10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File No. 001-31298

LANNETT COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

State of Delaware	23-0787699
(State of Incorporation)	(I.R.S. Employer I.D. No.)

9000 State Road

Philadelphia, PA 19136

(215) 333-9000

(Address of principal executive offices and telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	LCI	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-12 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each class of the registrant’s common stock, as of the latest practical date.

Class	Outstanding as of April 30, 2021
Common stock, par value $0.001 per share	41,446,013

Table of Contents

			Page No.
PART I. FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)
		Consolidated Balance Sheets as of March 31, 2021 and June 30, 2020	3
		Consolidated Statements of Operations for the three and nine months ended March 31, 2021 and 2020	4
		Consolidated Statements of Comprehensive Income/Loss for the three and nine months ended March 31, 2021 and 2020	5
		Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended March 31, 2021 and 2020	6
		Consolidated Statements of Cash Flows for the nine months ended March 31, 2021 and 2020	7
		Notes to Consolidated Financial Statements	8
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57
	ITEM 4.	CONTROLS AND PROCEDURES	57
PART II. OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS	58
	ITEM 1A.	RISK FACTORS	58
	ITEM 6.	EXHIBITS	59

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANNETT COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share data)

	March 31, 2021		June 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	81,290	$	144,329
Accounts receivable, net		114,691		125,688
Inventories		113,074		142,867
Income taxes receivable		40,043		14,419
Assets held for sale		2,678		2,678
Other current assets		18,135		13,227
Total current assets		369,911		443,208
Property, plant and equipment, net		168,844		179,518
Intangible assets, net		160,138		374,735
Operating lease right-of-use assets		10,762		9,343
Deferred tax assets		138,019		117,890
Other assets		14,696		11,861
TOTAL ASSETS	$	862,370	$	1,136,555
LIABILITIES
Current liabilities:
Accounts payable	$	32,605	$	32,535
Accrued expenses		4,025		14,962
Accrued payroll and payroll-related expenses		9,758		16,304
Rebates payable		31,848		38,175
Royalties payable		14,541		20,863
Restructuring liability		42		27
Current operating lease liabilities		2,040		1,097
Short-term borrowings and current portion of long-term debt		—		88,189
Other current liabilities		2,270		2,713
Total current liabilities		97,129		214,865
Long-term debt, net		610,698		592,940
Long-term operating lease liabilities		11,306		9,844
Other liabilities		19,187		16,010
TOTAL LIABILITIES		738,320		833,659
Commitments and contingencies (Notes 11 and 12)
STOCKHOLDERS’ EQUITY
Common stock ($0.001 par value, 100,000,000 shares authorized; 40,872,485 and 39,963,127 shares issued; 39,539,798 and 38,798,787 shares outstanding at March 31, 2021 and June 30, 2020, respectively)		41		40
Additional paid-in capital		328,911		321,164
Accumulated deficit		(186,880)		(1,291)
Accumulated other comprehensive loss		(603)		(627)
Treasury stock (1,332,687 and 1,164,340 shares at March 31, 2021 and June 30, 2020, respectively)		(17,419)		(16,390)
Total stockholders’ equity		124,050		302,896
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	862,370	$	1,136,555

The accompanying notes are an integral part of the Consolidated Financial Statements.

3

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Net sales	$	112,370	$	144,372	$	372,769	$	407,824
Cost of sales		82,063		94,380		298,738		258,699
Amortization of intangibles		3,851		8,316		21,097		23,497
Gross profit		26,456		41,676		52,934		125,628
Operating expenses:
Research and development expenses		5,973		7,441		18,156		23,287
Selling, general and administrative expenses		17,636		22,147		46,502		60,876
Restructuring expenses		—		191		4,043		1,771
Asset impairment charges		—		13,989		198,000		15,607
Total operating expenses		23,609		43,768		266,701		101,541
Operating income (loss)		2,847		(2,092)		(213,767)		24,087
Other income (loss):
Loss on extinguishment of debt		—		—		—		(2,145)
Investment income		80		393		168		1,552
Interest expense		(12,631)		(16,177)		(40,613)		(52,163)
Other		18		(380)		23		(181)
Total other loss		(12,533)		(16,164)		(40,422)		(52,937)
Loss before income tax		(9,686)		(18,256)		(254,189)		(28,850)
Income tax benefit		(2,544)		(1,664)		(68,600)		(5,185)
Net loss	$	(7,142)	$	(16,592)	$	(185,589)	$	(23,665)
Loss per common share:
Basic	$	(0.18)	$	(0.43)	$	(4.72)	$	(0.61)
Diluted (1)	$	(0.18)	$	(0.43)	$	(4.72)	$	(0.61)
Weighted average common shares outstanding:
Basic		39,511,296		38,707,049		39,340,670		38,539,850
Diluted (1)		39,511,296		38,707,049		39,340,670		38,539,850

(1) See Note 14 “Earnings (Loss) Per Common Share” for details on calculation.

The accompanying notes are an integral part of the Consolidated Financial Statements.

4

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Net loss	$	(7,142)	$	(16,592)	$	(185,589)	$	(23,665)
Other comprehensive income (loss):
Foreign currency translation gain (loss)		(8)		(63)		24		(26)
Total other comprehensive income (loss)		(8)		(63)		24		(26)
Comprehensive loss	$	(7,150)	$	(16,655)	$	(185,565)	$	(23,691)

The accompanying notes are an integral part of the Consolidated Financial Statements.

5

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

	Three months ended March 31, 2021
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Accumulated		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Deficit		Loss		Stock		Equity
Balance, December 31, 2020	40,832	$	41	$	326,939	$	(179,738)	$	(595)	$	(17,389)	$	129,258
Shares issued in connection with share-based compensation plans	40		—		109		—		—		—		109
Share-based compensation	—		—		1,863		—		—		—		1,863
Purchase of treasury stock	—		—		—		—		—		(30)		(30)
Other comprehensive loss	—		—		—		—		(8)		—		(8)
Net loss	—		—		—		(7,142)		—		—		(7,142)
Balance, March 31, 2021	40,872	$	41	$	328,911	$	(186,880)	$	(603)	$	(17,419)	$	124,050

	Three months ended March 31, 2020
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Earnings		Loss		Stock		Equity
Balance, December 31, 2019	39,852	$	40	$	317,012	$	25,002	$	(578)	$	(16,304)	$	325,172
Shares issued in connection with share-based compensation plans	47		—		182		—		—		—		182
Share-based compensation	—		—		1,870		—		—		—		1,870
Purchase of treasury stock	—		—		—		—		—		(31)		(31)
Other comprehensive income	—		—		—		—		(63)		—		(63)
Net loss	—		—		—		(16,592)		—		—		(16,592)
Balance, March 31, 2020	39,899	$	40	$	319,064	$	8,410	$	(641)	$	(16,335)	$	310,538

	Nine months ended March 31, 2021
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Accumulated		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Deficit		Loss		Stock		Equity
Balance, June 30, 2020	39,963	$	40	$	321,164	$	(1,291)	$	(627)	$	(16,390)	$	302,896
Shares issued in connection with share-based compensation plans	909		1		551		—		—		—		552
Share-based compensation	—		—		7,196		—		—		—		7,196
Purchase of treasury stock	—		—		—		—		—		(1,029)		(1,029)
Other comprehensive income	—		—		—		—		24		—		24
Net loss	—		—		—		(185,589)		—		—		(185,589)
Balance, March 31, 2021	40,872	$	41	$	328,911	$	(186,880)	$	(603)	$	(17,419)	$	124,050

	Nine months ended March 31, 2020
								Accumulated
	Common Stock			Additional				Other				Total
	Shares			Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Issued	Amount		Capital		Earnings		Loss		Stock		Equity
Balance, June 30, 2019	38,970	$	39	$	317,023	$	32,075	$	(615)	$	(14,481)	$	334,041
Shares issued in connection with share-based compensation plans	929		1		777		—		—		—		778
Share-based compensation	—		—		8,336		—		—		—		8,336
Purchase of treasury stock	—		—		—		—		—		(1,854)		(1,854)
Other comprehensive income	—		—		—		—		(26)		—		(26)
Purchase of capped call	—		—		(7,072)		—		—		—		(7,072)
Net loss	—		—		—		(23,665)		—		—		(23,665)
Balance, March 31, 2020	39,899	$	40	$	319,064	$	8,410	$	(641)	$	(16,335)	$	310,538

The accompanying notes are an integral part of the Consolidated Financial Statements.

6

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	Nine Months Ended
	March 31,
	2021		2020
OPERATING ACTIVITIES:
Net loss	$	(185,589)	$	(23,665)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		38,345		41,386
Deferred income tax benefit		(20,129)		(2,488)
Share-based compensation		7,196		8,336
Asset impairment charges		198,000		15,607
Gain on sale/disposal of assets		(26)		(821)
Loss on extinguishment of debt		—		2,145
Amortization of debt discount and other debt issuance costs		9,073		11,001
Provision for inventory write-downs		23,613		8,486
Other noncash expenses		853		1,387
Changes in assets and liabilities which provided (used) cash:
Accounts receivable, net		10,997		(15,604)
Inventories		6,180		(470)
Income taxes receivable/payable		(25,420)		(10,472)
Other assets		(1,423)		3,006
Rebates payable		(6,327)		(2,871)
Royalties payable		(6,322)		5,147
Restructuring liability		15		(2,254)
Operating lease liability		52		(1,005)
Accounts payable		70		20,341
Accrued expenses		(10,937)		1,366
Accrued payroll and payroll-related expenses		(6,546)		(6,803)
Other liabilities		2,530		(1,374)
Net cash provided by operating activities		34,205		50,381
INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(6,599)		(13,105)
Proceeds from sale of property, plant and equipment		51		7,332
Advance to VIE		—		(250)
Purchases of intangible assets		(4,500)		(27,750)
Net cash used in investing activities		(11,048)		(33,773)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		—		86,250
Purchase of capped call		—		(7,072)
Repayments of long-term debt		(78,353)		(129,989)
Proceeds from issuance of stock		552		778
Payment of debt issuance costs		(2,390)		(3,489)
Purchase of treasury stock		(1,029)		(1,854)
Net cash used in financing activities		(81,220)		(55,376)
Effect on cash and cash equivalents of changes in foreign exchange rates		24		(26)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(58,039)		(38,794)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD		144,329		140,249
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	86,290	$	101,455
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	30,670	$	39,554
Income taxes paid (refunded)	$	(23,052)	$	7,775
Accrued purchases of property, plant and equipment	$	803	$	2,023

The accompanying notes are an integral part of the Consolidated Financial Statements.

7

LANNETT COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Interim Financial Information

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for the presentation of interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited financial statements do not include all the information and footnotes necessary for a comprehensive presentation of the financial position, results of operations and cash flows for the periods presented. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for the three and nine months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021. These unaudited financial statements should be read in combination with the other Notes in this section; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 2; and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The Consolidated Balance Sheet as of June 30, 2020 was derived from audited financial statements.

Note 2. The Business and Nature of Operations

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company” or “Lannett”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, nasal and oral solution finished dosage forms of drugs that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the Company.

The Company operates pharmaceutical manufacturing plants in Carmel, New York and Seymour, Indiana. The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations.

