effective Date of the 2020 Chapter 11 Cases. References to "Successor" relate to the financial position as of June 16, 2022 and results of operations of the reorganized Company subsequent to June 16, 2022, while references to "Predecessor" relate to the financial position prior to June 16, 2022 and results of operations of the Company prior
to, and including, June 16, 2022. All emergence-related transactions of the Predecessor were recorded as of June 16, 2022. Accordingly, the unaudited condensed consolidated financial statements for the Successor are not comparable to the unaudited condensed consolidated financial statements for the Predecessor.
Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of December. Unless otherwise indicated, the three and nine months ended September 29, 2023 (Successor) refers to the thirteen and thirty-nine week period ended September 29, 2023 (Successor). The three months ended September 30, 2022 (Successor) and the period June 17, 2022 through September 30, 2022 (Successor) reflect the Successor periods, while the period January 1, 2022 through, and including, June 16, 2022 reflects the Predecessor period.
Voluntary Filing Under Chapter 11 and Examinership Proceedings
As contemplated by the RSA, and with the authorization of the Company’s board of directors, on August 28, 2023 ("Petition Date"), the Company and certain of its subsidiaries voluntarily initiated the 2023 Chapter 11 Cases under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court with the 2023 Plan. The entities that filed the 2023 Chapter 11 Cases include Mallinckrodt plc, substantially all of its U.S. subsidiaries, including the Specialty Generics business and Specialty Brands business, and certain of its international subsidiaries (collectively, the "2023 Debtors").
It is a condition precedent to the consummation of the 2023 Plan that the High Court of Ireland shall make an order pursuant to Section 541 of the Companies Act 2014 of Ireland confirming the 2023 Scheme of Arrangement, and that the 2023 Scheme of Arrangement shall become effective in accordance with its terms (or shall become effective concurrently with the effectiveness of the 2023 Plan). As contemplated by the 2023 Plan, and in furtherance of the satisfaction of such condition precedent, on September 20, 2023 the directors of Mallinckrodt plc initiated the Irish Examinership Proceedings. On the same date, following an ex parte application made by the directors of Mallinckrodt plc, the High Court of Ireland made an order appointing the Examiner on an interim basis, which appointment was subsequently confirmed by an Order of the High Court of Ireland on October 2, 2023. Refer to Note 15 for further information on the Irish Examinership Proceedings.
During the continuance of the Irish Examinership Proceedings, Mallinckrodt will be under the protection of the High Court of Ireland. During the period of court protection, no proceedings can be commenced in Ireland to wind up Mallinckrodt, and no action can be taken by creditors to enforce security or take possession of any assets of Mallinckrodt, without the consent of the Examiner. The period of court protection will subsist for an initial 70 days, which can, in certain circumstances, be extended by order of the High Court of Ireland for a further 30 days.
Information about the 2023 Chapter 11 Cases, including the case docket, may be found free of charge at https://restructuring.ra.kroll.com/mallinckrodt2023/.
The 2023 Chapter 11 Cases are being jointly administered under the caption In re Mallinckrodt plc, Case No. 23-11258. During the pendency of the 2023 Chapter 11 Cases, the 2023 Debtors continue to operate their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As debtors-in-possession, the 2023 Debtors are authorized to continue to operate as ongoing business, and may pay all debts and honor all obligations arising in the ordinary course of their businesses after the Petition Date. The 2023 Debtors may not pay third-party claims or creditors on account of obligations arising before the Petition Date or engage in transactions outside the ordinary course of business without approval of the Bankruptcy Court.
Under the Bankruptcy Code, third-party actions to collect pre-petition indebtedness owed by the 2023 Debtors, as well as most litigation pending against the Company as of the Petition Date, are subject to an automatic stay. However, under the Bankruptcy Code, certain regulatory or criminal proceedings generally are not subject to the automatic stay and may continue unless otherwise ordered by the Bankruptcy Court. Refer to Note 15 "Confirmation of Plan of Reorganization" for a summary of the anticipated distributions to the 2023 Debtors' creditors and interest holders under the 2023 Plan.
Under the Bankruptcy Code, the 2023 Debtors may assume, modify, assign or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and to certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the 2023 Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the 2023 Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease in this Quarterly Report on
Form 10-Q, including, where applicable, the express termination rights thereunder or a quantification of their obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights the 2023 Debtors have under the Bankruptcy Code.
Restructuring Support Agreement
On August 23, 2023, the 2023 Debtors entered into the RSA with creditors holding approximately 72% of the aggregate principal amount of the 2023 Debtors’ first lien funded debt and approximately 71% of the aggregate principal amount of the 2023 Debtors’ second lien funded debt and the Trust (collectively, the "Supporting Parties"), which has subsequently received support from creditors holding approximately 90% of each of the 2023 Debtors' first and second lien funded debt.
The RSA reflects an agreement by the Supporting Parties to support the 2023 Plan through the 2023 Chapter 11 Cases, which provides for the following:
•A new post-petition senior secured debtor-in-possession multi-draw, fully-backstopped priming term loan financing facility providing new funds in the amount of $250.0 million, which will be, either repaid in cash at emergence (to the extent cash on hand at emergence is above a specified threshold as further described in the 2023 Plan) or converted into first-out takeback debt;
•A post-petition receivables financing facility of up to $200.0 million, which will be repaid in cash in the ordinary course or at emergence;
•The reduction of first lien term debt from $2,861.8 million to $1,650.0 million, which will be in the form of takeback debt distributed to post-petition term lenders and pre-petition first lien creditors;
•The pre-petition first lien creditors will also receive 92.3% of the 2023 Debtors’ reorganized equity (subject to dilution by any management incentive plan that may be adopted in connection with emergence ("MIP") and the contingent value rights ("CVRs"), as defined below, if equity settled), plus cash (to the extent cash on hand at emergence is above a specified threshold as further described in the 2023 Plan) and second-out takeback debt;
•The elimination of pre-petition second lien debt in its entirety, with pre-petition second lien creditors receiving 7.7% of the 2023 Debtors’ reorganized equity (subject to dilution by the MIP and the CVRs if equity settled);
•The permanent elimination of the 2023 Debtors’ remaining opioid-related litigation settlement payment obligations (including the $200.0 million installment payment originally due on June 16, 2023) subject to the Company (a) making a $250.0 million payment to the Trust prior to the commencement of the 2023 Chapter 11 Cases (which was made on August 24, 2023) and (b) entering into an agreement ("CVR Agreement") for 4-year CVRs to receive a payment (in cash or, at the Company’s option subject to certain conditions, shares of the Company’s reorganized equity) equal to the value of 5% of the Company’s total outstanding equity (subject to certain dilution) less the exercise price, which will be based on a total enterprise value of $3.776 billion less funded debt at emergence plus any excess cash at emergence after the emergence-date cash sweep contemplated by the RSA;
•The 2023 Debtors’ non-monetary obligations to the Trust will generally be preserved, including the compliance-related operating injunction;
•All other claims against the 2023 Debtors (with the exception of subordinated securities claims) will be treated as unimpaired, including the Debtors’ settlement under the 2020 Plan with governmental entities regarding Acthar® Gel, and the associated Corporate Integrity Agreement, and also trade liabilities; and
•The cancellation of Mallinckrodt ordinary shares for no consideration.
Pursuant to the RSA, each of the 2023 Debtors and the Supporting Parties made certain customary commitments to each other in connection with the pursuit of the transactions contemplated by the term sheets attached thereto. The 2023 Debtors agreed to, among other things, use commercially reasonable efforts to make all requisite filings with the Bankruptcy Court, continue to involve and update the Supporting Parties’ representatives in the bankruptcy process and satisfy certain other covenants. The Supporting Parties committed to support and vote for the 2023 Plan and agreed to use commercially reasonable efforts to take, or refrain from taking, certain actions in furtherance of such support, including an agreement that the forbearance period under the previously disclosed forbearance agreements entered into on August 15, 2023 with requisite majorities of the Company’s term lenders and noteholders will continue until termination of the RSA. Similarly, the 2023 Debtors’ prior obligation to pay the Trust the $200.0 million installment payment originally due on June 16, 2023 pursuant to the opioid deferred cash payments agreement, dated as of June 16, 2022, by and among the Company and the Trust ("Opioid Deferred Cash Payments Agreement") ceased to be outstanding upon effectiveness of the RSA and all remaining opioid-related litigation settlement payment obligations were replaced with the $250.0 million payment that was made to the Trust prior to the commencement of the 2023 Chapter 11 Cases and the agreement to issue the CVRs described above.
The RSA contains milestones for the progress of the 2023 Chapter 11 Cases in the Bankruptcy Court, which include the dates by which the 2023 Debtors are required to, among other things, obtain certain orders of the Bankruptcy Court and consummate the 2023 Debtors’ restructuring. Among other dates set forth in the RSA, the RSA contemplates that the Bankruptcy Court shall have entered an
order confirming the 2023 Plan no later than 50 days after the Petition Date (which occurred on October 10, 2023) and that the 2023 Debtors shall have emerged from bankruptcy no later than 90 days after the Petition Date.
Each of the parties to the RSA may terminate the RSA (and thereby their support for the 2023 Plan) under certain limited circumstances. Any 2023 Debtor may terminate the RSA upon, among other circumstances: (i) its board of directors reasonably determining in good faith, after consultation with legal counsel, that performance under the RSA would be inconsistent with its fiduciary duties or duties as directors under applicable law; and (ii) certain actions by the Bankruptcy Court, including dismissing the 2023 Chapter 11 Cases or converting the 2023 Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code.
The Supporting Parties also have specified termination rights, including, among other circumstances, termination rights that arise if any of the milestones have not been achieved, extended or waived. The Supporting Parties’ termination rights may be exercised by the requisite thresholds of the applicable Supporting Parties specified in the RSA. Termination by one of these creditor groups will result in the termination of the RSA as to such terminating group only, with the RSA remaining in effect with respect to the 2023 Debtors and the non-terminating groups.
The transactions contemplated by the RSA remain subject to certain conditions, including the completion of the Irish Examinership Proceedings. Accordingly, no assurance can be given that the transactions described therein will be consummated.
First Day Motions
On August 30, 2023, the 2023 Debtors received Bankruptcy Court approval of their customary motions filed on the Petition Date ("First Day Motions") on an interim basis seeking court authorization to continue to support their business operations during the 2023 Chapter 11 Cases, including the continued payment of employee wages and benefits without interruption, payment of trade vendors, continuation of customer programs, continuation of use of existing cash management programs and authorization of the Company's $250.0 million post-petition, super-priority debtor-in-possession financing facility. The First Day Motions were subsequently approved by the Bankruptcy Court on a final basis at hearings.
Confirmed Plan of Reorganization
On September 22, 2023, in accordance with the RSA and the 2023 Plan, the Company filed a supplement to the 2023 Plan with the Bankruptcy Court, which includes, among other things, (a) a term sheet setting forth certain preliminary terms in respect of the corporate governance and related matters of the Company, as reorganized pursuant to and under the 2023 Plan ("Governance Term Sheet"), (b) certain governing documents for certain of the Company’s subsidiaries, (c) certain key terms in respect of the takeback debt related to the exit financing to be entered into by the Company, as reorganized pursuant to and under the 2023 Plan ("Exit Financing Documentation"), and (d) a draft of the CVR Agreement. After receiving information regarding the potential syndicated financing contemplated by the RSA, members of the ad hoc first lien term loan group and the members of the ad hoc crossover group did not consent to the 2023 Debtors’ pursuit of the syndicated exit financing, and therefore the Company expects to issue takeback debt at emergence. The form of constitution to be adopted by the Company, as reorganized pursuant to and under the 2023 Plan, reflecting the applicable terms of the Governance Term Sheet, forms part of the 2023 Scheme of Arrangement (as defined below). As of November 7, 2023, the Company has not finalized the terms with respect to the remaining terms of the Governance Term Sheet, the Exit Financing Documentation or the CVR Agreement, and such documents remain under negotiation by the applicable parties to the RSA and will be filed with the Bankruptcy Court in a subsequent 2023 Plan supplement once available.
