Background and Basis of Presentation

6 Months Ended

Jun. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Background and Basis of Presentation

1. Background and Basis of Presentation

Background

Mallinckrodt plc 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

On October 12, 2020 ("Petition Date"), Mallinckrodt plc and substantially all of its U.S. subsidiaries, including certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business ("Specialty Generics Subsidiaries") and the Specialty Brands business ("Specialty Brands Subsidiaries"), and certain of the Company's international subsidiaries (together with the Company, Specialty Generics Subsidiaries and Specialty Brands Subsidiaries, the "Debtors") voluntarily initiated proceedings ("Chapter 11 Cases") under chapter 11 of title 11 ("Chapter 11") of the United States Code ("Bankruptcy Code"). On March 2, 2022, the U.S. Bankruptcy Court for the District of Delaware ("Bankruptcy Court") entered an order confirming the fourth amended plan of reorganization (with technical modifications) ("Plan"). Subsequent to the filing of the Chapter 11 Cases, Chapter 11 proceedings commenced by a limited subset of the 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 is based on and consistent in all respects with the Plan ("Scheme of Arrangement"). On June 8, 2022, the Bankruptcy Court entered an order approving a minor modification to the Plan. The Plan became effective on June 16, 2022 ("Effective Date"), and on such date the Company emerged from the Chapter 11 and the Scheme of Arrangement became effective concurrently.

Upon emergence from Chapter 11, the Company adopted fresh-start accounting in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 852 - Reorganizations, and became a new entity for financial reporting purposes as of the Effective Date. 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.

Reorganization items, net for the Successor represents amounts incurred after the Effective Date that directly resulted from Chapter 11 and were entirely comprised of professional fees associated with the implementation of the Plan. Reorganization items, net for the Predecessor represents amounts incurred after the Petition Date but prior to emergence as a direct result of the Chapter 11 Cases and were comprised of bankruptcy-related professional fees and adjustments to reflect the carrying value of liabilities subject to compromise ("LSTC") at their estimated allowed claim amounts, as such adjustments were approved by the Bankruptcy Court. Cash paid for reorganization items, net for the six months ended June 30, 2023 (Successor), for the period from June 17, 2022 through July 1, 2022 (Successor), and the period from January 1, 2022 through June 16, 2022 (Predecessor), was $14.6 million, zero, and $304.1 million, respectively.

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 U.S. Securities and Exchange Commission ("SEC") on March 3, 2023 ("Annual Report on Form 10-K").

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.

Beginning on May 17, 2023, the Company received unsolicited letters on behalf of various parties holding substantial positions across the Company's capital structure, including certain holders of the Company's (i) first lien senior secured term loans due 2027 ("Term Loans") issued under the credit agreement, dated as of June 16, 2022, by and among the Company, certain of its subsidiaries, 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 ("Term Loan Credit Agreement") (ii) 10.00% first lien senior secured notes due 2025 ("2025 First Lien Notes"), (iii) 11.50% first lien senior secured notes due 2028 ("2028 First Lien Notes"), (iv) 10.00% second lien senior secured notes due 2025 ("2025 Second Lien Notes"), and (v) 10.00% second lien senior secured notes due 2029 ("2029 Second Lien Notes"). Under the Board of Directors' direction, the Company has been analyzing various proposals and engaging in discussions with various stakeholders, including such creditors and representatives of the Opioid Master Disbursement Trust II ("Trust"). As the Company’s discussions with its stakeholders proceeded, the Company determined not to make interest payments that were due on June 15, 2023 on its 2028 First Lien Notes and 2029 Second Lien Notes. Substantial doubt about the Company's ability to continue as a going concern exists in light of events of default arising from the failure to make these interest payments before the expiration of applicable grace periods, which events of default were continuing as of the date of this report. While the Company has sufficient liquidity to make such interest payments (as well as the $200.0 million installment payment originally due to be paid to the Trust on June 16, 2023 with respect to our opioid-related litigation settlement obligation ("Opioid Deferred Cash Payment"), which the Trust has agreed to extend until August 15, 2023), the failure to make the above described interest payments has resulted in events of default under the 2028 First Lien Notes and 2029 Second Lien Notes and, absent prompt cure of such events of default or discharge of the 2028 First Lien Notes and 2029 Second Lien Notes, cross-defaults under the Term Loans issued under the Term Loan Credit Agreement and the receivables financing facility pursuant to the ABL credit agreement, 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 and collateral agent ("ABL Credit Agreement"), permitting specified portions of the creditors in respect of the 2028 First Lien Notes, 2029 Second Lien Notes, Term Loans and/or the ABL Credit Agreement to accelerate such obligations (which, in the case of the 2028 First Lien Notes and the 2029 Second Lien Notes, would include a prepayment premium) and terminate any applicable commitments to make additional loans under the ABL Credit Agreement. Although the Company has entered into forbearance agreements with certain holders of, and agents under, the 2028 First Lien Notes, 2029 Second Lien Notes, Term Loans, and the loans under the ABL Credit Agreement, such agreements expire on August 15, 2023 and it is possible that such obligations may be accelerated and applicable commitments to make additional loans under the ABL Credit Agreement may be terminated even before such date, notwithstanding such forbearance agreements. If such obligations were to be accelerated, the Company would not have sufficient liquidity to meet all such obligations as of the date of issuance of this report. Moreover, if the creditors in respect of the 2028 First Lien Notes, 2029 Second Lien Notes or the Term Loans were to accelerate such obligations (without such obligations being discharged), it would permit the Company's remaining noteholders and/or the Trust to accelerate their respective obligations in respect of the Company's remaining secured notes and opioid-related litigation settlement obligation. See Note 11 for further information with respect to the Company's opioid-related litigation settlement obligation, and Note 14 for further information on these matters, including other significant developments with respect to the Company's funded debt obligations.

The Company's Board of Directors continues to actively evaluate the Company's financial situation and consider options, and the Company is actively engaged in advanced discussions with various stakeholders. These discussions contemplate entering into a restructuring support agreement with various stakeholders that would include, among other things, the Company's initiating Chapter 11 proceedings under the U.S. Bankruptcy Code or analogous foreign bankruptcy or insolvency laws. However, there can be no assurance that the Company will reach an agreement in a timely manner, or at all, on terms of a restructuring support agreement that

the Board of Directors would support. Because plans to resolve the risks to the Company's ability to continue as a going concern have not yet been finalized and are not fully within the Company's control, and therefore cannot be deemed probable, 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. See Note 4 for discussion regarding the valuation allowance on the Company's net deferred tax assets that was recorded within the unaudited condensed consolidated balance sheet as of June 30, 2023 (Successor) as a result of considering the aforementioned substantial doubt in the Company's assessment of the realizability of certain net deferred tax assets.

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 six months ended June 30, 2023 (Successor) refers to the thirteen and twenty-six week period ended June 30, 2023 (Successor). The period June 17, 2022 through July 1, 2022 reflects the Successor period, while the period April 2, 2022 through, and including, June 16, 2022 and the period January 1, 2022 through, and including, June 16, 2022 reflects the Predecessor periods.