COVID-19 Update

In December 2019, the COVID-19 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated COVID-19 a global pandemic. Governments on the national, state and local level in the United States, and around the world, implemented lockdown and shelter-in-place orders, requiring many non-essential businesses to shut down operations. The Company’s business, however, is deemed “essential” and it has continued to operate, manufacture, and distribute its medicines to customers.

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

While COVID-19 has thus far not had a material impact on the Company’s operations, subsequent to an initial stocking up of supplies at the start of the pandemic, the total volume of drug prescriptions being written in the country has decreased causing less demand for our products. We cannot reasonably predict the ultimate impact of COVID-19 on our future results of operations and cash flows due to the continued uncertainty around the duration and severity of the pandemic.

8

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP.

Principles of consolidation

The Consolidated Financial Statements include the accounts of Lannett Company, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, returns and other adjustments including a provision for the Company’s liability under the Medicare Part D program. Additionally, significant estimates and assumptions are required when determining the value of inventories and long-lived assets, including intangible assets, income taxes, contingencies and share-based compensation.

Because of the inherent subjectivity and complexity involved in these estimates and assumptions, actual results could differ from those estimates.

Foreign currency translation

The Consolidated Financial Statements are presented in U.S. dollars, the reporting currency of the Company. The financial statements of the Company’s foreign subsidiary are maintained in local currency and translated into U.S. dollars at the end of each reporting period. Assets and liabilities are translated at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. The adjustments resulting from the use of differing exchange rates are recorded as part of stockholders’ equity in accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in foreign currencies are recognized in the Consolidated Statements of Operations under other income (loss). Amounts recorded due to foreign currency fluctuations are immaterial to the Consolidated Financial Statements.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with original maturities less than or equal to three months at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value, and consist of bank deposits and money market funds. The Company maintains its cash deposits and cash equivalents at well-known, stable financial institutions. Such amounts frequently exceed insured limits. In connection with the Amendment No. 4 to the Term Loan B Facility, which is discussed in further detail in Note 10 “Long-Term Debt,” the Company is required to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent. At March 31, 2021, the Company classified this balance as restricted cash, which is included in other assets.

9

Presented in the table below is a reconciliation of the cash, cash equivalents and restricted cash amounts presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended March 31, 2021 and 2020.

	March 31, 2021		March 31, 2020
Cash and cash equivalents	$	81,290	$	101,455
Restricted cash, included in other assets		5,000		—
Cash, cash equivalents and restricted cash as presented on the Consolidated Statements of Cash Flows	$	86,290	$	101,455

Allowance for doubtful accounts

On July 1, 2020, the Company adopted guidance issued by the FASB in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the Company to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are determined to be uncollectible.

Inventories

Inventories are stated at the lower of cost or net realizable value by the first-in, first-out method. Inventories are regularly reviewed and write-downs for excess and obsolete inventory are recorded based primarily on current inventory levels, expiration date and estimated sales forecasts.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the assets’ estimated useful lives. Repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

Intangible Assets

Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives which commences upon shipment of the product, generally for periods ranging from 5 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred.

Valuation of Long-Lived Assets, including Intangible Assets

The Company’s long-lived assets primarily consist of property, plant and equipment and definite and indefinite-lived intangible assets. Property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances (“triggering events”) indicate that the carrying amount of the asset may not be recoverable. If a triggering event is determined to have occurred, the asset’s carrying value is compared to the future undiscounted cash flows expected to be generated by the asset. If the carrying value exceeds the undiscounted cash flows of the asset, then impairment exists. Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of each fiscal year or more frequently if triggering events indicate that the asset might be impaired.

10

An impairment loss is measured as the excess of the asset’s carrying value over its fair value, which in most cases is calculated using a discounted cash flow model. Discounted cash flow models are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

In-Process Research and Development

Amounts allocated to in-process research and development in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets subject to impairment testing in accordance with the Company’s impairment testing policy for indefinite-lived intangible assets. As products in development are approved for sale, amounts will be allocated to product rights and will be amortized over their estimated useful lives. Definite-lived intangible assets are amortized over the expected lives of the related assets. The judgments made in determining the estimated fair value of in-process research and development, as well as asset lives, can materially impact our results of operations. The Company’s fair value assessments are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

Segment Information

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

	Three Months Ended				Nine Months Ended
(In thousands)	March 31,				March 31,
Medical Indication	2021		2020		2021		2020
Analgesic	$	3,836	$	2,811	$	10,528	$	6,806
Anti-Psychosis		11,678		27,858		38,023		78,588
Cardiovascular		16,573		21,746		52,623		67,325
Central Nervous System		24,509		18,566		71,648		57,154
Endocrinology		6,822		—		19,551		—
Gastrointestinal		16,817		20,745		52,492		56,020
Infectious Disease		10,610		21,749		55,586		51,722
Migraine		5,169		12,886		20,942		32,907
Respiratory/Allergy/Cough/Cold		2,548		2,966		6,241		8,747
Urinary		1,566		1,149		4,385		2,817
Other		8,617		8,051		24,661		27,847
Contract manufacturing revenue		3,625		5,845		16,089		17,891
Total net sales	$	112,370	$	144,372	$	372,769	$	407,824

Customer, Supplier and Product Concentration

The following table presents the percentage of total net sales, for the three and nine months ended March 31, 2021 and 2020, for certain of the Company’s products, defined as products containing the same active ingredient or combination of ingredients, which accounted for at least 10% of net sales in any of those periods:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Product 1	8	%	11	%	13	%	10	%
Product 2	8	%	17	%	8	%	18	%

11

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

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Customer A	29	%	29	%	27	%	25	%
Customer B	20	%	21	%	21	%	24	%
Customer C	13	%	12	%	12	%	11	%

Revenue Recognition

The Company complies with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when (or as) we satisfy our performance obligations by transferring a promised good or service to a customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. The revenue standard impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time.” However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position.

When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments. These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual. Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.

Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity. While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions. Each major category is discussed in detail below:

Chargebacks

The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health, AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.

12

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their Food and Drug Administration (“FDA”) approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug application ("ANDA’). Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

Returns

Consistent with industry practice, the Company has a product returns policy that allows customers to return product within a specified time period prior to and subsequent to the product’s expiration date in exchange for a credit to be applied to future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices, credit terms and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve for returns increases as net sales increase.

Other Adjustments

Other adjustments consist primarily of “price adjustments”, also known as “shelf-stock adjustments” and “price protections,” which are both credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available. Other adjustments also include prompt payment discounts and “failure-to-supply” adjustments. If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.

Leases

On July 1, 2019, the Company adopted ASC Topic 842, Leases, which superseded ASC Topic 840, Leases. Under ASC 842, when the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. Once a lease has been identified, the Company must determine the lease term, the present value of lease payments and the classification of the lease as either operating or financing.

13

The lease term is determined to be the non-cancelable period including any lessee renewal options which are considered to be reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The present value of lease payments includes fixed and certain variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. To calculate the present value of lease payments, we use our incremental borrowing rate based on the information available at commencement date, as the rate implicit in the lease is generally not readily available.

In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors.

Upon the commencement of the lease, the Company will record a lease liability and right-of-use (“ROU”) asset based on the present value of the future minimum lease payments over the lease term at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.

For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term unless an impairment has been recorded with respect to a leased asset. For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.

Cost of Sales, including Amortization of Intangibles

Cost of sales includes all costs related to bringing products to their final selling destination, which includes direct and indirect costs, such as direct material, labor and overhead expenses. Additionally, cost of sales includes product royalties, depreciation, amortization and costs to renew or extend recognized intangible assets, freight charges and other shipping and handling expenses.

Research and Development

Research and development costs are expensed as incurred, including all production costs until a drug candidate is approved by the FDA. Research and development expenses include costs associated with internal projects as well as costs associated with third-party research and development contracts.

Contingencies

Loss contingencies, including litigation-related contingencies, are included in the Consolidated Statements of Operations when the Company concludes that a loss is both probable and reasonably estimable. Legal fees for litigation-related matters are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative expenses line item.

Restructuring Costs

The Company records charges associated with approved restructuring plans to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges based on estimated employee terminations, site closure and consolidation plans. The Company accrues severance and other employee separation costs under these actions when it is probable that a liability exists and the amount is reasonably estimable.

14

Share-based Compensation

Share-based compensation costs are recognized over the vesting period, using a straight-line method, based on the fair value of the instrument on the date of grant less an estimate for expected forfeitures. The Company uses the Black-Scholes valuation model to determine the fair value of stock options, the stock price on the grant date to value restricted stock and the Monte-Carlo simulation model to determine the fair value of performance-based shares. The Black-Scholes valuation and Monte-Carlo simulation models include various assumptions, including the expected volatility, the expected life of the award, dividend yield and the risk-free interest rate as well as performance assumptions of peer companies. These assumptions involve inherent uncertainties based on market conditions which are generally outside the Company’s control. Changes in these assumptions could have a material impact on share-based compensation costs recognized in the Consolidated Financial Statements.

Self-Insurance

The Company self-insures for certain employee medical and prescription benefits. The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure. The liability for self-insured risks is primarily calculated using independent third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported. Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The liability for self-insured risks under this plan was not material to the consolidated financial position of the Company as of March 31, 2021 and June 30, 2020.

Income Taxes

The Company uses the liability method to account for income taxes as prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. The Company evaluates the need for a valuation allowance each reporting period weighing all positive and negative evidence. The factors used to assess the likelihood of realization include, but are not limited to, the Company’s forecast of future taxable income, historical results of operations, statutory expirations and available tax planning strategies and actions that could be implemented to realize the net deferred tax assets. Under ASC 740, Income Taxes, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company continues to closely monitor the need for a valuation against its deferred tax assets in light of recent pre-tax losses while also giving consideration to our forecasted taxable income, which is inherently uncertain and subject to change based on market conditions. Further near-term losses along with significant changes to our forecasted income could affect the ultimate realization of our deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative accounting standards also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

15

On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, former President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law, which provides a stimulus to the U.S. economy in the form of various individual and business assistance programs as well as temporary changes to existing tax law. Among the changes to the provision in business tax laws include a five-year net operating loss carryback for the Fiscal 2019 - 2021 tax years, a deferral of the employer’s portion of certain payroll tax, and an increase in the interest expense deductibility limitation for the Fiscal 2020 and 2021 tax years. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. As a result of the CARES Act, the Company carried back its Fiscal 2020 taxable loss into the Fiscal 2015 tax year.