On September 29, 2023, the 2023 Debtors filed the First Amended Prepackaged Joint Chapter 11 Plan of Reorganization of Mallinckrodt Plc and Its Debtor Affiliates (as may be amended or supplemented from time to time in accordance with its terms, the "Amended 2023 Plan") in the 2023 Chapter 11 Cases in the Bankruptcy Court. Refer to Note 15 for details on the subsequent confirmation of the Amended 2023 Plan.
Event of default
The commencement of the 2023 Chapter 11 Cases constituted an event of default under certain of the Company’s debt agreements. Subject to any applicable provisions of the Bankruptcy Code, the Company’s debt instruments and agreements provide that, as a result of the commencement of the 2023 Chapter 11 Cases, the principal amount, together with accrued and unpaid interest thereon, and in the case of the indebtedness outstanding under the senior notes, premium, if any, thereon, shall be immediately due and payable. Accordingly, all long-term debt was classified as current on the unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor). However, any efforts to enforce payment obligations under the debt instruments are automatically stayed as a result of the 2023 Chapter 11 Cases and the creditors’ rights in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. The commencement of the 2023 Chapter 11 Cases would constitute an event of default under the receivables financing facility due December 2023 ("ABL Credit Agreement") but for certain amendments thereto, entered into prior to the date hereof (as further described in Note 10).
Financial Reporting in Reorganization
Effective on the Petition Date, the Company began to apply FASB ASC Topic 852 - Reorganizations, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions directly associated with the reorganization from activities related to the ongoing operations of the business within the financial statements for periods subsequent to the Petition Date. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as reorganization items, net in the unaudited condensed consolidated statements of operations. In addition, the unaudited condensed consolidated balance sheet must distinguish pre-petition liabilities subject to compromise ("LSTC") of the 2023 Debtors from pre-petition liabilities that are not subject to compromise, post-petition liabilities, and liabilities of the subsidiaries of the Company that are not debtors in the 2023 Chapter 11 Cases. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired pursuant to the 2023 Chapter 11 Cases, the Company has classified the entire amount of the claim as LSTC.
Furthermore, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession, actions to enforce or otherwise effect the payment of certain claims against the 2023 Debtors in existence before the Petition Date are stayed while the 2023 Debtors continue business operations as debtors-in-possession. These claims are reflected as LSTC in the unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor). Additional claims (which could be LSTC) may arise after the Petition Date resulting from the rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreement by parties-in-interest) of allowed claims for contingencies and other disputed amounts.
Certain subsidiary entities are not debtors under the 2023 Chapter 11 Cases. However, the assets and liabilities, operating results and cash flows of the non-debtor entities included in the unaudited condensed consolidated financial statements are insignificant. Therefore, the unaudited condensed consolidated financial statements presented herein materially represent the unaudited condensed combined financial statements of the 2023 Debtor entities for all periods presented and unaudited condensed combined financial statements of the 2023 Debtors are not separately presented in the notes to the unaudited condensed combined financial statements.
Non-debtor entity intercompany balances from/due to the 2023 Debtors as of September 29, 2023 (Successor) was as follows:
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| |
| |
| Intercompany receivables | $ | 25.9 | |
| Intercompany payables | 190.7 | |
The intercompany balances were primarily attributable to the Company's centralized approach to cash management and financing of its operations. The permission to continue the use of existing cash management systems during the pendency of the 2023 Chapter 11 Cases was approved by the Bankruptcy Court on a final basis as part of certain First Day Motions.
The Company is currently assessing whether or not it qualifies for fresh-start accounting upon emergence from the 2023 Chapter 11 Cases. If the Company were to meet the requirements to adopt the fresh-start accounting rules, its assets and liabilities would be recorded at fair value as of the fresh-start reporting date, which may differ materially from the recorded values of assets and liabilities on its unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor).
Notice of Delisting
On September 6, 2023, New York Stock Exchange ("NYSE") Regulation filed a Form 25 with the SEC to delist the Company's ordinary shares from NYSE American LLC. The delisting was effective on September 16, 2023. The deregistration of the ordinary shares under Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") will be effective 90 days, or such shorter period as the SEC may determine, after the filing date of the Form 25, at which point the ordinary shares will be deemed registered under Section 12(g) of the Exchange Act. The Company's ordinary shares began trading in the market for unlisted securities on August 29, 2023 under the symbol "MNKTQ."
Liabilities Subject to Compromise
As a result of the commencement of the 2023 Chapter 11 Cases, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to the 2023 Plan. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the 2023 Debtors the authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the 2023 Debtors' business and assets.
The determination of how liabilities will ultimately be settled or treated cannot be made until the 2023 Plan becomes effective. Accordingly, the ultimate amount of such liabilities is not determinable at this time. Pre-petition liabilities that are subject to
compromise to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as LSTC are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Liabilities subject to compromise at the end of the period consisted of the following:
| | | | | |
| Successor |
| September 29,
2023 |
Accrued interest (1) | $ | 159.0 | |
Debt (2) | 3,512.0 | |
| |
Acthar Gel-Related Settlement (3) | 236.1 | |
| |
Opioid-Related Litigation Settlement (4) | 1,025.0 | |
| Total liabilities subject to compromise | $ | 4,932.1 | |
(1)Accrued interest includes $14.9 million and $108.9 million related to makewhole settlement allowed claims with the 2025 and 2028 first lien senior secured noteholders, respectively, prescribed for per the RSA and 2023 Plan.
(2)The Company expensed $377.6 million to adjust the carrying value up to the principal value or estimated allowed claim amount and recorded the expense within in reorganization items, net in the unaudited condensed consolidated statement of operations for the three months ended September 29, 2023 (Successor).
(3)The Company expensed $145.0 million as reorganization items, net to adjust the present value of the Acthar Gel-Related Settlement liability to its estimated allowed claim amount during the three months ended September 29, 2023 (Successor). This settlement obligation is listed as unimpaired in the 2023 Plan, but is classified as LSTC in accordance with ASC 852 given it is unsecured and its ultimate treatment is dependent upon the effectuation of the 2023 Plan.
(4)The Company expensed $598.4 million as reorganization items, net to adjust the present value of the Opioid-Related Litigation Settlement liability to its estimated allowed claim amount during the three months ended September 29, 2023 (Successor). This settlement obligation is classified as LSTC in accordance with ASC 852 given it is unsecured and its ultimate permanent elimination is dependent upon the effectuation of the 2023 Plan. Refer to Note 12 for further information.
Contractual interest
While the 2023 Chapter 11 Cases are pending, the Company is not accruing interest on its second lien senior secured notes as of the Petition Date on a go-forward basis as the 2023 Debtors do not anticipate making interest payments due under the respective debt instruments. The total aggregate amount of interest payments due under the Company's second lien senior secured notes for the three months ended September 29, 2023, which the Company did not pay, was $40.6 million. The 2023 Debtors expect to pay all interest payments in full as they come due under their respective first lien senior secured debt instruments.
Reorganization items, net
Reorganization items, net, represent amounts incurred after the Petition Date as a direct result of the 2023 Chapter 11 Cases and are comprised of bankruptcy-related professional fees, debt valuation adjustments and adjustments to reflect the carrying value of LSTC at their estimated allowed claim amounts, as such adjustments are approved by the Bankruptcy Court. Such adjustments include non-cash adjustments associated with the Company's debt and settlement obligations in order to reflect the estimated allowed claim amount of these liabilities within LSTC, a makewhole settlement entered into with the Company's first lien senior secured noteholders as described in the RSA, and a backstop premium on the DIP Credit Agreement (as defined in Note 10).
Also included within reorganization items, net are amounts incurred after the Effective Date of the 2020 Chapter 11 Cases that directly resulted from the 2020 Chapter 11 Cases and were comprised of professional fees associated with the implementation of the 2020 Plan during the Successor period and expenses primarily driven by the loss on application of fresh-start accounting, gain on settlement of LSTC and professional and lender fees during the Predecessor period.
Cash paid for reorganization items, net, related to the 2023 Chapter 11 Cases for the nine months ended September 29, 2023 (Successor) was $2.1 million. Cash paid for reorganization items, net, related to the 2020 Chapter 11 Cases for the period from January 1, 2022 through June 16, 2022 (Predecessor) was $304.1 million.
Reorganization items, net, were comprised of the following:
| | | | | | | | | | | |
| Successor |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 |
| Professional fees | $ | 17.4 | | | $ | 14.2 | |
| | | |
| Debt valuation adjustments | 426.9 | | | — | |
| Adjustments of other claims | 867.2 | | | — | |
| Total reorganization items, net | $ | 1,311.5 | | | $ | 14.2 | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 |
| Gain on settlements of LSTC | $ | — | | | $ | — | | | | $ | (943.7) | |
| Loss on fresh-start adjustments | — | | | — | | | | 1,354.6 | |
| Professional and other service provider fees | 27.0 | | | 17.7 | | | | 161.1 | |
| Success fees for professional service providers | — | | | — | | | | 44.3 | |
| Write off of prepaid premium for directors' and officers' insurance policies | — | | | — | | | | 9.2 | |
Debt valuation adjustments | 426.9 | | | — | | | | — | |
| Adjustments of other claims | 867.2 | | | — | | | | 5.4 | |
| Total reorganization items, net | $ | 1,321.1 | | | $ | 17.7 | | | | $ | 630.9 | |
| | | | | |
| 3. | Revenue from Contracts with Customers |
Product Sales Revenue
See Note 14 for presentation of the Company's net sales by product family.
Reserves for variable consideration
The following table reflects activity in the Company's sales reserve accounts:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Rebates and Chargebacks (1) | | Product Returns | | Other Sales Deductions | | Total |
| Balance as of December 31, 2021 (Predecessor) | $ | 241.8 | | | $ | 21.5 | | | $ | 9.5 | | | $ | 272.8 | |
| Provisions | 693.4 | | | 5.2 | | | 17.1 | | | 715.7 | |
| Payments or credits | (684.6) | | | (8.1) | | | (18.9) | | | (711.6) | |
| Balance as of June 16, 2022 (Predecessor) | $ | 250.6 | | | $ | 18.6 | | | $ | 7.7 | | | $ | 276.9 | |
| | | | | | | |
| | | | | | | |
| Balance as of June 17, 2022 (Successor) | $ | 250.6 | | | $ | 18.6 | | | $ | 7.7 | | | $ | 276.9 | |
| Provisions | 429.9 | | | 3.1 | | | 26.8 | | | 459.8 | |
| Payments or credits | (462.4) | | | (4.3) | | | (11.2) | | | (477.9) | |
| Balance as of September 30, 2022 (Successor) | $ | 218.1 | | | $ | 17.4 | | | $ | 23.3 | | | $ | 258.8 | |
| | | | | | | |
| Balance as of December 30, 2022 (Successor) | $ | 265.3 | | | $ | 16.0 | | | $ | 12.7 | | | $ | 294.0 | |
| Provisions | 1,150.5 | | | 8.5 | | | 36.1 | | | 1,195.1 | |
| Payments or credits | (1,185.1) | | | (11.2) | | | (36.0) | | | (1,232.3) | |
| Balance as of September 29, 2023 (Successor) | $ | 230.7 | | | $ | 13.3 | | | $ | 12.8 | | | $ | 256.8 | |
(1)Includes $57.2 million and $89.3 million of accrued Medicaid and $35.9 million and $55.3 million of accrued rebates as of September 29, 2023 (Successor) and December 30, 2022 (Successor), respectively, included within accrued and other current liabilities in the unaudited condensed consolidated balance sheets.
Product sales transferred to customers at a point in time and over time were as follows:
| | | | | | | | | | | | | | |
| Successor | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | |
| Product sales transferred at a point in time | 85.1 | % | | 82.4 | % | | | |
| Product sales transferred over time | 14.9 | | | 17.6 | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 |
| Product sales transferred at a point in time | 83.1 | % | | 82.6 | % | | | 80.8 | % |
| Product sales transferred over time | 16.9 | | | 17.4 | | | | 19.2 | |
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue from contracts extending greater than one year for certain of the Company's hospital products that are expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of September 29, 2023 (Successor):
| | | | | |
| Remainder of Fiscal 2023 | $ | 12.6 | |
| Fiscal 2024 | 35.4 | |
| Fiscal 2025 | 17.4 | |
| Thereafter | 0.2 | |
Product Royalty Revenues
The Company licenses certain rights to Amitiza® (lubiprostone) ("Amitiza") to third parties in exchange for royalties on net sales of the product. The Company receives a double-digit royalty based on a percentage of the gross profits of the licensed products sold during the term of the agreements. The Company recognizes such royalty revenue as the related sales occur. The associated royalty revenue recognized was as follows:
| | | | | | | | | | | | | | | | | | |
| Successor | | | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | | | | | |
| Royalty revenue | $ | 0.2 | | | $ | 18.2 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | | | |
| Royalty revenue | $ | 4.0 | | | $ | 21.2 | | | | $ | 34.9 | | | | | |
| | | | | |
| 4. | Restructuring and Related Charges |
During fiscal 2021 and 2018, the Company launched restructuring programs designed to improve its cost structure, neither of which has a specified time period. Charges of $50.0 million to $100.0 million were provided for under the 2021 program and $100.0 million to $125.0 million were provided for under the 2018 program. The 2021 program will commence upon substantial completion of the 2018 program, and has not commenced as of September 29, 2023 (Successor).
Net restructuring and related charges by segment were as follows:
| | | | | | | | | | | | | | | | | | |
| Successor | | | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | | | | | |
| | | | | | | | | | |
Specialty Generics | $ | — | | | (0.2) | | | | | | | | |
Corporate | (0.1) | | | 2.4 | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Restructuring charges, net | $ | (0.1) | | | $ | 2.2 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | | | |
| | | | | | | | | | |
Specialty Generics | $ | — | | | $ | (0.2) | | | | $ | 3.5 | | | | | |
Corporate | 1.7 | | | 3.5 | | | | 6.1 | | | | | |
| Restructuring and related charges, net | 1.7 | | | 3.3 | | | | 9.6 | | | | | |
| Less: accelerated depreciation | (0.8) | | | — | | | | — | | | | | |
| Restructuring charges, net | $ | 0.9 | | | $ | 3.3 | | | | $ | 9.6 | | | | | |
Net restructuring and related charges by program were comprised of the following:
| | | | | | | | | | | | | | |
| Successor | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | |
2018 Program | $ | (0.1) | | | $ | 2.2 | | | | |
| | | | | | |
| | | | | | |
Less: non-cash charges, including accelerated depreciation | — | | | (0.7) | | | | |
| Total charges expected to be settled in cash | $ | (0.1) | | | $ | 1.5 | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 |
2018 Program | $ | 1.7 | | | $ | 3.3 | | | | $ | 9.6 | |
| | | | | | |
| | | | | | |
Less: non-cash charges, including accelerated depreciation | (0.8) | | | (0.9) | | | | (3.6) | |
| Total charges expected to be settled in cash | $ | 0.9 | | | $ | 2.4 | | | | $ | 6.0 | |
The following table summarizes cash activity for restructuring reserves for the 2018 Program, which primarily related to employee severance and benefits:
| | | | | |
| 2018 Program |
| Balance as of December 30, 2022 (Successor) | $ | 4.6 | |
Charges from continuing operations | 1.3 | |
Changes in estimate from continuing operations | (0.4) | |
Cash payments | (5.4) | |
| Balance as of September 29, 2023 (Successor) | $ | 0.1 | |
As of September 29, 2023 (Successor), net restructuring and related charges incurred cumulative to date for the 2018 Program were as follows:
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| Specialty Brands | $ | — | | | | $ | 3.1 | | | |
| Specialty Generics | 0.8 | | | | 18.5 | | | |
| Corporate | 12.9 | | | | 84.0 | | | |
| | | | | | |
| $ | 13.7 | | | | $ | 105.6 | | | |
All of the restructuring reserves were included in accrued and other current liabilities on the Company's unaudited condensed consolidated balance sheets. Amounts paid in the future may differ from the amount currently recorded.
The Company's income tax expense (benefit) was as follows:
| | | | | | | | | | | | | | | | | | |
| Successor | | | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | | | | | |
| Current tax expense (benefit) | $ | 10.8 | | | $ | (20.5) | | | | | | | | |
| Deferred tax expense (benefit) | — | | | (4.4) | | | | | | | | |
| Income tax expense (benefit) | $ | 10.8 | | | $ | (24.9) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | | | |
| Current tax expense (benefit) | $ | 32.6 | | | $ | (23.8) | | | | $ | (23.9) | | | | | |
| Deferred tax expense (benefit) | 475.5 | | | (10.8) | | | | (473.4) | | | | | |
| Income tax expense (benefit) | $ | 508.1 | | | $ | (34.6) | | | | $ | (497.3) | | | | | |
As further discussed in Note 1, the Company concluded that there is substantial doubt about its ability to continue as a going concern within one year from the date of issuance of this report. The Company considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. Therefore, a valuation allowance of $475.5 million was placed on the net deferred tax assets as of the beginning of the year. Additionally, a valuation allowance was recorded to offset the current year deferred tax activity, predominately related to intangible asset amortization, accretion expense associated with our settlement obligations and debt, and inventory step-up amortization expense. As a result, all of the Company’s net deferred tax assets as of the nine months ended September 29, 2023 (Successor) are fully offset by a valuation allowance.
The Company recognized income tax expense of $10.8 million and $508.1 million on losses from continuing operations before income taxes of $1,714.1 million and $2,213.9 million for the three and nine months ended September 29, 2023 (Successor), respectively. This resulted in effective tax rates of negative 0.6% and negative 23.0%, respectively. The current income tax expense for both the three and nine months ended September 29, 2023 (Successor) predominately related to a net decrease in prepaid income taxes. The deferred income tax expense for the nine months ended September 29, 2023 (Successor) related to the valuation allowance noted above, recorded against the Company's net deferred tax assets.
The income tax expense of $10.8 million for the three months ended September 29, 2023 (Successor) consisted of $9.3 million attributed to a decrease in prepaid income taxes and $1.5 million predominately attributed to pretax earnings in various jurisdictions.
The income tax expense of $508.1 million for the nine months ended September 29, 2023 (Successor) consisted of the valuation allowance of $475.5 million placed on the net deferred tax assets as of the beginning of the year that were no longer more likely than not realizable, $30.2 million attributed to a decrease in prepaid income taxes and $3.7 million predominately attributed to pretax earnings in various jurisdictions, offset by $1.3 million attributed to the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.
The Company recognized $24.9 million and $34.6 million of income tax benefit on losses from continuing operations before income taxes of $310.2 million, and $383.6 million for the three months ended September 30, 2022 (Successor) and the period from
June 17, 2022 through September 30, 2022 (Successor), respectively. This resulted in effective tax rates of 8.0% and 9.0%, respectively. The current and deferred income tax benefits predominantly related to intangible asset amortization activity attributed to fresh-start adjustments, partially offset by the utilization of loss carryforwards.
The income tax benefits of $24.9 million and $34.6 million for the three months ended September 30, 2022 (Successor) and the period from June 17, 2022 through September 30, 2022 (Successor), respectively, was attributed to pretax earnings in various jurisdictions, separation costs, reorganization items, net and restructuring charges.
The Company recognized $497.3 million of income tax benefit on $811.3 million of loss from continuing operations before income taxes for the period January 1, 2022 through June 16, 2022 (Predecessor). This resulted in an effective tax rate of 61.3%. The income tax benefit for the period from January 1, 2022 through June 16, 2022 (Predecessor) primarily consisted of the income tax impacts from reorganization and fresh-start adjustments, including adjustments to the Company's valuation allowance. For the period January 1, 2022 through June 16, 2022 (Predecessor), the Company recorded an income tax benefit of $497.3 million, primarily for reorganization adjustments in the Predecessor period consisting of (1) $1,231.5 million of tax expense for the reduction in federal and state NOL carryforwards from the cancellation of debt income ("CODI") realized upon emergence and limitations under Sections 382 and 383 of the IRC; (2) $141.3 million of tax expense for the net decrease in deferred tax assets resulting from reorganization adjustments; and (3) $1,270.1 million of tax benefit for the reduction in the valuation allowance on the Company's deferred tax assets; and fresh-start adjustments in the Predecessor period consisting of (4) $297.1 million of tax benefit for the net decrease in deferred tax liabilities resulting from fresh-start adjustments and (5) $285.3 million of tax benefit associated with the release of uncertain tax positions. The remaining tax benefit was attributable to pretax earnings in various jurisdictions during the Predecessor period.
During the nine months ended September 29, 2023 (Successor), net cash refunds for income taxes were $136.3 million, including refunds of $141.6 million received as a result of provisions in the CARES Act and net payments of $5.3 million related to operational activity. During the period June 17, 2022 through September 30, 2022 (Successor) and the period January 1, 2022 through June 16, 2022 (Predecessor), net cash payments for income taxes were $3.8 million and $3.0 million, respectively.
The Company's unrecognized tax benefits, excluding interest, totaled $24.8 million as of both September 29, 2023 (Successor) and December 30, 2022 (Successor). If favorably settled, $15.4 million of unrecognized tax benefits as of September 29, 2023 (Successor) would benefit the effective tax rate. The remaining unrecognized tax benefits are reflected as a write-off of related deferred tax assets. If these unrecognized tax benefits were recognized, the related deferred tax assets would be offset by a valuation allowance. The total amount of accrued interest and penalties related to these obligations was $3.8 million and $2.8 million as of September 29, 2023 (Successor) and December 30, 2022 (Successor), respectively.
Within the next twelve months, the unrecognized tax benefits and the related interest and penalties are not expected to change significantly.
Certain of the Company's subsidiaries continue to be subject to examination by taxing authorities. The earliest open years subject to examination for the U.S federal jurisdiction is 2015, and the earliest open year for state jurisdictions and various foreign jurisdictions, including Ireland, Japan, Luxembourg, Switzerland and the United Kingdom is 2013.
Loss per share is computed by dividing net loss by the number of weighted-average shares outstanding during the period. Dilutive securities, including participating securities, have not been included in the computation of loss per share as the Company reported a net loss from continuing operations during all periods presented below and therefore, the impact would be anti-dilutive.
The weighted-average number of shares outstanding used in the computations of both basic and diluted loss per share were as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| Successor | | | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | | | | | |
| Basic and diluted | 13.4 | | | 13.2 | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | | | |
| Basic and diluted | 13.3 | | | 13.2 | | | | 84.8 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The computation of diluted weighted-average shares outstanding for the three and nine months ended September 29, 2023 (Successor) excluded approximately zero shares of equity awards. The computation of diluted weighted-average shares outstanding for both the three months ended September 30, 2022 (Successor) and the period June 17, 2022 through September 30, 2022 (Successor) excluded approximately 3.3 million shares of Opioid Warrants because the effect would have been anti-dilutive. The computation of diluted weighted-average shares outstanding for the period January 1, 2022 through June 16, 2022 (Predecessor) excluded approximately 0.5 million shares of equity awards because the effect would have been anti-dilutive.
Inventories were comprised of the following at the end of each period:
| | | | | | | | | | | |
| Successor |
| September 29,
2023 | | December 30,
2022 |
| Raw materials and supplies | $ | 102.4 | | | $ | 80.2 | |
| Work in process | 463.5 | | | 552.1 |
| Finished goods | 268.3 | | | 315.3 |
| $ | 834.2 | | | $ | 947.6 | |
| | | | | |
| 8. | Property, Plant and Equipment |
The gross carrying amount and accumulated depreciation of property, plant and equipment were comprised of the following at the end of each period:
| | | | | | | | | | | |
| Successor |
| September 29,
2023 | | December 30,
2022 |
| Property, plant and equipment, gross | $ | 520.8 | | | $ | 485.0 | |
| Less: accumulated depreciation | (61.0) | | | (27.4) | |
| Property, plant and equipment, net | $ | 459.8 | | | $ | 457.6 | |
Depreciation expense was as follows:
| | | | | | | | | | | | | | | | | | |
| Successor | | | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | | | | | |
| Depreciation expense | $ | 11.4 | | | $ | 11.9 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | | | |
| Depreciation expense | $ | 35.1 | | | $ | 14.8 | | | | $ | 40.0 | | | | | |
The gross carrying amount and accumulated amortization of intangible assets were comprised of the following at the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| September 29, 2023 | | December 30, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Amortizable: | | | | | | | |
| Completed technology | $ | 3,010.4 | | | $ | 700.1 | | | $ | 3,041.2 | | | $ | 318.7 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Amortizable: | | | | | | | |
| | | | | | | |
| In-process research and development | 9.5 | | | | | 121.3 | | | |
| | | | | | | |
Generics IPR&D
During the three months ended September 29, 2023 (Successor), the U.S. Food and Drug Administration approved the abbreviated new drug application for certain of the Company's Specialty Generics in-process research and development ("IPR&D") assets. Upon approval, the Company transferred a total of $26.0 million of asset value from non-amortizable indefinite-lived IPR&D rights to amortizable, finite-lived completed technology with amortization commencing upon the first commercial shipment of the respective products.