Earnings (Loss) Per Common Share

A dual presentation of basic and diluted earnings (loss) per common share is required on the face of the Company's Consolidated Statements of Operations as well as a reconciliation of the computation of basic earnings (loss) per common share to diluted earnings (loss) per common share. Basic earnings (loss) per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Beginning in the first quarter of Fiscal 2020, the Company's diluted earnings (loss) per common share is computed using the "if-converted" method by dividing the adjusted "if-converted" net income by the adjusted weighted average number of shares of common stock outstanding during the period. The adjusted "if-converted" net income is adjusted for interest expense and amortization of debt issuance costs, both net of tax, associated with the Company’s 4.50% Convertible Senior Notes due 2026. The weighted average number of diluted shares is adjusted for the potential dilutive effect of the exercise of stock options, treats unvested restricted stock and performance-based shares as if it were vested, and assumes the conversion of the 4.50% Convertible Senior Notes. Anti-dilutive securities are excluded from the calculation. Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss), but excluded from income (loss) for all amounts are recorded directly as an adjustment to stockholders’ equity.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the impairment model used to measure credit losses for most financial assets. We are required to recognize an allowance that reflects the Company’s current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The Company adopted this guidance in the first quarter of Fiscal 2021. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity, with changes to modify and simplify the application of U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted. The ASU requires adoption using either the retrospective basis or the modified retrospective basis. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements.

16

Note 4. Restructuring Charges

2020 Restructuring Plan

On July 10, 2020, the Board of Directors authorized a restructuring and cost savings plan (the “2020 Restructuring Plan”) to enhance manufacturing efficiencies, streamline operations and reduce the Company’s cost structure. The 2020 Restructuring Plan was implemented, in part, as a result of previously anticipated near-term competition and pricing pressure with respect to certain key products. The 2020 Restructuring Plan includes lowering operating costs and reducing the workforce by approximately 80 positions. The 2020 Restructuring Plan was initiated on July 13, 2020 and completed as of December 31, 2020.

The Company incurred $4.0 million in severance-related costs in the first nine months of Fiscal 2021 in connection with the 2020 Restructuring Plan. The Company expects the 2020 Restructuring Plan to result in annual cost savings in excess of $15.0 million.

A reconciliation of the changes in restructuring liabilities associated with the 2020 Restructuring Plan from June 30, 2020 through March 31, 2021 is set forth in the following table:

	Employee
(In thousands)	Separation Costs
Balance at June 30, 2020	$	—
Restructuring charges		4,043
Payments		(4,001)
Balance at March 31, 2021	$	42

Note 5. Accounts Receivable, net

Accounts receivable, net consisted of the following components at March 31, 2021 and June 30, 2020:

	March 31,		June 30,
(In thousands)	2021		2020
Gross accounts receivable	$	258,652	$	271,557
Less: Chargebacks reserve		(74,729)		(61,877)
Less: Rebates reserve		(16,446)		(24,536)
Less: Returns reserve		(38,708)		(40,796)
Less: Other deductions		(13,449)		(17,557)
Less: Allowance for doubtful accounts		(629)		(1,103)
Accounts receivable, net	$	114,691	$	125,688

For the three months ended March 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $135.4 million, $27.1 million, $3.9 million and $18.6 million, respectively. For the three months ended March 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $201.0 million, $63.8 million, $6.4 million and $35.7 million, respectively.

For the nine months ended March 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $515.2 million, $104.8 million, $14.5 million and $55.2 million, respectively. For the nine months ended March 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $608.6 million, $180.6 million, $16.6 million and $77.2 million, respectively.

17

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

Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2020	$	61,877	$	62,711	$	40,796	$	17,557	$	182,941
Current period provision		515,196		104,795		14,545		55,213		689,749
Credits issued during the period		(502,344)		(119,212)		(16,633)		(59,321)		(697,510)
Balance at March 31, 2021	$	74,729	$	48,294	$	38,708	$	13,449	$	175,180

Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2019	$	89,567	$	78,274	$	55,554	$	18,128	$	241,523
Current period provision		608,570		180,574		16,600		77,167		882,911
Credits issued during the period		(637,664)		(181,465)		(24,466)		(52,508)		(896,103)
Balance at March 31, 2020	$	60,473	$	77,383	$	47,688	$	42,787	$	228,331

For the three months ending March 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 46.1% and 45.1%, the provision for rebates was 9.2% and 14.3%, the provision for returns was 1.3% and 1.4% and the provision for other adjustments was 6.3% and 8.0%, respectively.

For the nine months ending March 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 49.2% and 47.8%, the provision for rebates was 10.0% and 14.2%, the provision for returns was 1.4% and 1.3% and the provision for other adjustments was 5.3% and 6.1%, respectively.

The increase in the chargebacks reserve was primarily due to timing of sales and product mix partially offset by lower sales. The rebates reserve decreased primarily due to lower sales of Fluphenazine in Fiscal 2021, which had higher than average government-related rebates. Historically, we have not recorded any material amounts in the current period related to reversals or additions of prior period reserves.

Note 6. Inventories

Inventories at March 31, 2021 and June 30, 2020 consisted of the following:

	March 31,		June 30,
(In thousands)	2021		2020
Raw Materials	$	47,307	$	59,703
Work-in-process		16,143		12,235
Finished Goods		49,624		70,929
Total	$	113,074	$	142,867

During the three months ended March 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $0.4 million and $2.4 million, respectively. During the nine months ended March 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $23.6 million and $8.5 million, respectively. The increase in write-downs for excess and obsolete inventory was primarily related to the discontinuation of certain product lines during the second quarter of Fiscal 2021, which is discussed further in Note 9 “Intangible Assets.”

18

Note 7. Property, Plant and Equipment, net

Property, plant and equipment, net at March 31, 2021 and June 30, 2020 consisted of the following:

		March 31,		June 30,
(In thousands)	Useful Lives	2021		2020
Land	—	$	1,783	$	1,783
Building and improvements	10 - 39 years		103,361		100,285
Machinery and equipment	5 - 10 years		168,858		164,704
Furniture and fixtures	5 - 7 years		3,402		3,116
Less accumulated depreciation			(119,953)		(102,983)
			157,451		166,905
Construction in progress			11,393		12,613
Property, plant and equipment, net		$	168,844	$	179,518

Depreciation expense for the three months ended March 31, 2021 and 2020 was $5.8 million and $6.2 million, respectively. Depreciation expense for the nine months ended March 31, 2021 and 2020 was $17.2 million and $17.9 million, respectively.

Property, plant and equipment, net included amounts held in foreign countries in the amount of $0.5 million at March 31, 2021 and June 30, 2020.

Note 8. Fair Value Measurements

The Company’s financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt obligations. The Company’s cash and cash equivalents include bank deposits and money market funds. The carrying value of certain financial instruments, primarily cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair values based upon the short-term nature of their maturity dates.

The Company follows the authoritative guidance of ASC Topic 820 “Fair Value Measurements and Disclosures.” Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s financial assets and liabilities measured at fair value are entirely within Level 1 of the hierarchy as defined below:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 — Directly or indirectly observable inputs, other than quoted prices, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are material to the fair value of the asset or liability. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation are examples of Level 3 assets and liabilities.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

19

Financial Instruments Disclosed, But Not Reported, at Fair Value

We estimate the fair value of our debt utilizing market quotations for debt that have quoted prices in active markets. Since our debt does not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). The estimated fair value of our term loan debt was approximately $518 million and $608 million as of March 31, 2021 and June 30, 2020, respectively. The estimated fair value of our 4.50% Convertible Senior Notes was approximately $53 million and $58 million as of March 31, 2021 and June 30, 2020, respectively. The fair value as of March 31, 2021 was lower than the carrying value primarily due to the Company’s stock price at March 31, 2021 as compared to the $15.29 conversion price.

Non-recurring Fair Value Measurements

The Company has certain assets that are measured at fair value on a non-recurring basis and are adjusted to fair value only when the carrying values are greater than the fair values. These assets are subject to fair value adjustments when there is evidence of impairment. The Company’s estimation of the fair value of intangible assets for impairment represents a Level 3 fair value measurement, due to the use of internal and external projections and unobservable measurement inputs. Based on an impairment analysis performed during the second quarter of Fiscal 2021, the Company adjusted the KUPI product rights assets and the KUPI in-process research and development asset to fair value, $84.0 million and $4.0 million respectively, as of December 31, 2020. Refer to Note 9 “Intangible Assets” for further information.

Note 9. Intangible Assets

Intangible assets, net as of March 31, 2021 and June 30, 2020 consisted of the following:

	Weighted	Gross Carrying Amount				Accumulated Amortization				Intangible Assets, Net
	Avg. Life	March 31,		June 30,		March 31,		June 30,		March 31,		June 30,
(In thousands)	(Yrs.)	2021		2020		2021		2020		2021		2020
Definite-lived:
KUPI product rights	15		83,955		416,154		(2,099)		(125,327)		81,856		290,827
KUPI trade name	2		2,920		2,920		(2,920)		(2,920)		—		—
KUPI other intangible assets	15		19,000		19,000		(6,778)		(5,828)		12,222		13,172
Silarx product rights	15		20,000		20,000		(4,556)		(3,556)		15,444		16,444
Other product rights	10		55,218		50,718		(8,602)		(5,426)		46,616		45,292
Total definite-lived		$	181,093	$	508,792	$	(24,955)	$	(143,057)	$	156,138	$	365,735
Indefinite-lived:
KUPI in-process research and development	—	$	4,000	$	9,000	$	—	$	—	$	4,000	$	9,000
Total indefinite-lived			4,000		9,000		—		—		4,000		9,000
Total intangible assets, net		$	185,093	$	517,792	$	(24,955)	$	(143,057)	$	160,138	$	374,735

For the three months ended March 31, 2021 and 2020, the Company recorded amortization expense of $3.9 million and $8.3 million, respectively. For the nine months ended March 31, 2021 and 2020, the Company recorded amortization expense of $21.1 million and $23.5 million, respectively.

20

In December 2020, the Company reviewed its product portfolio and decided to discontinue 23 lower gross margin product lines, including product lines that were acquired through various past business and product acquisitions. As a result of the discontinuance and the reduction in net sales and gross margin of certain other product lines, the Company determined that such decision represents a “triggering event” and, therefore, commenced an analysis to determine the potential for impairment of certain long-lived assets, primarily its intangible assets. Based on that analysis, the Company recorded an impairment charge of $193.0 million related to the KUPI product rights intangible assets during the second quarter of Fiscal 2021. The impairment charge is primarily a result of the decline in net sales and gross margin of certain product lines acquired in connection with the KUPI acquisition, including those product lines being discontinued.

In the second quarter of Fiscal 2021, the Company also recorded a $5.0 million impairment charge to its KUPI in-process research and development intangible asset due to delays in the expected launch of a product within the portfolio, which resulted in reduced projected cash flows.

In November 2020, the Company entered into Amendment No. 2 to License and Supply Agreement (the “2020 Amendment”) with Recro Gainesville LLC (“Recro”), which amended the Company’s agreement with Recro to exclusively distribute Verelan PM ®, Verelan SR ®, and Verapamil PM. In accordance with the Company’s policy to expense costs to renew or extend the term of a recognized intangible asset as incurred, the Company recorded $5.0 million in consideration to renew the Company’s distribution agreement during the second quarter of Fiscal Year 2021, which is included within cost of sales on the Consolidated Statements of Operations.