Additionally, during the three months ended September 29, 2023 (Successor), the Company recognized a full impairment on certain other Specialty Generics IPR&D assets totaling $85.8 million. The Company has decided it will no longer pursue further development of the respective assets.
StrataGraft®
During the three months ended September 29, 2023 (Successor), due to lower anticipated cash flows expected from StrataGraft, the Company identified a triggering event with respect to the associated intangible asset within the Specialty Brands segment and assessed the recoverability of the definite-lived asset. The Company determined that the undiscounted cash flows related to the StrataGraft intangible asset were less than its net book value, which required the Company to record a full impairment charge.
The Company determined the fair value of the StrataGraft intangible asset using the income approach, a level three measurement technique. For purposes of determining fair value, the Company made various assumptions regarding estimated future cash flows, the discount rate and other factors in determining the fair value of the intangible asset. The Company's projections in relation to the StrataGraft intangible asset included long-term net sales and operating income at lower than historical levels. These changes in assumptions resulted in a fair value of the StrataGraft intangible asset that was less than its net book value. Therefore, the Company recorded a full impairment charge of $50.1 million.
Intangible asset amortization expense was as follows:
| | | | | | | | | | | | | | | | | | |
| Successor | | | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | | | | | |
| Amortization expense | $ | 125.6 | | | $ | 136.6 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | | | |
| Amortization expense | $ | 388.1 | | | $ | 182.1 | | | | $ | 281.8 | | | | | |
The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
| | | | | |
| Successor |
| Remainder of Fiscal 2023 | $ | 121.4 |
| Fiscal 2024 | 446.1 |
| Fiscal 2025 | 385.2 |
| Fiscal 2026 | 337.6 |
| Fiscal 2027 | 284.4 |
The commencement of the 2023 Chapter 11 Cases constituted an event of default under certain of the Company’s debt agreements. Accordingly, all debt not reclassified as LSTC with original long-term stated maturities was classified as current on the unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor). However, any efforts to enforce payment obligations under the Company's debt instruments are automatically stayed as a result of the 2023 Chapter 11 Cases and the creditors’ rights in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. See Note 2 for further information.
Debt was comprised of the following at the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| September 29, 2023 | | December 30, 2022 |
| Principal (Carrying Value) (1) | | Unamortized Discount and Debt Issuance Costs (2) | | Principal | | Carrying Value | | Unamortized Discount and Debt Issuance Costs |
Debtor-in-Possession Financing due November 2023 | $ | 280.0 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Receivables financing facility due December 2023 | 100.0 | | | 2.6 | | | — | | | — | | | — | |
| 10.00% first lien senior notes due April 2025 | 495.0 | | | — | | 495.0 | | 475.9 | | | — |
| 10.00% second lien senior notes due April 2025 | 321.9 | | | — | | 321.9 | | 242.2 | | | — |
| 2017 Replacement Term loan due September 2027 | 1,356.7 | | | — | | | 1,374.1 | | | $ | 1,222.1 | | | $ | — | |
| 2018 Replacement Term loan due September 2027 | 360.1 | | | — | | | 364.8 | | | 326.9 | | | — | |
| 11.50% first lien senior secured notes due December 2028 | 650.0 | | | — | | 650.0 | | 650.0 | | | 20.8 |
| 10.00% second lien senior secured notes due June 2029 | 328.3 | | | — | | 328.3 | | 175.5 | | | — |
| Total debt | 3,892.0 | | | 2.6 | | | 3,534.1 | | | 3,092.6 | | | 20.8 | |
| Less: Current portion | (380.0) | | | (2.6) | | | (44.1) | | | (44.1) | | | — | |
Less: Amounts reclassified to liabilities subject to compromise (3) | (3,512.0) | | | — | | | — | | | — | | | — | |
| Total long-term debt, net of current portion | $ | — | | | $ | — | | | $ | 3,490.0 | | | $ | 3,048.5 | | | $ | 20.8 | |
(1)As a result of the 2023 Chapter 11 Cases, the Company expensed $377.6 million of accelerated accretion to adjust the carrying value up to the principal value or allowed claim amount pursuant to the 2023 Plan and recorded the expense within in reorganization items, net in the unaudited condensed consolidated statement of operations for the three months ended September 29, 2023 (Successor).
(2)As a result of the 2023 Chapter 11 Cases, the Company expensed $18.5 million of unamortized discount and debt issuance costs, net, recorded in reorganization items, net in the unaudited condensed consolidated statement of operations for the three months ended September 29, 2023 (Successor).
(3)In connection with the 2023 Chapter 11 Cases, $3,512.0 million of outstanding debt instruments have been reclassified to LSTC in the Company's unaudited consolidated balance sheet as of September 29, 2023 (Successor). Up to the Petition Date, the Company continued to accrue interest expense in relation to the second lien secured notes reclassified to LSTC. The Company continues to accrue and pay interest on the outstanding first lien senior secured debt instruments classified as LSTC in conjunction with the cash collateral order. Refer to Note 2 for further information.
Amended ABL Credit Agreement
On August 23, 2023, the Company entered into an amendment with the lenders and agents under the ABL Credit Agreement ("ABL Amendment"), dated as of June 16, 2022, by and among ST US AR Finance LLC, the lenders party thereto, the L/C Issuers (as defined in the ABL Credit Agreement) party thereto and Barclays Bank plc, as administrative agent ("Administrative Agent") and collateral agent (as amended, the "Amended ABL Credit Agreement"). Pursuant to the Amended ABL Credit Agreement, the Company obtained up to $100.0 million of new borrowing availability thereunder. The Company and the lenders, L/C Issuers and agent under the Amended ABL Credit Agreement separately agreed on August 23, 2023 to amend and restate the previously disclosed forbearance agreement among them (the "Amended and Restated Forbearance Agreement"), extending the forbearance period thereunder to September 12, 2023, unless such forbearance agreement (which contains customary termination events), is earlier terminated in accordance with the terms thereof. As further discussed above, any efforts to enforce payment obligations under the
Company's debt instruments were automatically stayed as a result of the commencement on August 28, 2023 of the 2023 Chapter 11 Cases. Pursuant to the terms of the ABL Amendment, as of the Availability Date (as defined in the ABL Amendment), which occurred on August 30, 2023, each of the Specified Defaults (as defined in the Forbearance Agreement) were waived.
Amendment to Purchase and Sale Agreement
In connection with the Bankruptcy Court’s approval of certain First Day Motions, on August 30, 2023, the Purchase and Sale Agreement, dated as of June 16, 2022, by and among the various entities listed on Schedule I thereto as originators or that become parties thereto as originators from time to time pursuant to Section 4.3 thereof ("Originators"), MEH, Inc., as servicer, and ST US AR Finance LLC, as buyer (as amended, the "Purchase and Sale Agreement"), was amended by the parties thereto to amend certain representations, covenants and events of default contained in the Purchase and Sale Agreement in light of the 2023 Chapter 11 Cases.
Performance Guarantees
Also in connection with the Bankruptcy Court’s approval of certain First Day Motions, on August 30, 2023, the Originators and the Administrative Agent entered into the Originator Performance Guaranty ("Originator Performance Guaranty") and MEH, Inc. and the Administrative Agent entered into the Performance Guaranty ("Performance Guaranty").
Pursuant to the Originator Performance Guaranty, each Originator guarantees performance by each other Originator of its obligations under the Purchase and Sale Agreement, which includes representations and warranties with respect to the characteristics of the receivables which such Originators sell to ST US AR Finance LLC.
Pursuant to the Performance Guaranty, MEH, Inc. guarantees performance by each Originator of its obligations under the Purchase and Sale Agreement, including with respect to such representations and warranties made by the Originators. Neither MEH, Inc. nor any Originator guarantees performance by ST US AR Finance LLC of its obligations under the Amended ABL Credit Agreement nor do they guarantee any losses arising from insolvency or lack of creditworthiness or other financial inability to pay off the underlying obligors of such receivables, or the uncollectability of any receivables.
Debtor-in-Possession Financing
Also in connection with the Bankruptcy Court's approval of certain First Day Motions, including, among others, a motion ("DIP Motion") seeking approval of a debtor-in-possession financing, the Senior Secured Debtor-In-Possession Credit Agreement ("DIP Credit Agreement"), was entered into on September 8, 2023, by and among the Company, Mallinckrodt International Finance S.A. ("MIFSA") and Mallinckrodt CB LLC (together with MIFSA, the "DIP Borrowers"), as debtors and debtors-in-possession, the lenders from time to time party thereto ("DIP Lenders"), Acquiom Agency Services LLC and Seaport Loan Products LLC, as co-administrative agents, and Acquiom Agency Services LLC, as collateral agent. On September 21, 2023, the Bankruptcy Court entered a final order granting the relief requested in the DIP Motion ("Final DIP Order").
Pursuant to the terms of the DIP Credit Agreement, the DIP Lenders provided a priming, senior secured, super-priority debtor-in-possession term loan facility in the aggregate principal amount (exclusive of capitalized fees) of $250.0 million ("DIP Facility", and the term loans advanced (or deemed advanced) thereunder, the "DIP Loans"), of which (i) an initial draw amount of $150.0 million was drawn in a single drawing on September 8, 2023, and (ii) an additional draw amount of $100.0 million was drawn in a single drawing on September 25, 2023. Borrowings under the DIP Facility are (a) senior secured obligations of the DIP Borrowers, (b) guaranteed by the Company and each of the other 2023 Debtors and (c) secured by (i) priming, automatically perfected first priority liens and security interests on substantially all property and assets of the 2023 Debtors securing the Company's pre-petition secured term loans and notes and (ii) automatically perfected first priority liens and security interests on substantially all of the 2023 Debtors' other now-owned and hereafter-acquired real and personal property and assets, in each case subject to certain carve outs and conditions. The DIP Loans accrue interest at a rate equal to the secured overnight financing rate as administered by the SOFR Administrator ("SOFR") plus 8.00%, subject to a SOFR floor of 1.00%. Upon the effectiveness of the DIP Credit Agreement, the DIP Borrowers caused a premium equal to 12.00% of the $250.0 million in backstop commitments held by certain DIP Lenders providing such commitments to be paid. Such premium was paid in kind by increasing the principal amounts of the DIP Loans. For further information regarding the DIP Credit Agreement, see the Company’s Current Report on Form 8-K filed with the SEC on September 11, 2023.
Applicable interest rate
As of September 29, 2023 (Successor), the applicable interest rate and outstanding principal on the Company's debt instruments were as follows:
| | | | | | | | | | | |
| Applicable Interest Rate | | Outstanding Principal |
| Fixed-rate instruments | 10.54 | % | | $ | 1,795.2 | |
Debtor-in-Possession Financing due November 2023 | 13.44 | | | 280.0 | |
Receivables financing facility due December 2023 | 8.75 | | | 100.0 | |
2017 Replacement Term Loan due September 2027 (1) | 11.94 | | | 1,356.7 | |
2018 Replacement Term Loan due September 2027 (1) | 12.19 | | | 360.1 | |
(1)Includes the impact of the interest rate cap agreement, which is discussed further in Note 13.