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

(In thousands)	Amortization
Fiscal Year Ending June 30,	Expense
2021	$	3,857
2022		17,026
2023		16,726
2024		16,426
2025		16,026
Thereafter		86,077
	$	156,138

Note 10. Long-Term Debt

Long-term debt, net consisted of the following:

	March 31,		June 30,
(In thousands)	2021		2020
Term Loan A	$	—	$	48,844
Unamortized discount and other debt issuance costs		—		(433)
Term Loan A, net		—		48,411
Term Loan B due 2022; 6.38% as of March 31, 2021		543,348		572,857
Unamortized discount and other debt issuance costs		(16,162)		(23,278)
Term Loan B, net		527,186		549,579
4.50% Convertible Senior Notes due 2026		86,250		86,250
Unamortized discount and other debt issuance costs		(2,738)		(3,111)
4.50% Convertible Senior Notes, net		83,512		83,139
$125 million Revolving Credit Facility		—		—
$30 million ABL Credit Facility		—		—
Total debt, net		610,698		681,129
Less short-term borrowings and current portion of long-term debt		—		(88,189)
Total long-term debt, net	$	610,698	$	592,940

21

The weighted average interest rate for the three months ended March 31, 2021 and 2020 was 7.9% and 8.6%, respectively. The weighted average interest rate for the nine months ended March 31, 2021 and 2020 was 7.9% and 9.0%, respectively. The Company paid off the outstanding balance of the Term Loan A of $42.0 million on November 25, 2020 with cash on hand. The Company’s undrawn $125 million Revolving Credit Facility also expired on November 25, 2020.

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

	Amounts Payable
(In thousands)	to Institutions
2022 (a)	$	39,345
2023		504,003
2024		—
2025		—
2026		—
Thereafter		86,250
Total	$	629,598

(a) The Company completed multiple transactions to refinance the existing Term Loan B Facility due 2022 on April 22, 2021. In accordance with ASC 470 Debt, the principal payments due for the twelve-month period ending March 31, 2022 are classified as non-current on the Consolidated Balance Sheet as of March 31, 2021.

On December 7, 2020, the Company entered into a credit and guaranty agreement, which provides for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $30 million, subject to borrowing base availability, and includes letter of credit and swing line sub-facilities. Borrowing availability under the ABL Credit Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of eligible accounts receivable less certain reserves and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. Loans outstanding under the ABL Credit Agreement bear interest at a floating rate measured by reference to an adjusted London Inter-Bank Offered Rate (“LIBOR”), subject to a floor of 0.75%, plus an applicable margin of 2.50% per annum. Unused commitments under the ABL Credit Facility are subject to a per annum fee of 0.50%. The obligations under the ABL Credit Agreement are guaranteed by the Company and all of the Company’s existing and future subsidiaries, subject to certain exceptions (collectively, the “Guarantors”), and such obligations and the obligations of the Guarantors are secured by:

● a perfected security interest in all present and after-acquired accounts receivable, payment intangibles, inventory, deposit accounts, securities accounts, and any cash, cash equivalents or other assets in such accounts and other related assets owned by each Guarantor and the proceeds of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral (as defined below), and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the ABL Priority Collateral securing the Company’s existing Term Loan B Facility; and

● a perfected security interest in substantially all present and after-acquired tangible and intangible assets of each Guarantor other than the ABL Priority Collateral (the “Cash Flow Priority Collateral”), which security interest is junior to the security interest in the Cash Flow Priority Collateral securing the Term Loan B Facility.

22

The ABL Credit Agreement contains customary representations and warranties and customary affirmative covenants and negative covenants. The negative covenants include restrictions on, among other things: the incurrence of additional indebtedness; the incurrence of additional liens; dividends or other distributions on equity; the purchase, redemption or retirement of capital stock; the payment or redemption of certain indebtedness; the nature of the business activity of the Company and its subsidiaries; loans, guarantees and other investments; entering into other agreements that create restrictions on the ability to pay dividends or make other distributions on equity or create or incur certain liens; asset sales; consolidations or mergers; amendment of certain material documents; changes in fiscal year; and affiliate transactions. The negative covenants are subject to customary exceptions and also permit dividends and other distributions on equity, consolidations, mergers and asset sales, certain acquisitions and other investments, and payments or redemptions of certain indebtedness, in each case upon satisfaction of the “payment conditions”. The payment conditions are deemed satisfied upon Excess Availability (as defined in the ABL Credit Agreement) on the date of the designated action and Excess Availability for the prior 30-day period exceeding agreed-upon thresholds, the absence of the occurrence and continuance of any event of default and, in certain cases, pro forma compliance with a fixed charge coverage ratio of no less than 1.10 to 1.00.

The ABL Credit Agreement includes a minimum fixed charge coverage ratio of no less than 1.10 to 1.00, which is tested only when Excess Availability is less than 15.0% of the lesser of (A) the borrowing base and (B) the then effective commitments under the ABL Credit Facility for three consecutive business days, and continuing until the first day immediately succeeding the last day of 30 consecutive days on which Excess Availability is in excess of such threshold.

The ABL Credit Agreement provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the ABL Credit Facility to be due and payable immediately and the commitments under the ABL Credit Facility to be terminated.

The Company also entered into Amendment No. 4 to the Credit and Guaranty Agreement, which amends the Term Loan B Facility to permit the incurrence of the ABL Credit Facility and requires the Company to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent, and a minimum cash balance of $15 million as of the last day of each month. At March 31, 2021, the Company classified the $5 million required deposit account balance as restricted cash, which is included in other assets caption in the Consolidated Balance Sheet. The amendment also replaced Morgan Stanley Senior Funding, Inc. with Alter Domus (US) LLC as administrative agent and collateral agent under the Term Loan B Facility.

The outstanding Term Loan B Facility and ABL Credit Facility amounts above are guaranteed by all of Lannett’s significant wholly-owned domestic subsidiaries and are collateralized by substantially all present and future assets of the Company.

On April 22, 2021, the Company entered into multiple transactions to refinance the existing Term Loan B Facility due 2022. The Company also amended the existing ABL Credit Facility to, among other things, increase the aggregate amount and extend the maturity of the revolving credit. Refer to Note 20 “Subsequent Events” for further discussion of the details of the transactions.

23

Note 11. Legal, Regulatory Matters and Contingencies

State Attorneys General Inquiry into the Generic Pharmaceutical Industry

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

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

Federal Investigation into the Generic Pharmaceutical Industry

In November and December 2014, the Company and certain affiliated individuals and customers were served with grand jury subpoenas relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The subpoenas requested corporate documents of the Company relating to corporate, financial and employee information, communications or correspondence with competitors regarding the sale of generic prescription medications and the marketing, sale, or pricing of certain products, generally for the period of 2005 through the dates of the subpoenas.

The Company received a Civil Investigative Demand (“CID”) from the Department of Justice on May 14, 2018. The CID requested information from 2009-present regarding allegations that the generic pharmaceutical industry engaged in market allocation, price fixing, payment of illegal remuneration and submission of false claims. The Company has responded to the CID.

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

Government Pricing

During the quarter ended December 31, 2016, the Company completed a contract compliance review, for the period January 1, 2012 through June 30, 2016, for one of KUPI’s government-entity customers. As a result of the review, the Company identified certain commercial customer prices and other terms that were not properly disclosed to the government-entity resulting in potential overcharges. For the period January 1, 2012 through November 24, 2015 (“the pre-acquisition period”), the Company is fully indemnified per the Stock Purchase Agreement.

On May 22, 2019, the Department of Veterans Affairs issued a Contracting Officer’s Final Decision and Demand for Payment, assessing the sum of $9.4 million for overpayments by the Veteran’s Administration for the period of January 1, 2012 through June 30, 2016. In August 2019, the Company remitted payment to the VA and received reimbursement from UCB for the indemnified portion of the payment in the amount of $8.1 million. The VA requested additional information for the period of July 1, 2016 through March 2018. The Company is in the process of responding to the information request.

24

State Attorneys General and Private Plaintiffs Antitrust and Consumer Protection Litigation

In December 2016, the Connecticut Attorney General and various other State Attorneys General filed a civil complaint alleging that six pharmaceutical companies engaged in anti-competitive behavior. The Company was not named in the action and does not compete on the products that formed the basis of the complaint. The complaint was later transferred for pretrial purposes to the United States District Court for the Eastern District of Pennsylvania as part of a multidistrict litigation captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation (the “MDL”). On October 31, 2017, the State Attorneys General filed a motion for leave to amend their complaint to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs. The District Court granted that motion on June 5, 2018. The State Attorneys General filed their amended complaint on June 18, 2018. The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, but does not involve the pricing for digoxin. The State Attorneys General also allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. On August 15, 2019, the Court denied the defendants' joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it.

On May 10, 2019, the State Attorneys General filed a new lawsuit naming the Company and one of its employees as defendants, along with 33 other companies and individuals. The complaint again alleges an overarching conspiracy and contains claims for price-fixing and market allocation under the Sherman Act and related state laws. The complaint focuses on the conduct of another generic pharmaceutical company, and the relationships that company had with other generic companies and their employees. The specific allegations in this complaint against Lannett relate to the Company’s sales of baclofen and levothyroxine. The complaint also names another current employee as a defendant, but the allegations pertain to conduct that occurred prior to their employment by Lannett. In June 2020, the State Attorneys General filed a third overarching conspiracy complaint involving scores of different drugs, including alleged price-fixing by the Company for acetazolamide. Both complaints have been added to the MDL.

In 2016 and 2017, the Company and certain competitors were named as defendants in a number of lawsuits alleging that the Company and certain generic pharmaceutical manufacturers have conspired to fix prices of generic digoxin, levothyroxine, ursodiol and baclofen. These cases are part of a larger group of more than 100 lawsuits generally alleging that over 30 generic pharmaceutical manufacturers and distributors conspired to fix prices for multiple different generic drugs in violation of the federal Sherman Act, various state antitrust laws, and various state consumer protection statutes. The United States also has been granted leave to intervene in the cases. On April 6, 2017, these cases were added to the MDL. The various plaintiffs are grouped into three categories - Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers - and filed Consolidated Amended Complaints (“CACs”) against the Company and the other defendants in August 2017.

The CACs naming the Company as a defendant involve generic digoxin, levothyroxine, ursodiol and baclofen. Pursuant to a court-ordered schedule grouping the 18 different drug cases into three separate tranches, the Company and other generic pharmaceutical manufacturer defendants in October 2017 filed joint and individual motions to dismiss the CACs involving the six drugs in the first tranche, including digoxin. In October 2018, the Court (with one exception) denied defendants’ motions to dismiss plaintiffs’ Sherman Act claims with respect to the drugs in the first tranche. In March 2019, the Company and other defendants filed answers to the Sherman Act claims. In addition, in February 2019, the Court dismissed certain of the plaintiffs’ state law claims, but denied the remainder of defendants’ motions to dismiss and set a deadline of April 1, 2019 for certain plaintiffs to amend their existing complaints. Those plaintiffs amended their complaints, but further motions to dismiss the state-law claims remain pending.

Following the lead of the state Attorneys General, the Direct Court Purchaser Plaintiffs, End Payer Plaintiffs and Indirect Reseller Plaintiffs filed their own complaints in June 2018 alleging an overarching conspiracy relating to 14 generic drugs in the End Payer complaint and 15 generic drugs in the Indirect Reseller complaint. Although the complaints allege an overarching conspiracy with respect to all of the drugs identified, the specific allegations related to drugs the Company manufactures involve acetazolamide and doxycycline monohydrate.

25

The Company and the other defendants filed motions to dismiss the overarching conspiracy claims. In August 2019, the Court denied the defendants' joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it. In addition, between December 2019 and February 2020, the End Payer Plaintiffs, Indirect Reseller Purchasers, and Direct Purchaser Plaintiffs filed separate complaints alleging overarching, industry-wide price-fixing conspiracies modeled on the second one filed by the state Attorneys General. The new complaint involves 135 new drugs in addition to those named in previous complaints. As to the Company, the new drugs involved are pilocarpine HCL, triamterene HCTZ capsules, amantadine HCL, and oxycodone HCL. None of the defendants, including the Company, has responded yet to these new complaints.

Between January 2018 and December 2020, a number of opt-out parties have filed individual complaints or otherwise commenced actions against the Company and dozens of other companies and individuals alleging an overarching conspiracy and individual conspiracies to fix the prices and allocate markets on scores of different drug products, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen. The opt-out parties include various retailers, insurers and county governments, which have filed federal suits in Pennsylvania, New York, California, Minnesota and Texas. All of those complaints have been added to the MDL but none of the defendants, including the Company, has responded to any of the complaints. Other groups of insurers have commenced actions in Pennsylvania state court against the Company and other drug companies by filing writs of summons, which are not complaints but can serve to toll the running of statutes of limitations. Those state-court cases have not been added to the MDL, although the parties have agreed to stay those cases pending further developments in the MDL.

In June 2020, the Company and a number of other generic pharmaceutical manufacturers were named as defendants in a Statement of Claim, along with a number of other generic pharmaceutical manufacturers, in a proposed class proceeding in federal court in Toronto, Ontario, Canada. The case alleges a violation of Canada’s Competition Act. The allegations are similar to those in the MDL alleging an overarching, industry-wide conspiracy to allocate markets and fix the price of generic drugs. That alleged conspiracy reached Canada because these same manufacturers also allegedly sell the majority of generic drugs in Canada. The Statement of Claim alleges that the conspiracy extends to the entire generic pharmaceutical market. The specific drugs identified with respect to the Company are: acetazolamide, baclofen, digoxin, doxycycline monohydrate, levothyroxine, and ursodiol. The Company has not yet responded to the Statement of Claim.

On July 13, 2020, the District Court overseeing the MDL selected as “bellwether” cases the second overarching conspiracy case filed by the state Attorneys General in May 2019 as well as individual-conspiracy cases filed by the Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers involving the drugs clobetasol, clomipramine and pravastatin. The Company is a defendant only in the overarching conspiracy case. On February 9, 2021, the District Court vacated the order selecting the bellwether cases. The District Court has re-designated the clobetasol and clomipramine cases as individual-conspiracy bellwethers, but has not yet designated a new overarching conspiracy bellwether case. To date, none of the bellwether cases have been scheduled for trial.

The Company believes that it acted in compliance with all applicable laws and regulations. Accordingly, the Company disputes the allegations set forth in these class actions and plans to vigorously defend itself against these claims.

26

Shareholder Litigation

In November 2016, a putative class action lawsuit was filed against the Company and two of its former officers in the federal district court for the Eastern District of Pennsylvania, alleging that the Company and two of its former officers damaged the purported class by making false and misleading statements regarding the Company’s drug pricing methodologies and internal controls. In December 2017, counsel for the putative class filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint in February 2018. In July 2018, the court granted the Company’s motion to dismiss the second amended complaint. In September 2018, counsel for the putative class filed a third amended complaint alleging that the Company and two of its former officers made false and misleading statements regarding the impact of competition on prices and sales of certain of the Company’s products and regarding the potential effects on the Company of regulatory investigations and antitrust litigation. The Company filed a motion to dismiss the third amended complaint in November 2018. In May 2019, the court denied the Company’s motion to dismiss the third amended complaint. In July 2019, the Company filed an answer to the third amended complaint. On October 1, 2020, the plaintiff filed a motion for class certification. In March 2021, the Company filed a brief in opposition to the motion to certify the putative class. The Company believes it acted in compliance with all applicable laws and plans to vigorously defend itself from these claims. The Company cannot reasonably predict the outcome of the suit at this time.

In May 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers and certain of the current and former members of the Company’s Board of Directors in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, that certain of the defendants caused the Company to issue false and misleading proxy statements in violation of Section 14(a) of the Securities Exchange Act of 1934, that the defendants were unjustly enriched at the expense of the Company, and that the defendants wasted corporate assets belonging to the Company. On December 4, 2019 the Court entered a stipulation consolidating the suit with a separate shareholder derivative suit filed in July 2019, as described below. On December 6, 2019, the Company filed a motion to dismiss the consolidated cases. On January 14, 2020, the parties reached an agreement in principle to resolve the consolidated cases, subject to the execution of a mutually acceptable settlement document and Court approval.

In July 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers and directors in the federal court for the Eastern District of Pennsylvania. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company and that certain of the defendants caused the Company to violate Sections 10(b), 14(a), and 29(b) of the Securities Exchange Act of 1934. In October 2019, this suit was transferred to the federal court for the District of Delaware and was pending before the same judge presiding over the shareholder derivative suit that was filed in May 2019. On December 4, 2019, the Court entered a stipulation consolidating the suit with a separate shareholder derivative suit filed in May 2019, as described above. On December 6, 2019, the Company filed a motion to dismiss the consolidated cases. On January 14, 2020, the parties reached an agreement in principle to resolve the consolidated cases, subject to the execution of a mutually agreeable settlement document and Court approval.

The settlement of the two consolidated cases, which was preliminarily approved by the Court on August 7, 2020, requires the Company to implement certain new corporate policies and pay the plaintiffs’ counsel in the consolidated cases, collectively, the sum of $600,000 in exchange for a release of all liability with respect to both of the consolidated cases. A settlement hearing was held on October 7, 2020. At the settlement hearing, the Magistrate Judge issued an oral Report and Recommendation approving the settlement and denying the objecting parties’ motion to intervene. The time period to object to the Report and Recommendation has expired. On October 22, 2020, the Court adopted the Report and Recommendation, granted the motion for final approval of the settlement, denied the objecting parties’ motion to intervene, and issued a final judgement dismissing the consolidated cases with prejudice. The Company considers these matters closed.

27

In September 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers, directors, and employees in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, alleges waste of corporate assets and gross mismanagement, and alleges that certain of the defendants caused the Company to violate Section 14(a) of the Securities and Exchange Act of 1934. On November 22, 2019, the Company filed a motion to dismiss the complaint. On January 16, 2020, the Court entered the parties’ stipulation to stay the case pending the resolution of the defendants’ motion to dismiss the two earlier filed consolidated shareholder derivative cases referenced above. On February 18, 2020, the Court entered the parties’ stipulation to withdraw the Company’s motion to dismiss without prejudice to the Company’s ability to refile a renewed motion to dismiss after the stay is lifted. On March 11, 2020, following notice that Plaintiffs no longer consented to the stay, the Court lifted the stay. On April 6, 2020, certain of the defendants, including the Company, filed a renewed motion to dismiss or, in the alternative, to stay the account. On April 29, 2020, the Court entered the parties’ stipulation to stay the action, pending a decision from the Court regarding the settlement in the consolidated derivative actions discussed above. In light of the Final Order and Judgment entered in the two earlier filed consolidated shareholder derivative cases referenced above, the parties filed a stipulation and proposed order dismissing this action, with prejudice. On October 29, 2020, the District Court Judge entered an Order approving the parties’ Stipulation of Dismissal, with prejudice. The Company considers this matter closed.

In February 2020, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers, directors, and employees in the Court of Chancery of the State of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, and were unjustly enriched. On March 16, 2020, the Company filed a motion to dismiss the complaint, and a motion to stay the proceedings. On March 27, 2020, the Company filed its opening brief in support of its motion to stay the proceedings. On April 6, 2020, the parties entered into a stipulation and proposed order to stay the action. The Court granted the stipulation and proposed order that same day. In light of the Final Order and Judgment entered in the two earlier filed consolidated shareholder derivative cases referenced above, the parties agreed to dismiss this action, with prejudice. The Court granted Stipulation of Dismissal with Prejudice on November 4, 2020. The Company considers this matter closed.

Genus Life Sciences

In December 2018, Genus Lifesciences, Inc. (“Genus”) sued the Company, Cody Labs, and others in California federal court, alleging violations of the Lanham Act, Sherman Act, and California false advertising law. Genus received FDA approval for a cocaine hydrochloride product in December 2018, and its claims are premised in part on allegations that the Company falsely advertises its unapproved cocaine hydrochloride solution product. The Company denies that it is falsely advertising its cocaine hydrochloride solution product and continues to market its unapproved product relying on the Guidance for FDA Staff and Industry, Marketed Unapproved Drugs — Compliance Policy Guide, pending approval of its Section 505(b)(2) application. In January 2019, the Company filed a motion to dismiss the complaint. On May 3, 2019, the Court issued a written decision granting in part and denying in part the motion to dismiss. On June 6, 2019, Genus filed an Amended Complaint. On June 27, 2019, the Company filed a motion to dismiss the amended complaint. By Order dated September 3, 2019, the Court granted in part and denied in part the Company's motion to dismiss. On November 20, 2019, Genus filed a second amended complaint. On December 17, 2019, the Company filed an answer to the second amended complaint. The Company believes it acted in compliance with all applicable laws and regulations and plans to vigorously defend itself from these claims. Discovery is ongoing and the Company cannot reasonably predict the outcome of this suit at this time.

28

Sandoz, Inc.

On July 20, 2020, Sandoz, Inc. (“Sandoz”) filed a complaint in federal court in Philadelphia, alleging claims for tortious interference with contract, unfair competition and conversion of confidential information, arising out of Cediprof, Inc.’s (“Cediprof”) termination of Sandoz’s contract to distribute levothyroxine tablets in the United States and certain territories. Along with the complaint, Sandoz filed a motion for a temporary restraining order and preliminary injunction, seeking to enjoin the Company from commencing the distribution of levothyroxine tablets on August 3, 2020. On the same day, Sandoz filed a separate complaint and application for a temporary restraining order and preliminary injunction against Cediprof in federal court in New York, seeking to prevent Cediprof from selling its levothyroxine tablets in the United States and certain of its territories to anyone other than Sandoz. On July 27, 2020, the New York court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling Sandoz had failed to establish irreparable harm. Sandoz subsequently dismissed the complaint and is proceeding against Cediprof in an Arbitration in New York, where the Company has agreed to indemnify Cediprof. On July 28, 2020, the Philadelphia court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling that Sandoz had failed to establish irreparable harm and failed to establish that it is likely to succeed on the merits of its claim against Lannett. On October 5, 2020, the Company filed a motion to dismiss the complaint. On December 28, 2020, the Court granted in part and denied in part the motion, dismissing certain of the claims. The Company has filed a motion to stay the case pending the Arbitration of the Sandoz/Cediprof dispute. On January 11, 2021, the Company filed an answer and counterclaim to the complaint. The Company denies that it tortiously interfered with Sandoz’s contract or that it converted any of Sandoz’s alleged confidential information. Discovery is ongoing and the Company cannot reasonably predict the outcome of this suit at this time.