In disposing of assets or businesses, the Company has from time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that the ultimate resolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.
In connection with the sale of the Specialty Chemical business (formerly known as Mallinckrodt Baker) in fiscal 2010, the Company agreed to indemnify the purchaser with respect to various matters, including certain environmental, health, safety, tax and other matters. The indemnification obligations relating to certain environmental, health and safety matters have a term of 17 years from the sale, while some of the other indemnification obligations have an indefinite term. The liability relating to all of these indemnification obligations was governed by a contract that was rejected as part of the 2020 Chapter 11 Cases and is no longer a liability of the Successor Company. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser. The contract governing the escrow account was assumed in the 2020 Chapter 11 Cases. As of September 29, 2023 (Successor) and December 30, 2022 (Successor), $20.0 million and $19.3 million remained in restricted cash, included in other long-term assets on the unaudited condensed consolidated balance sheets, respectively. As of September 29, 2023 (Successor), the Company does not expect to make future payments related to these indemnification obligations.
As of September 29, 2023 (Successor), the Company had various other letters of credit, guarantees and surety bonds totaling $31.0 million and restricted cash of $42.2 million held in segregated accounts primarily to collateralize surety bonds for the Company's environmental liabilities.
| | | | | |
| 12. | Commitments and Contingencies |
The Company is subject to various legal proceedings and claims, including government investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and other commercial disputes, and all other legal proceedings, all in the ordinary course of business, including those described below. Although it is not feasible to predict the outcomes of these matters, the Company believes, unless otherwise indicated below, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.
Governmental Proceedings
SEC Subpoena. In August 2019, the Company received a subpoena from the SEC for documents related to the Company's disclosure of its dispute with the U.S. Department of Health and Human Services ("HHS") and Centers for Medicare and Medicaid Services (together with HHS, the "Agency") concerning the base date average manufacturer price for Acthar® Gel under the Medicaid Drug Rebate Program, which was also the subject of litigation that the Company filed against the Agency. The SEC issued subsequent subpoenas on January 7, 2022 and September 28, 2022, requesting additional documents from the Company.
In connection with the investigation, on January 13, 2023, the SEC staff issued Wells Notices to the Company and individuals, including certain of its current and former executive officers, who were employed during 2019 (collectively, the “Individuals”). The notices indicate that the SEC staff has made a preliminary determination to recommend that the SEC file an enforcement action
against the Company that would allege violations of the federal securities laws, and against the Individuals that would allege violations of the federal securities laws and/or aiding and abetting violations of the federal securities laws. The recommendation as to the Company may involve an injunction, a cease-and-desist order and/or other appropriate relief.
The actions recommended by the SEC staff would allege, among other things, that (a) the Company improperly omitted to disclose the dispute with the Agency prior to the litigation filed by the Company in federal court on May 21, 2019, and (b) the Company’s disclosure of the civil investigative demand received from the U.S. Attorney’s Office for the District of Massachusetts in January 2019 (“Boston CID”) should have stated that the Boston CID related to the Company’s dispute with the Agency.
A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. Under the SEC procedures, a recipient of a Wells Notice has an opportunity to respond and make a submission to the SEC staff setting forth the recipient’s interests and position in regard to the subject matter of the investigation.
The Company believes that it has complied with all applicable laws and regulations, and it has provided a submission explaining the Company’s position and its belief that no enforcement action is warranted or appropriate. The Company understands that the Individuals have provided similar submissions to the SEC staff. The Company is currently engaged in discussions with the staff of the enforcement division of the SEC on a resolution, and the Company does not currently expect such resolution to result in any material liability to the Company. However, the Company can give no assurances as to the ultimate resolution of these matters or the timing thereof.
U.S. Attorney's Office Subpoena. On August 22, 2023, the Company received a grand jury subpoena from the U.S. Attorney's Office for the Western District of Virginia ("USAO") seeking production of data and information for the time period from July 17, 2017 to the present, including information and data relating to the Company's reporting of suspicious orders for controlled substances, chargebacks and other transactions, and communications between the Company and the U.S. Drug Enforcement Administration ("DEA") regarding those issues. The Company's legal representatives discussed the intended scope of the subpoena and initial timeline with the USAO in August and September 2023. On September 27, 2023, the Company received a second grand jury subpoena from the USAO for documents pertaining to financial accounts related to the prior requests.
On October 11, 2023, the Company’s legal representatives met with the USAO to, among other things, share information with the USAO about the operating injunction under which the Company's Specialty Generics segment has been operating since October 2020 and which was agreed to by 50 state and territory attorneys general and entered by the Bankruptcy Court ("operating injunction"). Among other things, the operating injunction provides that Specialty Generics must retain an independent monitor to evaluate and audit compliance with the operating injunction. R. Gil Kerlikowske, former Director of the Office of National Drug Control Policy and former Commissioner of U.S. Customs and Border Protection, currently serves as the monitor and issues periodic reports on Specialty Generics' compliance program, which can be found on the Company's web site at https://www.mallinckrodt.com/corporate-responsibility/corporate-compliance/.
The Company believes that Specialty Generics is in compliance with its obligations through its industry-leading compliance program for controlled substances. Prior to the existing operating injunction, Specialty Generics operated under a compliance-related memorandum of understanding with DEA established in July 2017 that expired in July 2020.
The Company is in the process of responding to the subpoenas and intends to cooperate in the investigation. The Company cannot predict the eventual scope, duration or outcome of the investigation at this time.
Commercial and Securities Litigation
Putative Class Action Securities Litigation (Continental General). On July 7, 2023, a putative class action lawsuit was filed against the Company, its Chief Executive Officer ("CEO") Sigurdur Olafsson, its Chief Financial Officer ("CFO") Bryan Reasons, and the Chairman of the Board, Paul Bisaro, in the U.S. District Court for the Southern District of New Jersey, captioned Continental General Insurance Company and Percy Rockdale, LLC v. Mallinckrodt plc et al., No. 23-cv-03662. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt's securities between June 17, 2022 and June 14, 2023. The lawsuit generally alleges that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder related to the Company’s business, operations, and prospects, including its financial strength, its ability to timely make certain payments related to Mallinckrodt’s settlement of opioid-related litigation and the risk of additional filings for bankruptcy protection. The lawsuit seeks monetary damages in an unspecified amount. On September 20, 2023, the Court appointed Continental General Insurance Company and Percy Rockdale, LLC as lead plaintiffs under the Private Securities Litigation Reform Act of 1995. The case was automatically stayed against the Company due to the 2023 Chapter 11 Cases. Pursuant to the 2023 Plan, Mallinckrodt expects that the matter as against the Company will be resolved in bankruptcy, and that Mallinckrodt will assume the obligation to defend and indemnify the individual defendants. The parties are negotiating a schedule for lead plaintiffs to file an amended complaint. The Company intends to vigorously defend itself and its directors and officers in this matter.
Acument Global. In May 2019, Acument Global Technologies, Inc. ("Acument"), filed a non-class complaint against the Company and other defendants in Tennessee state court alleging violations of Tennessee Consumer Protection Laws, unjust enrichment, fraud and conspiracy to defraud and is captioned as Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. In February 2020, the court granted-in-part and denied-in-part the Company's motion to dismiss. While the court dismissed Acument's fraud-based claims and its claim under the Tennessee Consumer Protection Act, the court ruled that the antitrust and unjust enrichment claims may proceed. Following lifting of the automatic stay of this litigation pursuant to Section 362 of the Bankruptcy Code, on September 29, 2022, the court remanded the case to state court. On October 30, 2023, the plaintiff filed an order with the state court to dismiss the Company from the case.
Local 542. In May 2018, the International Union of Operating Engineers ("IUOE") Local 542 filed a non-class complaint against the Company and other defendants in Pennsylvania state court alleging improper pricing and distribution of Acthar Gel, in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, aiding and abetting, unjust enrichment and negligent misrepresentation captioned as Int'l Union of Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. Plaintiff filed an amended complaint in August 2018, the Company's objections to which were denied by the court. In January 2021, the Company removed this case to the U.S. District Court for the Eastern District of Pennsylvania ("EDPA"). In March 2021, the EDPA granted the Company's motion to transfer the case to the U.S. District Court for the District of Delaware ("District of Delaware") and denied without prejudice Local 542's motion to remand the case to state court. In June 2021, the District of Delaware referred this case to the Bankruptcy Court in Delaware. On November 17, 2022, Local 542 filed a motion to withdraw the reference to the District Court, and the case was transferred back to the District of Delaware at Case No. 22-cv-01502. On December 22, 2022, Local 542 filed a request for the motion to withdraw the reference to be decided by the EDPA and to permit remand to state court. On December 28, 2022, the case was assigned to Judge Ambro of the United States Court of Appeals for the Third Circuit due to related cases. On June 27, 2023, the District of Delaware entered an order to withdraw reference of the action to the Delaware Bankruptcy Court and to transfer the case back to the EDPA in order to be remanded to state court. On October 30, 2023, the plaintiff filed a motion to dismiss the Company from the case.
Patent Litigation
Mallinckrodt Pharmaceuticals Ireland Limited et al. v. Airgas Therapeutics LLC et al. On December 30, 2022, the Company initiated litigation against Airgas Therapeutics, LLC, Airgas USA LLC, and Air Liquide S.A. (collectively "Airgas") in the District of Delaware following notice from Airgas of its abbreviated new drug application ("ANDA") submission seeking approval from the FDA for a generic version of INOmax® (nitric oxide) gas, for inhalation ("INOmax"). Airgas's ANDA received final approval from the FDA in July 2023, and according to Airgas' counsel, the original ANDA was filed in April 2011. The case is at an early stage and discovery is ongoing. In October 2023, the parties completed briefing on the Company’s motion for preliminary injunction seeking to prevent defendants Airgas Therapeutics LLC and Airgas USA LLC from infringing the Company’s U.S. patents during the pendency of the litigation; no hearing date has been scheduled at this time. The court set an initial trial date of March 10, 2025.
Many of the patents asserted against Airgas were previously asserted in the District of Delaware against Praxair Distribution, Inc. and Praxair, Inc. (collectively "Praxair") in 2015 and 2016 following Praxair's submissions with FDA seeking approval for a nitric oxide drug product and delivery system. The litigation against Praxair resulted in Praxair's launch of a competitive nitric oxide product. The Company continues to develop and pursue patent protection of next generation nitric oxide delivery systems and additional uses of nitric oxide and intends to vigorously enforce its intellectual property rights against any parties that may seek to market a generic version of the Company's INOmax product and/or next generation delivery systems.
Amitiza Patent Challenge. The Company was granted numerous Japanese patents related to Amitiza and its use. In October 2023, the Company received two notifications from the Japan Patent Office that indicated that a company has filed two invalidation proceedings against two patent term extension ("PTE") registrations relating to one or more patent(s) that cover Amitiza and its use in Japan. This process is at an early stage. The Company believes that its PTE registrations are valid, and the Company will vigorously defend its PTE registrations.
Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of September 29, 2023 (Successor), it was probable that it would incur remediation costs in the range of $17.4 million to $47.6 million. The Company also concluded that, as of September 29, 2023 (Successor), the best estimate within this range was $35.9 million, of which $1.1 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor). While it is not possible at this time to determine with certainty the ultimate outcome of these matters,
the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies ("Cooperating Parties Group" or "CPG") are parties to a May 2007 Administrative Order on Consent with the Environmental Protection Agency ("EPA") to perform a remedial investigation and feasibility study ("RI/FS") of the 17-mile stretch known as the Lower Passaic River Study Area (“River”). The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey (the “Lodi facility” and the “Belleville facility” respectively). In April 2014, the EPA issued a revised Focused Feasibility Study ("FFS"), with remedial alternatives to address cleanup of the lower 8-mile stretch of the River. The EPA estimated that the cost for the remediation alternatives ranged from $365.0 million to $3.2 billion and the EPA's preferred approach had an estimated cost of $1.7 billion. In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA that included alternative remedial actions for the entire 17-mile stretch of the River. In March 2016, the EPA issued the Record of Decision ("ROD(s)") for the lower 8 miles of the River with a slight modification on its preferred approach and a revised estimated cost of $1.38 billion. In October 2016, the EPA announced that Occidental Chemicals Corporation had entered into an agreement to develop the remedial design.