Other Litigation Matters

The Company is also subject to various legal proceedings arising out of the normal course of its business including, but not limited to, product liability, intellectual property, patent infringement claims and antitrust matters. It is not possible to predict the outcome of these various proceedings. An adverse determination in any of these proceedings or in any of the proceedings described above in the future could have a significant impact on the financial position, results of operations and cash flows of the Company.

Note 12. Commitments

Leases

At March 31, 2021 and June 30, 2020, the Company had a ROU lease asset of $10.8 million and $9.3 million, respectively, and a ROU liability of $13.3 million and $10.9 million, respectively. The current balance of the ROU liability at March 31, 2021 and June 30, 2020 was $2.0 million and $1.1 million, respectively.

In February 2021, the Company extended our existing lease for the warehouse in Seymour, Indiana. The lease term is now set to expire in March 2031. Accordingly, the Company recorded a ROU lease asset and liability totaling $2.3 million, respectively, in the third quarter of Fiscal 2021.

Components of lease cost are as follows:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Operating lease cost	$	463	$	642	$	1,342	$	1,713
Variable lease cost		37		32		119		93
Short-term lease cost (a)		111		194		337		473
Total	$	611	$	868	$	1,798	$	2,279

(a) Not recorded on the Consolidated Balance Sheet.

29

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

	Nine Months Ended
	March 31,
(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,405	$	1,439
Non-cash activity:
ROU assets obtained in exchange for new operating lease liabilities	$	2,275	$	4,317

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

	Nine Months Ended
	March 31,
	2021		2020
Weighted-average remaining lease term	10	years	9	years
Weighted-average discount rate	8.5	%	7.9	%

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

(In thousands)	Amounts Due
2021	$	527
2022		2,045
2023		2,064
2024		2,083
2025		2,103
Thereafter		10,637
Total lease payments		19,459
Less: Imputed interest		6,113
Present value of lease liabilities	$	13,346

Other Commitments

During Fiscal 2017, the Company signed an agreement with a company operating in the pharmaceutical business, under which the Company agreed to provide up to $15.0 million in revolving loans, which expires in seven years and bears interest at 2.0%, for the purpose of expansion and other business needs. In Fiscal 2019, the Company sold 50% of the outstanding loan to a third party for $5.6 million, in addition to assigning 50% of all rights, title and interest in the loan and loan documents. As of March 31, 2021, $6.6 million was outstanding under the revolving loan and is included in other assets. Based on the guidance set forth in ASC 810-10 Consolidation, the Company has concluded that it has a variable interest in the entity. However, the Company is not the primary beneficiary to the entity and as such, is not required to consolidate the entity’s results of operations.

In Fiscal 2020, the Company executed a License and Collaboration Agreement with North South Brother Pharmacy Investment Co., Ltd. and HEC Group PTY, Ltd. (collectively, “HEC”) to develop an insulin glargine product that would be biosimilar to Lantus Solostar. Under the terms of the deal, among other things, the Company shall fund up to the initial $32 million of the development costs and split 50/50 any development costs in excess thereof. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of HEC for the following five years. To date, the COVID-19 pandemic has not had a material impact on the development of the insulin glargine product. The longer that countries around the world remain on lockdown, the more likely it becomes that the timing of the product development and approval will be delayed. 

30

On February 8, 2021, the Company executed a License and Collaboration Agreement and a Supply Agreement with Sunshine Lake Pharma Co., Ltd. an HEC Group company (“Sunshine”) with respect to the development of a biosimilar insulin aspart product. Under the terms of the deal, among other things, the Company shall fund up to the initial $32 million of the development costs, provided that if total development and other costs paid by Lannett are less than $32 million then the difference will be paid to Sunshine over the first year of commercialization. The parties shall negotiate the sharing of any development costs in excess of $32 million. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of Sunshine for the following five years.

Note 13. Accumulated Other Comprehensive Loss

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

	March 31,
(In thousands)	2021		2020
Foreign Currency Translation
Beginning Balance, June 30	$	(627)	$	(615)
Net income (loss) on foreign currency translation (net of tax of $0 and $0)		24		(26)
Other comprehensive income (loss), net of tax		24		(26)
Total Accumulated Other Comprehensive Loss	$	(603)	$	(641)

31

Note 14. Loss Per Common Share

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

	Three Months Ended
	March 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(7,142)	$	(16,592)
Interest expense applicable to the Convertible Notes, net of tax		—		—
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax		—		—
Adjusted “if-converted” net loss	$	(7,142)	$	(16,592)
Denominator:
Basic weighted average common shares outstanding		39,511,296		38,707,049
Effect of potentially dilutive options and restricted stock awards		—		—
Effect of conversion of the Convertible Notes		—		—
Diluted weighted average common shares outstanding		39,511,296		38,707,049
Loss per common share:
Basic	$	(0.18)	$	(0.43)
Diluted	$	(0.18)	$	(0.43)

	Nine Months Ended
	March 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(185,589)	$	(23,665)
Interest expense applicable to the Convertible Notes, net of tax		—		—
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax		—		—
Adjusted “if-converted” net loss	$	(185,589)	$	(23,665)
Denominator:
Basic weighted average common shares outstanding		39,340,670		38,539,850
Effect of potentially dilutive options and restricted stock awards		—		—
Effect of conversion of the Convertible Notes		—		—
Diluted weighted average common shares outstanding		39,340,670		38,539,850
Loss per common share:
Basic	$	(4.72)	$	(0.61)
Diluted	$	(4.72)	$	(0.61)

The number of anti-dilutive shares that have been excluded in the computation of diluted loss and earnings per share for the three months ended March 31, 2021 and 2020 were 8.1 million and 7.8 million, respectively. The number of anti-dilutive shares that have been excluded in the computation of diluted loss and earnings per share for the nine months ended March 31, 2021 and 2020 were 8.1 million and 6.0 million, respectively. The effect of potentially dilutive shares was excluded from the calculation of diluted loss per share in the three and nine months ended March 31, 2021 and 2020 because the effect of including such securities would be anti-dilutive.

32

Note 15. Share-based Compensation

At March 31, 2021, the Company had two share-based employee compensation plans (the 2014 Long-Term Incentive Plan “LTIP” and the 2021 “LTIP”). The 2021 LTIP, which authorized 3.0 million new shares of common stock for future issuances, was approved by the stockholders of the Company January 2021. Together these plans authorized an aggregate total of 8.0 million shares to be issued. As of March 31, 2021, the plans have a total of 3.0 million shares available for future issuances. No awards have been granted from the 2021 LTIP as of March 31, 2021.

Historically, the Company has issued share-based compensation awards with a vesting period ranging up to 3 years and a maximum contractual term of 10 years. The Company issues new shares of stock when stock options are exercised. As of March 31, 2021, there was $11.2 million of total unrecognized compensation cost related to non-vested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 2.2 years.

Stock Options

The Company measures share-based compensation cost for options using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used to estimate fair values of the stock options granted, the estimated annual forfeiture rates used to recognize the associated compensation expense and the weighted average fair value of the options granted during the nine months ended March 31, 2021 and 2020:

	Nine Months Ended
	March 31, 2021			March 31, 2020
Risk-free interest rate		0.2	%		1.9	%
Expected volatility		82.5	%		73.7	%
Expected dividend yield		—	%		—	%
Forfeiture rate		—	%		—	%
Expected term		5.0	years		5.1	years
Weighted average fair value	$	3.86		$	4.04

Expected volatility is based on the historical volatility of the price of our common shares during the historical period equal to the expected term of the option. The Company uses historical information to estimate the expected term, which represents the period of time that options granted are expected to be outstanding. The risk-free rate for the period equal to the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period. This assumption is based on our actual forfeiture rate on historical awards. Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. Additionally, the expected dividend yield is equal to zero, as the Company has not historically issued and has no immediate plans to issue a dividend.

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

						Weighted
		Weighted-				Average
		Average		Aggregate		Remaining
		Exercise		Intrinsic		Contractual
(In thousands, except for weighted average price and life data)	Awards	Price		Value		Life (yrs.)
Outstanding at June 30, 2020	991	$	12.11	$	678	5.6
Granted	309	$	5.95
Exercised	(37)	$	4.12	$	61
Forfeited, expired or repurchased	(217)	$	17.17
Outstanding at March 31, 2021	1,046	$	9.51	$	62	7.4
Vested and expected to vest at March 31, 2021	1,045	$	9.51	$	62	7.4
Exercisable at March 31, 2021	383	$	14.82	$	62	5.1

33

Restricted Stock

The Company measures restricted stock compensation costs based on the stock price at the grant date less an estimate for expected forfeitures. The annual forfeiture rate used to calculate compensation expense was 6.5% for the nine months ended March 31, 2021 and 2020.

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

		Weighted
		Average Grant -		Aggregate
(In thousands, except for weighted average price data)	Awards	date Fair Value		Intrinsic Value
Non-vested at June 30, 2020	1,344	$	8.70
Granted	894		5.74
Vested	(792)		8.49	$	4,613
Forfeited	(75)		9.57
Non-vested at March 31, 2021	1,371	$	6.85

Performance-Based Shares

In September 2017, the Company began granting performance-based awards to certain key executives. The stock-settled awards will cliff vest based on relative Total Shareholder Return (“TSR”) over a three-year period. The Company measures share-based compensation cost for TSR awards using a Monte-Carlo simulation model.

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

		Weighted
		Average Grant -
(In thousands, except for weighted average price and life data)	Awards	date Fair Value
Non-vested at June 30, 2020	204	$	12.99
Granted	339	$	9.22
Performance adjustment (1)	(12)	$	25.58
Non-vested at March 31, 2021	531	$	10.29

(1) Represents the adjustment based on the performance of the September 2017 awards, which was below the Threshold goal level at the end of the three-year performance period.

Employee Stock Purchase Plan

In February 2003, the Company’s stockholders approved an Employee Stock Purchase Plan (“ESPP”). Employees eligible to participate in the ESPP may purchase shares of the Company’s stock at 85% of the lower of the fair market value of the common stock on the first day of the calendar quarter, or the last day of the calendar quarter. Under the ESPP, employees can authorize the Company to withhold up to 10% of their compensation during any quarterly offering period, subject to certain limitations. The ESPP was implemented on April 1, 2003 and is qualified under Section 423 of the Internal Revenue Code. The Board of Directors authorized an aggregate total of 1.1 million shares of the Company’s common stock for issuance under the ESPP. During the nine months ended March 31, 2021 and 2020, 81 thousand shares and 83 thousand shares were issued under the ESPP, respectively. As of March 31, 2021, 991 thousand total cumulative shares have been issued under the ESPP.