In August 2018, the EPA finalized a buyout offer of $280,600 with the Company, limited to its former Lodi facility, for the lower 8 miles of the River. In September 2021, the EPA issued the ROD for the upper 9 miles of the River selecting source control as the remedy for the upper 9 miles with an estimated cost of $441.0 million. In September 2022, the Company entered into a conditional $0.3 million Early Cash-Out Consent Decree (“CD”) with the EPA as a buyout for its portion of the upper part of the River related to its former Lodi facility; finalization of the CD is subject to the EPA approval following the public comment period that was extended until a September 22, 2023 court hearing to determine whether the court will hold a Fairness Hearing or whether the EPA will finalize and approve the conditional CD. On October 16, 2023, the court granted the EPA's request for a sixty-day extension, until November 21, 2023, to notify the Court regarding whether it plans to move forward with the conditional CD.
The portion of the liability related to the Belleville facility was discharged against the Company as a result of the 2020 Plan. Any reserves associated with this contingency were included in LSTC as of June 16, 2022, and any related liabilities were discharged under the Bankruptcy Code.
As of September 29, 2023 (Successor), the Company estimated that its remaining liability related to the River was $21.0 million, which was included within environmental liabilities on the unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor). Despite the issuance of the revised FFS and the RODs for both the lower and upper River by the EPA, the RI/FS by the CPG, and the conditional CD by the EPA, there are many uncertainties associated with the final agreed-upon remediation, potential future liabilities and the Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.
Hoffmann, et al. v. ASHTA Chemical, Inc., et al. On June 20, 2023, a complaint was filed against several corporations, including Mallinckrodt LLC, by 75 of the corporations' respective former employees and contractors, and certain family members thereof, alleging various tort claims related to alleged injuries resulting from exposure to mercury at a manufacturing facility in Ashtabula, Ohio. The alleged claims (employer intentional tort, negligence, fraudulent concealment and misrepresentation, premises liability, and civil conspiracy) against Mallinckrodt LLC are based on alleged mercury exposure between 1974 to 1982, when an alleged predecessor in interest to Mallinckrodt owned and operated the Ashtabula facility. The Company believes that the claims arose before June 16, 2022 emergence from bankruptcy and therefore were discharged as a result of the 2020 Plan, and the plaintiffs are enjoined from bringing an action against Mallinckrodt LLC. The Company was voluntarily dismissed from the case without prejudice on August 15, 2023 as discharged in connection with the 2020 Chapter 11 Cases.
Bankruptcy Litigation and Appeals
First Lien Noteholder Matters. The 2020 Plan reinstated the issuers' 2025 First Lien Notes in an aggregate principal amount of $495.0 million and the note documents relating thereto. Certain holders of the 2025 First Lien Notes and the trustee in respect thereof (collectively, "Noteholder Parties"), objected to the reinstatement, arguing, among other things, that the Company was required to pay a significant make-whole premium as a condition to reinstatement of the 2025 First Lien Notes. In the course of confirming the 2020 Plan, the Bankruptcy Court overruled these objections.
On March 30, 2022, the Noteholder Parties appealed the confirmation order's approval of the reinstatement of the 2025 First Lien Notes to the United States District Court for the District of Delaware ("District Court"). The Company and the 2025 First Lien Notes trustee reached an agreement to hold the trustee's appeal in abeyance, to be determined by the result of the holders' appeals, subject to certain conditions, which was approved by the District Court. Briefing on the merits of the Noteholder Parties' appeals was completed on July 1, 2022. On the same date, the Company moved to dismiss the Noteholder Parties' appeals as equitably moot. Briefing on the motion was completed on August 5, 2022 and supplemental declarations have been filed in the appeal. Oral argument was held on the Noteholder Parties' appeals on May 5, 2023, and the District Court took the matter under advisement.
As part of the RSA, certain holders including the Ad Hoc 2025 Noteholder Group representing a substantial majority of the 2025 First Lien Notes agreed to settle these appeals through the 2023 Plan. Among other provisions, the 2023 Plan incorporates the 2025
First Lien Notes Makewhole Settlement (as defined in the 2023 Plan), which comprises the allowance of a 2025 First Lien Notes Makewhole Amount Claim in a stipulated amount of $14.9 million (or 3.0% of the principal amount of the 2025 First Lien Notes). In exchange, the Ad Hoc First Lien Notes Group agreed to dismiss its appeal, and to cause the trustee to dismiss its companion appeal, upon the Company's emergence from the 2023 Chapter 11 Cases ("2023 Effective Date"). On August 23, 2023, the parties wrote to the District Court to outline the settlement and request that the appeals be held in abeyance pending the confirmation of the Amended 2023 Plan. On August 23, 2023, the District Court entered an order stating that it will defer indefinitely issuing a decision in the appeal, but reserving the right to file an opinion and order at any later time prior to the filing of a stipulated dismissal of the appeals. On August 28, 2023, Columbus Hill Capital Management, L.P., a Noteholder Party that had filed a separate appeal, agreed to dismiss its appeal because it had sold the entirety of its position in the 2025 First Lien Notes.
As further described herein, the 2023 Plan, including the 2025 First Lien Notes Makewhole Settlement, was confirmed by the Bankruptcy Court on October 10, 2023. The Company expects that upon the 2023 Effective Date, these appeals will be fully resolved on the terms outlined above.
Sanofi. On October 12, 2021, in the Company's 2020 Chapter 11 Cases, sanofi-aventis U.S. LLC ("Sanofi") filed a motion asking the Bankruptcy Court for an order determining that, under the Bankruptcy Code, the Company could not discharge alleged royalty obligations owed to Sanofi under an asset purchase agreement through which the Company acquired certain intellectual property from Sanofi's predecessor ("Sanofi Motion"). On November 8, 2021, the Bankruptcy Court denied the Sanofi Motion and ordered that any royalty obligations allegedly owed to Sanofi constitute prepetition unsecured claims that may be discharged under the Bankruptcy Code. On November 19, 2021, Sanofi appealed the Bankruptcy Court's ruling of the Sanofi Motion to the District Court. Briefing was completed on March 10, 2022 and the District Court affirmed on December 20, 2022, for which Sanofi filed a notice of appeal to the United States Court of Appeals for the Third Circuit ("Third Circuit") on January 17, 2023. Briefing in the Third Circuit on this appeal was completed in July 2023. Sanofi had also appealed the Bankruptcy Court's confirmation order in the 2020 Chapter 11 Cases, but pursuant to the terms of a settlement between Sanofi and the General Unsecured Claims Trustee appointed pursuant to the 2020 Plan, Sanofi dismissed its appeal of the confirmation order with prejudice.
Banks et al. v. Cotter Corporation et al. v. Mallinckrodt LLC, et al. On January 29, 2023, the named plaintiffs in Banks et al. v. Cotter Corporation et al. v. Mallinckrodt LLC, et al. No. 20-CV-1227 (E.D. Mo.) filed a motion to amend their class-action petition to add Mallinckrodt LLC as a defendant. Mallinckrodt LLC filed a motion in the Bankruptcy Court to enjoin this petition on the grounds that these alleged claims were discharged pursuant to the 2020 Plan and related confirmation order. Following an April 11, 2023 oral argument on the motion to enjoin, the Bankruptcy Court denied the motion, with the effect being that the named plaintiffs were permitted to proceed with their motion to amend their petition. Under the confirmation order of the 2020 Plan, any liability Mallinckrodt LLC may have in connection with the Banks litigation was discharged upon emergence from Chapter 11, with the limited exception of liability that both was asserted in writing prepetition and is indemnified by the U.S. government.
Opioid-related litigation settlement
On June 15, 2023, the Company, certain subsidiaries of the Company and the Trust entered into Amendment No. 1 ("Amendment") to the Opioid Deferred Cash Payments Agreement, which was entered into in connection with the 2020 Plan. The Amendment extended to June 23, 2023, from June 16, 2023, the date on which the $200.0 million installment payment with respect to the Company's opioid-related litigation settlement obligations ("Opioid Deferred Cash Payment") was required to be made to the Trust. Pursuant to the Amendment, the Trust subsequently provided several additional written notices that had the effect of extending the due date of the Opioid Deferred Cash Payment to August 15, 2023. In connection with entry into the RSA, the Company and the Trust entered into a final amendment to the Opioid Deferred Cash Payments Agreement, which provided that the Company's prior obligation to pay all remaining opioid-related litigation settlement payment obligations (including the Opioid Deferred Cash Payment) was permanently eliminated subject to the Company (a) making a $250.0 million payment to the Trust prior to the commencement of the 2023 Chapter 11 Cases (which was made on August 24, 2023) and (b) entering into the CVR Agreement to receive a payment (in cash or, at the Company's option subject to certain conditions, shares of the Company's equity) equal to the value of 5% of the Company's total outstanding equity (subject to certain dilution) less the exercise price, which will be based on a total enterprise value of $3.776 billion less funded debt at emergence plus any excess cash at emergence after the emergence-date cash sweep contemplated by the RSA. Additionally, the 2023 Debtors' non-monetary obligations to the Trust will generally be preserved, including the compliance-related operating injunction.
Other Matters
The Company's legal proceedings and claims are further described within the notes to the financial statements included within the Company's Annual Report on Form 10-K.
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| 13. | Financial Instruments and Fair Value Measurements |
Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:
Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2— significant other observable inputs that are observable either directly or indirectly; and
Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.
The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 29,
2023 (Successor) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Debt and equity securities held in rabbi trusts | $ | 40.7 | | | $ | 27.1 | | | $ | 13.6 | | | $ | — | |
Equity securities | 16.3 | | | 16.3 | | | — | | | — | |
| Interest rate cap | 25.1 | | | — | | | 25.1 | | | — | |
| $ | 82.1 | | | $ | 43.4 | | | $ | 38.7 | | | $ | — | |
Liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 18.9 | | | $ | — | | | $ | 18.9 | | | $ | — | |
| Contingent consideration liabilities | — | | | — | | | — | | | — | |
| $ | 18.9 | | | $ | — | | | $ | 18.9 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 30,
2022 (Successor) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Debt and equity securities held in rabbi trusts | $ | 36.6 | | | $ | 24.8 | | | $ | 11.8 | | | $ | — | |
| Equity securities | 25.5 | | | 25.5 | | | — | | | — | |
| $ | 62.1 | | | $ | 50.3 | | | $ | 11.8 | | | $ | — | |
| Liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 26.0 | | | $ | — | | | $ | 26.0 | | | $ | — | |
| Contingent consideration liabilities | 7.3 | | | — | | | — | | | 7.3 | |
| | | | | | | |
| $ | 33.3 | | | $ | — | | | $ | 26.0 | | | $ | 7.3 | |
Debt and equity securities held in rabbi trusts. Debt securities held in rabbi trusts primarily consist of U.S. government and agency securities and corporate bonds. When quoted prices are available in an active market, the investments are classified as level 1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in rabbi trusts primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.
Equity securities. Equity securities consist of shares in Silence Therapeutics plc and Panbela Therapeutics, Inc. for which quoted prices are available in an active market; therefore, these investments are classified as level 1 and are valued based on quoted market prices reported on internationally recognized securities exchanges.
Interest rate cap. The Company is exposed to interest rate risk on its variable-rate debt. During the three months ended March 31, 2023, the Company entered into an interest rate cap agreement, which serves to reduce the volatility on future interest expense cash outflows. The interest rate cap agreement has a total notional value of $860.0 million with an upfront premium of $20.0 million and provides the Company with interest rate protection (i) for the period March 16, 2023 through July 19, 2023 to the extent that the one-
month London Interbank Offered Rate ("LIBOR") exceeds 4.65%, and (ii) for the period July 20, 2023 through March 26, 2026 to the extent that the one-month SOFR exceeds 3.84%.