34

The following table presents the allocation of share-based compensation costs recognized in the Consolidated Statements of Operations by financial statement line item:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Selling, general and administrative expenses	$	1,411	$	1,124	$	5,632	$	5,965
Research and development expenses		132		180		419		618
Cost of sales		320		566		1,145		1,753
Total	$	1,863	$	1,870	$	7,196	$	8,336
Tax benefit at statutory rate	$	419	$	421	$	1,619	$	1,876

Note 16. Employee Benefit Plan

The Company has a 401k defined contribution plan (the “Plan”) covering substantially all employees. Pursuant to the Plan provisions, the Company was required to make matching contributions equal to 50% of each employee’s contribution, not to exceed 4% of the employee’s compensation for the Plan year. Beginning January 1, 2021, the Company reduced the matching contribution to 50% of each employee’s contribution, not to exceed 2% of the employee’s compensation for the Plan year. Contributions to the Plan were $0.3 million and $0.6 million during the three months ended March 31, 2021 and 2020, respectively. Contributions to the Plan were $1.3 million and $1.7 million during the nine months ended March 31, 2021 and 2020, respectively.

In Fiscal 2020, the Company implemented a non-qualified deferred compensation plan for certain senior-level management and executives. The non-qualified deferred compensation plan allows certain eligible employees to defer additional pre-tax earnings for retirement, beyond the IRS limits in place under the Plan. Contributions to the non-qualified deferred compensation plan during the three and nine months ended March 31, 2021 were not material.

Note 17. Income Taxes

The Company uses the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which are expected to be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

The federal, state and local income tax benefit for the three months ended March 31, 2021 was $2.5 million compared to $1.7 million for the three months ended March 31, 2020. The effective tax rates for the three months ended March 31, 2021 and 2020 were 26.3% and 9.1%, respectively. The effective tax rate for the three months ended March 31, 2021 was higher compared to the three months ended March 31, 2020 primarily due to the relative impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The federal, state and local income tax benefit for the nine months ended March 31, 2021 was $68.6 million compared to $5.2 million for the nine months ended March 31, 2020. The effective tax rates for the nine months ended March 31, 2021 and 2020 were 27.0% and 18.0%, respectively. The effective tax rate for the nine months ended March 31, 2021 was higher compared to the nine months ended March 31, 2020 primarily due to the impact of the CARES Act, which increased the interest expense deductibility limitation in the current year and also allowed the Company to carry back its taxable loss into a prior fiscal year, where the statutory tax rate was 35 %. The impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the nine months ended March 31, 2020 relative to expected pre-tax loss also contributed to a lower effective tax rate as compared to the nine months ended March 31, 2021.

35

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

As of March 31, 2021 and June 30, 2020, the Company has total unrecognized tax benefits of $4.6 million and $4.6 million, respectively, of which $4.4 million and $4.5 million would impact the Company’s effective tax rate for each period, if recognized. As a result of the positions taken during the period, the Company has not recorded any material interest and penalties for the period ended March 31, 2021 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s statement of financial position as of March 31, 2021 and June 30, 2020. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.

The Company files income tax returns in the United States federal jurisdiction and various states. The Company’s federal tax returns for Fiscal Year 2014 and prior generally are no longer subject to review as such years are closed. The Company’s Fiscal Year 2015 through 2017 federal returns are currently under examination by the Internal Revenue Service (“IRS”). In March 2021, the Company was notified that its Fiscal Year 2020 federal return was also selected for examination. The Company has received preliminary assessments from the IRS, which are not considered material to Company’s Consolidated Statements of Operations; however, we cannot reasonably predict the final outcome of the examinations at this time. In October 2018, the Company was notified that the Commonwealth of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns. In March 2021, the Company received a preliminary assessment from the Commonwealth of Pennsylvania, which is not considered material to the Company’s Consolidated Statement of Operations.

Note 18. Related Party Transactions

The Company had sales of $0.6 million and $0.9 million during the three months ended March 31, 2021 and 2020, respectively, to a generic distributor, Auburn Pharmaceutical Company (“Auburn”), which is a member of the Premier Buying Group. Sales to Auburn were $2.1 million for each of the nine months ended March 31, 2021 and 2020. Jeffrey Farber, a current board member, is the owner of Auburn. Accounts receivable includes amounts due from Auburn of $0.4 million and $0.7 million at March 31, 2021 and June 30, 2020, respectively.

Note 19. Assets Held for Sale

In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business, which includes the manufacturing and distribution of active pharmaceutical ingredients for use in finished goods production. The Company was unable to sell the Cody API business as an ongoing operation and sold the equipment utilized by the Cody API business during Fiscal 2020. The Company ceased operations at Cody Labs, leased a portion of the real estate to a third party and intends to sell the remaining real estate. In October 2020, the Company entered into an agreement for the sale of real estate associated with the Cody API business for $3.8 million before fees and selling costs, subject to certain closing conditions. However, prior to closing, the buyer terminated the transaction in December 2020. The Company continues to actively market the real estate. As of March 31, 2021, the remaining real estate associated with the Cody API business, totaling $2.7 million, was recorded in the assets held for sale caption in the Consolidated Balance Sheet.

36

The following table summarizes the financial results of the Cody API business for the three and nine months ended March 31, 2021 and 2020:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Net sales	$	—	$	—	$	—	$	1,607
Pretax loss attributable to Cody API business		(110)		(1,279)		(727)		(6,340)

The pretax loss attributable to the Cody API business during the nine months ended March 31, 2020 includes a full impairment of a $1.2 million ROU lease asset that was recorded upon adoption of ASU No. 2016-02 on July 1, 2019.

Note 20. Subsequent Events

On April 22, 2021, the Company issued $350.0 million aggregate principal amount of 7.750% senior secured notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States to persons other than U.S. persons in reliance upon Regulation S under the Securities Act. The Notes will pay interest semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021, at a rate of 7.750% per annum in cash. The Notes will mature on April 15, 2026, unless earlier redeemed or repurchased in accordance with their terms. The Notes will be secured by first priority liens on substantially all of the assets of the Company and the guarantors, other than working capital assets pledged to secure the Company’s asset-based credit facility, as to which the Notes will be secured on a second lien basis.

On April 5, 2021, the Company entered into an Exchange Agreement with certain Participating Lenders to exchange a portion of their existing Term B Loans for Second Lien Loans pursuant to a new $190.0 million Second Lien Secured Loan Facility (“Second Lien Facility”). On April 22, 2021, in connection with the issuance of the Notes and the entrance into the Amended ABL Facility, which is discussed further below, the exchange between the Company and the Participating Lenders was consummated. From the Closing Date until the 1-year anniversary of the Closing Date, the Second Lien Loans will pay 10% paid-in-kind interest. Thereafter, the Second Lien notes will pay 5% cash interest and 5% paid-in-kind interest until maturity. The Second Lien Loans will mature on July 15, 2026. In connection with the Second Lien Facility, the Company issued to the Participating Lenders warrants to purchase up to 8,280,000 shares of common stock of the Company (the “Warrants”) at an exercise price of $6.88 per share. The Warrants will have a term of 8 years from issuance and the Participating Lenders will receive registration rights with respect to the shares of common stock of the Company to be received upon exercise of the Warrants.

In addition to the Notes Offering and the Second Lien Facility, the Company entered into an amendment (the “Amended ABL Credit Agreement”) to that certain Credit and Guaranty Agreement, dated as of December 7, 2020, among the Company, certain of its wholly-owned domestic subsidiaries party thereto, as borrowers or as guarantors, Wells Fargo Bank, National Association, as administrative agent and as collateral agent and the other lenders party thereto, for the purpose of, among other things, increasing the aggregate amount of the revolving credit facility to $45.0 million and extending the maturity thereof to the fifth anniversary of the closing date of Notes Offering (subject to a springing maturity as set forth therein.

The Company used the net proceeds of the Notes Offering and Second Lien Facility, in addition to cash on hand, to pay off the existing Term Loan B Facility in full and pay certain fees and expenses related to the transactions.

37

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

Cautionary Statement About Forward-Looking Statements

This Report on Form 10-Q and certain information incorporated herein by reference contains forward-looking statements which are not historical facts made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not promises or guarantees and investors are cautioned that all forward-looking statements involve risks and uncertainties, including but not limited to the impact of competitive products and pricing, product demand and market acceptance, new product development, acquisition-related challenges, the regulatory environment, interest rate fluctuations, reliance on key strategic alliances, availability of raw materials, fluctuations in operating results and other risks detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”). These statements are based on management’s current expectations and are naturally subject to uncertainty and changes in circumstances. We caution you not to place undue reliance upon any such forward-looking statements which speak only as of the date made. Lannett is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise and other events or factors, many of which are beyond our control, including those resulting from such events, or the prospect of such events, such as public health issues including health epidemics or pandemics, such as the recent outbreak of the novel coronavirus (“COVID-19”), whether occurring in the United States or elsewhere, which could disrupt our operations, disrupt the operations of our suppliers and business development and other strategic partners, disrupt the global financial markets or result in political or economic instability.

The following information should be read in conjunction with the consolidated financial statements and notes in Part I, Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. All references to “Fiscal 2021” or “Fiscal Year 2021” shall mean the fiscal year ending June 30, 2021 and all references to “Fiscal 2020” or “Fiscal Year 2020” shall mean the fiscal year ended June 30, 2020.

Company Overview

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company”, “Lannett”, “we” or “us”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, liquids, nasal and oral solution finished dosage forms of drugs, generic forms of both small molecule and biologic medications, that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the Company. Additionally, the Company is pursuing partnerships, research contracts and internal expansion for the development and production of other dosage forms including: ophthalmic, nasal, patch, foam, buccal, sublingual, suspensions, soft gel, injectable and oral dosages.

The Company operates pharmaceutical manufacturing plants in Carmel, New York and Seymour, Indiana. The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations.

Impact of COVID-19 Pandemic

In December 2019, the COVID-19 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated COVID-19 a global pandemic. Governments on the national, state and local level in the United States, and around the world, have implemented lockdown and shelter-in-place orders, requiring many non-essential businesses to shut down operations for the time being. The Company’s business, however, is deemed “essential” and it has continued to operate, manufacture, and distribute its medicines to customers. The Company has developed a comprehensive plan that enables it to maintain operational continuity with an emphasis on manufacturing, distribution and R&D facilities during this crisis, and to date, has not encountered any significant obstacles implementing its business continuity plans. However, the Company continually assesses COVID-19 related developments and adjusts its risk mitigation planning and business continuity activities as needed.

38

In mid-March, 2020, the Company instituted a work from home process for all employees, other than employees in our manufacturing plants, distribution center, and R&D facilities which support manufacturing. For employees who cannot perform their job remotely, the Company has implemented enhanced cleaning and sanitizing procedures, weekly fogging and provided additional personal hygiene supplies and personal protective equipment such as rubber gloves, N95 respirators and powered air-purifying respirator that are in line with Centers for Disease Control and Preventions (“CDC”) recommendations. The Company has also implemented thermal screening for all employees and visitors entering its facilities. Employees are required to adhere to the CDC guidelines, social distancing and any employee experiencing any symptoms of COVID-19 is required to stay home and seek medical attention. Any employee who tests positive for COVID-19 is required to quarantine and is not allowed to return to the facilities without a physician’s release or completion of published quarantine periods. The Company has closed its facilities to outside persons that are not critical to continuing our operations. In cases where they are essential, visitors undergo a pre-admittance check to include a thermal screening and risk evaluation. The Company has experienced an increase in absenteeism arising from intermittent spikes in cases across the country, which has caused an increase in overtime and cost to produce the products, but to date the rate of employee absenteeism has not had any material effect on the Company’s business or its ability to manufacture and distribute products and plants continue to operate at normal capacity. As the pandemic continues to linger due to variants or limited vaccine supplies, there is an ongoing risk of employee absenteeism which could materially impact the Company’s operations. To date, the Company’s work from home process has not materially impacted the Company’s financial reporting systems or controls over financial reporting and disclosures nor do we expect that the remote work arrangement will have a material impact in the future.