The interest rate cap agreement qualifies as a cash flow hedge. The premium paid is recognized in income on a rational basis, and changes in the fair value of the interest rate cap are recorded within accumulated other comprehensive income ("AOCI") and are subsequently reclassed into interest expense in the period when the hedged interest affects earnings. The fair value of the interest rate cap is included in other assets on the Company’s unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor). The Company elected to use the income approach to value the interest rate cap derivative using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) reflecting current market expectations about those future amounts. Level 2 inputs for derivative valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts) and inputs other than quoted prices that are observable such as LIBOR or SOFR rate curves, futures and volatilities. Mid-market pricing is used as a practical expedient in the fair value measurements. During the three and nine months ended September 29, 2023 (Successor) the Company recognized an unrealized gain of $2.7 million and $8.8 million, respectively, within AOCI with a loss of $1.1 million and gain of $0.1 million, respectively, being reclassified into earnings as a component of interest expense, net. It is expected that over the next 12 months, $6.7 million of the estimated losses in AOCI will be recognized into interest expense, net. The cash payment of the $20.0 million premium and other corresponding activity related to the interest rate cap were reflected as cash flows from operating activities in the unaudited condensed consolidated statement of cash flows for the nine months ended September 29, 2023 (Successor).
Deferred compensation liabilities. The Company maintains a non-qualified deferred compensation plan in the U.S., which permits eligible employees of the Company to defer a portion of their compensation. A recordkeeping account is set up for each participant and the participant chooses from a variety of funds for the deemed investment of their accounts. The recordkeeping accounts generally correspond to the funds offered in the Company's U.S. tax-qualified defined contribution retirement plan and the account balance fluctuates with the investment returns on those funds.
Contingent consideration liabilities. In accordance with the 2020 Plan and the 2020 Scheme of Arrangement, the Company will provide consideration for a contingent value right associated with Terlivaz® ("Terlivaz CVR") primarily in the form of the achievement of a cumulative net sales milestone. The Company assesses the likelihood and timing of making such payments at each balance sheet date. The fair value of the contingent payment was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the Terlivaz CVR as of September 29, 2023 (Successor) and December 30, 2022 (Successor) to be zero and $7.3 million, respectively. As a result of the 2023 Chapter 11 Cases, this liability was reclassified to LSTC on the unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor).
Financial Instruments Not Measured at Fair Value
The following methods and assumptions were used by the Company in estimating fair values for financial instruments not measured at fair value as of September 29, 2023 (Successor) and December 30, 2022 (Successor):
•The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $62.2 million and $57.2 million as of September 29, 2023 (Successor) and December 30, 2022 (Successor) (level 1), respectively.
•The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $44.1 million and $46.7 million as of September 29, 2023 (Successor) and December 30, 2022 (Successor), respectively. These contracts are included in other assets on the unaudited condensed consolidated balance sheets.
•The Company's 10.00% and 11.50% first and second lien senior secured notes, DIP Financing and receivables financing facility are classified as level 1, as quoted prices are available in an active market for these notes. Since quoted market prices for the Company's term loans are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value.
The following table presents the carrying values and estimated fair values of the Company's debt as of the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| September 29, 2023 | | December 30, 2022 |
| Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Level 1: | | | | | | | |
| Debtor-in-Possession Financing due November 2023 | $ | 280.0 | | | $ | 285.6 | | | $ | — | | | $ | — | |
| Receivables financing facility due December 2023 | 100.0 | | | 100.0 | | | — | | | — | |
| 10.00% first lien senior secured notes due April 2025 | 495.0 | | | 393.0 | | | 475.9 | | | 425.9 | |
| 10.00% second lien senior secured notes due April 2025 | 321.9 | | | 24.2 | | | 242.2 | | | 216.8 | |
| 11.50% first lien senior secured notes due December 2028 | 650.0 | | | 574.1 | | | 650.0 | | | 552.6 | |
| 10.00% second lien senior secured notes due June 2029 | 328.3 | | | 28.7 | | | 175.5 | | | 176.7 | |
| | | | | | | |
| Level 2: | | | | | | | |
| 2017 Replacement Term loan due September 2027 | 1,356.7 | | | 1,025.2 | | | 1,222.1 | | | 1,037.8 | |
| 2018 Replacement Term loan due September 2027 | 360.1 | | | 272.2 | | | 326.9 | | | 274.8 | |
| Total Debt | $ | 3,892.0 | | | $ | 2,703.0 | | | $ | 3,092.6 | | | $ | 2,684.6 | |
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company generally does not require collateral from customers. A portion of the Company's accounts receivable outside the U.S. includes sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.
The following table shows net sales attributable to distributors that accounted for 10.0% or more of the Company's total net sales:
| | | | | | | | | | | | | | |
| Successor | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | |
| FFF Enterprises, Inc. | 24.0 | % | | 26.1 | % | | | |
AmerisourceBergen Corporation | 13.3 | | | * | | | |
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 |
| FFF Enterprises, Inc. | 22.4 | % | | 25.7 | % | | | 11.8 | % |
| CuraScript, Inc. | * | | * | | | 15.6 | |
* Net sales to this distributor was less than 10.0% of the Company's total net sales for the respective periods presented above.
The following table shows accounts receivable attributable to distributors that accounted for 10.0% or more of the Company's gross accounts receivable at the end of each period:
| | | | | | | | | | | |
| Successor |
| September 29,
2023 | | December 30,
2022 |
AmerisourceBergen Corporation | 31.3 | % | | 23.3 | % |
McKesson Corporation | 17.8 | | | 17.3 | |
| FFF Enterprises, Inc. | * | | 16.2 | |
*Accounts receivable attributable to this distributor was less than 10.0% of total gross accounts receivable at the end of the respective period presented above.
The following table shows net sales attributable to products that accounted for 10.0% or more of the Company's total net sales:
| | | | | | | | | | | | | | | | | | |
| Successor | | | | | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | | | | | |
| Acthar Gel | 24.6 | % | | 27.0 | % | | | | | | | |
| INOmax | 14.7 | | | 17.3 | | | | | | | | |
| Therakos | 13.3 | | | 12.5 | | | | | | | | |
| APAP | 11.6 | | | 12.4 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | | | |
| Acthar Gel | 23.0 | % | | 27.8 | % | | | 25.4 | % | | | | |
| INOmax | 16.6 | | | 17.1 | | | | 19.0 | | | | | |
| Therakos | 13.4 | | | 12.4 | | | | 12.5 | | | | | |
| APAP | 11.7 | | | 12.6 | | | | 11.0 | | | | | |
The Company operates in two reportable segments, which are further described below:
•Specialty Brands includes innovative specialty pharmaceutical brands; and
•Specialty Generics includes niche specialty generic drugs and APIs.
Management measures and evaluates the Company's operating segments based on segment net sales and operating income. Management excludes corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment operating income because management and the chief operating decision maker evaluate the operating results of the segments excluding such items. These items may include, but are not limited to, depreciation and amortization, share-based compensation, net restructuring charges, non-restructuring impairment charges and liabilities management and separation costs. Although these amounts are excluded from segment operating income, as applicable, they are included in reported consolidated operating loss and are reflected in the reconciliations presented below.
Selected information by reportable segment was as follows:
| | | | | | | | | | | | | | |
| Successor | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | |
| Net sales: | | | | | | |
| Specialty Brands | $ | 286.2 | | | $ | 303.5 | | | | |
| Specialty Generics | 210.8 | | | 161.9 | | | | |
| Net sales | $ | 497.0 | | | $ | 465.4 | | | | |
| Operating income (loss): | | | | | | |
| Specialty Brands | $ | 87.6 | | | $ | 43.7 | | | | |
| Specialty Generics | 64.0 | | | (9.0) | | | | |
Segment operating income | 151.6 | | | 34.7 | | | | |
| Unallocated amounts: | | | | | | |
Corporate and unallocated expenses (1) | (16.3) | | | (15.0) | | | | |
| Depreciation and amortization | (137.0) | | | (148.5) | | | | |
| Share-based compensation | (2.4) | | | (0.5) | | | | |
| Restructuring charges, net | 0.1 | | | (2.2) | | | | |
| Non-restructuring impairment charges | (135.9) | | | — | | | | |
Liabilities management and separation costs (2) | (142.1) | | | (6.9) | | | | |
| Bad debt expense - customer bankruptcy | — | | | (5.8) | | | | |
| Operating loss | $ | (282.0) | | | $ | (144.2) | | | | |
(1)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments.
(2)Represents costs primarily related to professional fees incurred by the Company (including where the Company is responsible for the fees of third parties) in connection with its evaluation of its financial situation and related discussions with its stakeholders prior to the commencement of the 2023 Chapter 11 Cases, expenses incurred related to the severance of certain former executives of the Predecessor, in addition to professional fees and costs incurred as the Company explores potential sales of non-core assets to enable further deleveraging post-emergence from the 2020 Chapter 11 Cases. As of the Petition Date, professional fees directly related to the 2023 Chapter 11 Cases that were previously reflected as liabilities management and separation costs are being classified on a go-forward basis as reorganization items, net.
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 |
| Net sales: | | | | | | |
| Specialty Brands | $ | 818.3 | | | $ | 361.7 | | | | $ | 587.1 | |
| Specialty Generics | 578.3 | | | 188.7 | | | | 287.5 | |
| Net sales | $ | 1,396.6 | | | $ | 550.4 | | | | $ | 874.6 | |
| Operating income (loss): | | | | | | |
| Specialty Brands | $ | 181.6 | | | $ | 48.2 | | | | $ | 267.2 | |
| Specialty Generics | 131.9 | | | (8.7) | | | | 65.3 | |
Segment operating income | 313.5 | | | 39.5 | | | | 332.5 | |
| Unallocated amounts: | | | | | | |
Corporate and unallocated expenses (1) | (29.7) | | | (15.9) | | | | (48.2) | |
| Depreciation and amortization | (423.2) | | | (196.9) | | | | (321.8) | |
| Share-based compensation | (7.7) | | | (0.5) | | | | (1.7) | |
| Restructuring charges, net | (0.9) | | | (3.3) | | | | (9.6) | |
| Non-restructuring impairment charges | (135.9) | | | — | | | | — | |
Liabilities management and separation costs (2) | (157.3) | | | (16.1) | | | | (9.0) | |
| Bad debt expense - customer bankruptcy | — | | | (5.8) | | | | — | |
| Operating loss | $ | (441.2) | | | $ | (199.0) | | | | $ | (57.8) | |
(1)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments.
(2)Represents costs primarily related to professional fees incurred by the Company (including where the Company is responsible for the fees of third parties) in connection with its evaluation of its financial situation and related discussions with its stakeholders prior to the commencement of the 2023 Chapter 11 Cases, expenses incurred related to the Predecessor directors' and officers' insurance policies and severance for the former CEO and certain former executives of the Predecessor, in addition to professional fees and costs incurred as the Company explores potential sales of non-core assets to
enable further deleveraging post-emergence from the 2020 Chapter 11 Cases. As of the Petition Date, professional fees directly related to the 2023 Chapter 11 Cases that were previously reflected as liabilities management and separation costs are being classified on a go-forward basis as reorganization items, net.
Net sales by product family within the Company's reportable segments were as follows:
| | | | | | | | | | | | | | |
| Successor | | | |
| Three Months
Ended
September 29, 2023 | | Three Months
Ended
September 30, 2022 | | | |
| Acthar Gel | $ | 122.1 | | | $ | 125.7 | | | | |
| INOmax | 72.9 | | | 80.7 | | | | |
| Therakos | 66.0 | | | 58.0 | | | | |
Amitiza (1) | 18.3 | | | 37.1 | | | | |
| Terlivaz | 4.4 | | | — | | | | |
| Other | 2.5 | | | 2.0 | | | | |
| Specialty Brands | 286.2 | | | 303.5 | | | | |
| | | | | | |
| Opioids | 65.9 | | | 46.5 | | | | |
| ADHD | 41.5 | | | 11.6 | | | | |
| Addiction treatment | 15.1 | | | 16.6 | | | | |
| Other | 3.4 | | | 2.9 | | | | |
| Generics | 125.9 | | | 77.6 | | | | |
| Controlled substances | 22.0 | | | 19.7 | | | | |
| APAP | 57.4 | | | 57.9 | | | | |
| Other | 5.5 | | | 6.7 | | | | |
| API | 84.9 | | | 84.3 | | | | |
| Specialty Generics | 210.8 | | | 161.9 | | | | |
| Net sales | $ | 497.0 | | | $ | 465.4 | | | | |
(1)Amitiza consists of both product net sales and royalties. Refer to Note 3 for further details on Amitiza's revenues.
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Nine Months
Ended
September 29, 2023 | | Period from
June 17, 2022
through
September 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 |
| Acthar Gel | $ | 320.9 | | | $ | 153.2 | | | | $ | 221.9 | |
| INOmax | 232.5 | | | 94.2 | | | | 165.8 | |
| Therakos | 187.6 | | | 68.2 | | | | 109.6 | |
Amitiza (1) | 61.4 | | | 42.9 | | | | 81.5 | |
| Terlivaz | 10.0 | | | — | | | | — | |
| Other | 5.9 | | | 3.2 | | | | 8.3 | |
| Specialty Brands | 818.3 | | | 361.7 | | | | 587.1 | |
| | | | | | |
| Opioids | 200.2 | | | 55.2 | | | | 88.8 | |
| ADHD | 82.9 | | | 13.4 | | | | 17.5 | |
| Addiction treatment | 46.8 | | | 19.1 | | | | 30.0 | |
| Other | 7.6 | | | 3.0 | | | | 4.9 | |
| Generics | 337.5 | | | 90.7 | | | | 141.2 | |
| Controlled substances | 61.4 | | | 21.4 | | | | 37.6 | |
| APAP | 163.6 | | | 69.2 | | | | 96.5 | |
| Other | 15.8 | | | 7.4 | | | | 12.2 | |
| API | 240.8 | | | 98.0 | | | | 146.3 | |
| Specialty Generics | 578.3 | | | 188.7 | | | | 287.5 | |
| Net sales | $ | 1,396.6 | | | $ | 550.4 | | | | $ | 874.6 | |
(1)Amitiza consists of both product net sales and royalties. Refer to Note 3 for further details on Amitiza's revenues.
Commitments and Contingencies
Certain litigation matters occurred on, or prior to, September 29, 2023 (Successor), but had subsequent updates through the date of issuance of this report. See further discussion in Note 12.
Examinership Proceedings
On October 2, 2023, the hearing of the Examinership Petition took place before the High Court of Ireland. Following that hearing, and on the same date, the High Court of Ireland made an order confirming the appointment of the Examiner. Subsequently, on October 6, 2023, the High Court of Ireland made various orders giving directions to the Examiner with respect to the convening of meetings of the shareholders of Mallinckrodt plc and each class of creditors of Mallinckrodt plc that would be impaired by the Examiner's proposal for the 2023 Scheme of Arrangement (which include the First Lien Claims, the Second Lien Notes Claims, the Intercompany Claims and the Subordinated Claims (each as defined in the 2023 Plan)), for the purposes of considering and voting in relation to the proposed 2023 Scheme of Arrangement that, if confirmed by High Court of Ireland, will implement certain Irish law aspects of the 2023 Plan. In order to make an order confirming the 2023 Scheme of Arrangement, the High Court of Ireland must be satisfied that:
•a majority in number of creditors whose interests or claims would be impaired by implementation of the 2023 Scheme of Arrangement, representing a majority in value of the claims that would be impaired by its implementation, have voted to accept it; or
•if the above requirement is not satisfied, then a majority of the classes of creditors whose interests would be impaired by the 2023 Scheme of Arrangement have voted to accept it, provided that at least one of those creditors classes is a class of secured creditors or is senior to the class or ordinary unsecured creditors; or
•if neither of the above requirements is satisfied, at least one class of creditors whose interests or claims would be impaired by the 2023 Scheme of Arrangement, other than a class which would not receive any payment or keep any interest in a liquidation scenario, has voted to accept it.
On October 30, 2023, the Examiner convened meetings of the shareholders and impaired creditor classes of Mallinckrodt plc. On November 2, 2023, the Examiner presented a report to the High Court of Ireland on the outcome of the meetings, which confirmed that all of the meetings of the impaired creditors and the members of Mallinckrodt plc that were held on November 2, 2023 voted in favor of the 2023 Scheme of Arrangement.
On the same date that the report was presented, the High Court of Ireland made an order directing that a hearing for the confirmation of the 2023 Scheme of Arrangement pursuant to Section 541 of the Companies Act 2014 of Ireland be held on November 10, 2023.
Confirmation of the Plan of Reorganization
On October 10, 2023, the Bankruptcy Court entered the Confirmation Order confirming the Amended 2023 Plan.
Notwithstanding the entry of the Confirmation Order, consummation of the 2023 Plan remains subject to the satisfaction or waiver of various conditions precedent set forth in the 2023 Plan, including that the High Court of Ireland will make an order in the Irish Examinership Proceedings pursuant to Section 541 of the Companies Act 2014 of Ireland confirming the 2023 Scheme of Arrangement, and that the 2023 Scheme of Arrangement will become effective in accordance with its terms (or will become effective concurrently with the effectiveness of the 2023 Plan).
As a result, the Company can make no assurances as to when, or ultimately if, it will emerge from Chapter 11.
The following is a summary of the material features of the 2023 Plan as confirmed by the Bankruptcy Court. For further information about the 2023 Chapter 11 Cases, refer to Note 2.
Pursuant to the 2023 Plan, there will be a restructuring comprising, among other things, the treatment for classes of claims and interests as follows:
•DIP Claims. All allowed claims ("DIP Claims") under the DIP Credit Agreement will be satisfied in cash from the DIP Cash Sweep (as defined below), with the amount of any allowed DIP Claims in excess of the DIP Cash Sweep being converted on a dollar-for-dollar basis into New First Priority Takeback Term Loans (as defined in the Amended 2023 Plan) in the amount of such excess. Any Unrestricted Cash (as defined in the 2023 Plan) held immediately before the 2023 Effective Date by the 2023 Debtors collectively in excess of $160.0 million (after accounting for implementation of the Exit A/R Facility Cash Sweep defined below) will be paid to the holders of DIP Claims on a pro rata basis until either (i) DIP Claims have been
satisfied in full or (ii) the 2023 Debtors (or reorganized 2023 Debtors) collectively hold no more than $160.0 million of Unrestricted Cash ("DIP Cash Sweep").
•Post-Petition A/R Claims. Claims arising under the accounts receivable lending facility established under the Amended ABL Credit Agreement ("Post-Petition A/R Facility") generally will be paid in full in cash as they come due in the ordinary course of business in accordance with the terms and conditions of the Post-Petition A/R Facility, as extended on the 2023 Effective Date pursuant to its terms. Furthermore, on the 2023 Effective Date, each holder of an allowed Post-Petition A/R Claim will receive its pro rata share of the Exit A/R Facility Cash Sweep (as defined below) to the extent that the Company and its affiliates collectively hold more than $160.0 million of Unrestricted Cash immediately before the 2023 Effective Date. In such case, Unrestricted Cash held immediately before the 2023 Effective Date by the 2023 Debtors collectively in excess of $160.0 million will be transferred to pay any outstanding amounts owed under the Post-Petition A/R Facility until either (i) such outstanding amounts have been reduced to $100.0 million or (ii) the 2023 Debtors collectively have no more than $160.0 million of Unrestricted Cash ("Exit A/R Facility Cash Sweep").
•Other Secured Claims. Other secured claims will, on the 2023 Effective Date, (i) be paid in full in cash including the payment of any interest required to be paid under section 506(b) of the Bankruptcy Code, (ii) receive the collateral securing such claim, or (iii) receive any other treatment that would render such claim unimpaired.
•First Lien Claims. Each holder of an allowed claim related to the outstanding 10.00% first lien senior secured notes due 2025 issued by certain of the Company’s subsidiaries ("2025 First Lien Senior Notes"), the outstanding 11.50% first lien senior secured notes due 2028 issued by certain of the Company’s subsidiaries ("2028 First Lien Senior Notes") or the first lien senior secured term loans due 2027 borrowed by certain of the Company’s subsidiaries pursuant to the credit agreement, dated as of June 16, 2022, by and among the Company, certain of its subsidiaries and the lenders party thereto, Acquiom Agency Services LLC and Seaport Loan Products LLC, as co-administrative agents, and Deutsche Bank AG New York Branch, as collateral agent ("First Lien Term Loans", and together with the 2025 First Lien Senior Notes and the 2028 First Lien Senior Notes, the "First Lien Claims"), will receive on the 2023 Effective Date its pro rata share of (A) 92.3% of the 2023 Debtors’ reorganized equity (subject to dilution) to be issued on the 2023 Effective Date ("New Common Equity"), (B) as applicable, cash in an amount sufficient to repay in full (x) the accrued and unpaid interest on the First Lien Term Loans in the case of any holder of First Lien Term Loans, (y) the accrued and unpaid interest on the 2025 First Lien Senior Notes in the case of any holder of 2025 First Lien Senior Notes, and (z) the accrued and unpaid interest on the 2028 First Lien Senior Notes in the case of any holder of 2028 First Lien Senior Notes, (C) cash from the Exit Minimum Cash Sweep (as defined below), if the Exit Minimum Cash Sweep trigger occurs, and (D) if applicable, the New Second Priority Takeback Debt (as defined in the Amended 2023 Plan). The Exit Minimum Cash Sweep trigger will occur if the Company and its affiliates collectively hold more than $160.0 million of Unrestricted Cash immediately before the 2023 Effective Date after accounting for implementation of the Exit A/R Facility Cash Sweep and the DIP Cash Sweep. Furthermore, on the 2023 Effective Date, the 2023 Debtors or the reorganized 2023 Debtors, as applicable, will pay in cash certain outstanding fees, expenses and costs of the agents and trustees related to the First Lien Claims.
•Second Lien Notes Claims. Each holder of an allowed claim related to the outstanding 10.00% second lien senior secured notes due 2025 issued by certain of the Company’s subsidiaries and the outstanding 10.00% second lien senior secured notes due 2029 issued by certain of the Company’s subsidiaries will receive, on the Effective Date, its pro rata share of 7.7% of the New Common Equity (subject to dilution). Furthermore, on the 2023 Effective Date, the 2023 Debtors or the reorganized 2023 Debtors, as applicable, will pay in cash certain outstanding fees, expenses and costs of the agents and trustees related to such claims.
•General Unsecured Claims. Each holder of a General Unsecured Claim (as defined in the Amended 2023 Plan) against a 2023 Debtor will receive payment in full in cash in accordance with applicable law and the terms and conditions of the particular transaction giving rise to, or the agreement that governs, such allowed General Unsecured Claim on the later of (i) the date due in the ordinary course of business or (ii) the 2023 Effective Date, unless such General Unsecured Claims has already been satisfied.
•Subordinated Claims. Subordinated Claims (as defined in the Amended 2023 Plan) will be cancelled, released, discharged and extinguished, and holders of Subordinated Claims will receive no recovery or distribution on account of such subordinated claims.
•Intercompany Claims. Unless otherwise provided for under the Amended 2023 Plan, on the 2023 Effective Date, at the option of the applicable 2023 Debtor in consultation with the Ad Hoc First Lien Term Loan Group, the Ad Hoc Crossover Group, and the Ad Hoc 2025 Noteholder Group (each as defined in the Amended 2023 Plan), Intercompany Claims (as defined in the Amended 2023 Plan) will be either: (i) reinstated; or (ii) set off, settled, distributed, contributed, merged, canceled or released.
•Intercompany Interests. Unless otherwise provided for under the Amended 2023 Plan, on the 2023 Effective Date, at the option of the applicable 2023 Debtor in consultation with the Ad Hoc First Lien Term Loan Group, the Ad Hoc Crossover Group, and the Ad Hoc 2025 Noteholder Group, Intercompany Interests will be either: (i) reinstated; or (ii) set off, settled, distributed, contributed, merged, canceled or released.
•Existing Equity Interests. Holders of equity interests in the Company that existed immediately before the 2023 Effective Date will receive no distribution on account of such equity interests. On the 2023 Effective Date, all such equity interests will be discharged, canceled, released and extinguished and will be of no further force or effect.