Currently and as anticipated for the near future, the supply chain supporting the Company’s products remains intact, enabling the Company to receive sufficient inventory of the key materials needed across the Company’s network. The Company is experiencing some delays and allocations for certain API and other raw materials of higher demand, which, to date, have not had a material impact on its results of operations. However, the Company is regularly communicating with its suppliers, third-party partners, customers, healthcare providers and government officials in order to respond rapidly to any issues as they arise. The longer the current situation continues, it is more likely that the Company may experience some sort of interruption to its supply chain, and such an interruption could materially affect its business, including but not limited to, our ability to timely manufacture and distribute its products as well as unfavorably impact our results of operations. Additionally, subsequent to an initial stocking up of supplies at the start of the pandemic, the total volume of drug prescriptions written during the pandemic has decreased causing less demand for our products. Specifically, the pandemic has resulted in fewer elective surgeries being performed, causing less demand for our Numbrino cocaine hydrochloride product.

As a result of the pandemic, certain clinical trials which were underway or scheduled to begin were temporarily placed on hold, although all such clinical trials were resumed and have been completed. Such delays impacted the Company’s timing for filing applications for product approvals with the FDA as well as related timing of FDA approval of such filings. Additionally, the pandemic has slowed down the Company’s efforts to expand its product portfolio through acquisitions and distribution opportunities, impacting the speed with which the Company is able to bring additional products to market. While there have been some efforts by some of our customers to increase their inventory levels for the Company’s products in the near term, the Company has not seen significant increases in demand. The Company does not anticipate any significant changes in demand for its products in the future, however, depending on the duration and severity of the outbreak, levels of demand may change.

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

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

39

2020 Restructuring Plan

On July 10, 2020, the Board of Directors authorized a restructuring and cost savings plan (the “2020 Restructuring Plan”) to enhance manufacturing efficiencies, streamline operations and reduce the Company’s cost structure. The 2020 Restructuring Plan was implemented, in part, as a result of previously anticipated near-term competition and pricing pressure with respect to certain key products. The 2020 Restructuring Plan includes lowering operating costs and reducing the workforce by approximately 80 positions. The 2020 Restructuring Plan was initiated on July 13, 2020 and completed as of December 31, 2020.

The Company incurred approximately $4.0 million in severance-related costs in the first nine months of Fiscal 2021, in connection with the 2020 Restructuring Plan. The Company expects the 2020 Restructuring Plan to result in annual cost savings in excess of $15.0 million.

Financial Summary

For the third quarter of Fiscal Year 2021, net sales decreased to $112.4 million as compared to $144.4 million in the same prior-year period. Gross profit decreased to $26.5 million compared to $41.7 million in the prior-year period and gross profit percentage decreased to 24% compared to 29% in the prior-year period. R&D expenses decreased 20% to $6.0 million compared to $7.4 million in the third quarter of Fiscal Year 2020 while SG&A expenses decreased 20% to $17.6 million from $22.1 million. Operating income for the third quarter of Fiscal Year 2021 was $2.8 million compared to operating loss of $2.1 million in the third quarter of Fiscal Year 2020, which included an asset impairment charge totaling $14.0 million. Net loss for the third quarter of Fiscal Year 2021 was $7.1 million, or $(0.18) per diluted share. Comparatively, net loss in the prior-year period was $16.6 million, or $(0.43) per diluted share.

For the first nine months of Fiscal 2021, net sales decreased to $372.8 million compared to $407.8 million in the same prior-year period. Gross profit decreased to $52.9 million compared to $125.6 million in the prior-year period. Gross profit percentage decreased to 14% compared to 31% in the prior-year period. R&D expenses decreased 22% to $18.2 million compared to $23.3 million in the first nine months of Fiscal 2020 while SG&A expenses decreased 24% to $46.5 million from $60.9 million in the prior-year period. Restructuring expenses increased to $4.0 million from $1.8 million in the prior-year period. Operating loss for the first nine months of Fiscal 2021, which included intangible asset impairment charges totaling $198.0 million, was $213.8 million compared to operating income of $24.1 million in the prior-year period, which included asset impairment charges totaling $15.6 million. Net loss for the first nine months of Fiscal 2021 was $185.6 million, or $(4.72) per diluted share compared to net loss of $23.7 million, or $(0.61) per diluted share in the prior-year period.

A more detailed discussion of the Company’s financial results can be found below.

40

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

Net sales decreased 22% to $112.4 million for the three months ended March 31, 2021. The table below identifies the Company’s net product sales by medical indication for the three months ended March 31, 2021 and 2020.

(In thousands)	Three Months Ended March 31,
Medical Indication	2021		2020
Analgesic	$	3,836	$	2,811
Anti-Psychosis		11,678		27,858
Cardiovascular		16,573		21,746
Central Nervous System		24,509		18,566
Endocrinology		6,822		—
Gastrointestinal		16,817		20,745
Infectious Disease		10,610		21,749
Migraine		5,169		12,886
Respiratory/Allergy/Cough/Cold		2,548		2,966
Urinary		1,566		1,149
Other		8,617		8,051
Contract manufacturing revenue		3,625		5,845
Total net sales	$	112,370	$	144,372

The decrease in net sales was driven by a decrease in the selling price of products of $18.5 million and a decrease in volumes of $13.5 million. The decrease in the selling price of products was primarily driven by lower sales prices of Fluphenazine, which is included within the Anti-Psychosis medical indication, and Posaconazole, which is included within the Infectious Disease medical indication, due to new competitors entering the market. Overall volumes decreased primarily due to lower volumes of Fluphenazine and Sumatriptan, which is included within the Migraine medical indication, partially offset by the launch of Levothyroxine Tablets and Capsules, which are included within the Endocrinology medical indication.

In January 2017, a provision in the Bipartisan Budget Act of 2015 required drug manufacturers to pay additional rebates to state Medicaid programs if the prices of their generic drugs rise at a rate faster than inflation. The provision negatively impacted the Company’s net sales by $3.7 million and $9.3 million during the three months ended March 31, 2021 and 2020, respectively.

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

	Sales volume		Sales price
Medical indication	change %		change %
Analgesic	33	%	3	%
Anti-Psychosis	(28)	%	(30)	%
Cardiovascular	(25)	%	1	%
Central Nervous System	29	%	3	%
Endocrinology	100	%	—	%
Gastrointestinal	(11)	%	(8)	%
Infectious Disease	(17)	%	(34)	%
Migraine	(43)	%	(17)	%
Respiratory/Allergy/Cough/Cold	(8)	%	(6)	%
Urinary	27	%	9	%

41

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

(In thousands)	March 31,		March 31,
Customer Distribution Channel	2021		2020
Wholesaler/Distributor	$	94,016	$	116,025
Retail Chain		12,226		18,951
Mail-Order Pharmacy		2,503		3,551
Contract manufacturing revenue		3,625		5,845
Total net sales	$	112,370	$	144,372

The overall decrease in sales was primarily driven by lower sales of Fluphenazine and Posaconazole due to new competitors entering the market partially offset by sales from new product launches.

42

Cocaine Hydrochloride Solution

In December 2017, a competitor received approval from the FDA to market and sell a Cocaine Hydrochloride topical product. The approval affected the Company’s right to market and sell its unapproved cocaine hydrochloride solution product. According to FDA guidance, the FDA typically allows the marketing of unapproved products for up to one year following the approval of an NDA for the product. Upon the request of the FDA to cease manufacturing and distributing our unapproved cocaine hydrochloride solution product as a result of an approved product on the market, the Company committed to not manufacture or distribute cocaine hydrochloride 10% solution, which was not sold during Fiscal 2019. The Company also ceased manufacturing its unapproved cocaine hydrochloride 4% solution on June 15, 2019 and ceased distributing the product on August 15, 2019.

The competitor filed a Citizen Petition with the FDA in February 2019, claiming that the grant of the New Chemical Entity (“NCE”) exclusivity blocks the approval of the Company’s application for five years and requesting that the FDA refuse to accept any further submissions in furtherance of the Company’s Section 505(b)(2) NDA application, treat as withdrawn any submissions made by the Company after December 2017 and withdraw the Company’s Section 505(b)(2) application. On April 24, 2019, the Company filed an opposition to the Citizen Petition requesting that it be denied. On July 3, 2019, the FDA denied the competitor’s Citizen Petition. Thereafter, the competitor filed a second Citizen Petition claiming that the FDA should rescind the acceptance of the Company’s Section 505(b)(2) application and only permit the Company to re-submit the application as an ANDA after the expiration of the competitor’s five-year exclusivity. The Company filed an opposition to the second Citizen Petition asserting, among other things, that the FDA should summarily deny the second Citizen Petition as an improper attempt to delay competition. On January 10, 2020, the FDA denied the second Citizen Petition and the FDA approved the Company’s Section 505(b)(2) NDA application. On January 27, 2020, the competitor filed a complaint against the FDA seeking an order invalidating the approval of the Company’s 505(b)(2) NDA, claiming the approval violates the competitor’s five-year exclusivity. On February 14, 2020, the Company filed a motion to intervene in the competitor’s lawsuit in order to argue that the request for relief be denied. On April 15, 2020, the competitor filed a motion for summary judgment. The Company and FDA filed responses in opposition and cross motions for summary judgement requesting dismissal of the complaint. The parties submitted further reply briefs and are awaiting a decision by the Court. On September 15, 2020, the Court granted summary judgment in part to the competitor on one of the counts of the complaint. While the Court agreed with the FDA that the competitor’s NCE exclusivity did not block the approval of the Company’s 505(b)(2) application, the Court found that the FDA erred by not requiring the Company to submit a patent certification. The Court requested that the parties file a joint status report indicating the remedy the Court should order to correct the error. The FDA and the Company requested the Court order the case remanded to the FDA without vacating the Company’s 505(b)(2) approval. The competitor requested the Court remand the case to the FDA while also vacating the Company’s 505(b)(2) approval. On October 7, 2020, the Court held a status conference and ordered that the competitor file a motion to vacate on October 16, 2020, and the FDA and the Company to file an opposition and cross motion for reconsideration on October 30, 2020. On October 16, 2020, the competitor filed a motion to vacate the Company’s NDA approval and on October 30, 2020, the Company and FDA filed a response in opposition and a cross motion for reconsideration. On January 11, 2021, the law clerk to the Judge sent an email indicating that Court was inclined to deny the competitor’s motion to vacate, deny the motion for reconsideration and remand the case to the FDA to take appropriate action to cure any procedural defect with the Company’s NDA. On January 21, 2021, the Court held a conference and indicated that it would be issuing an Order remanding the case to FDA for either 45 or 60 days to address the error relating to the missing patent certification in the NDA. By Memorandum and Opinion dated January 27, 2021, the Court denied the FDA and Company’s motion for reconsideration, granted the competitor’s motion to vacate, but stayed the order for 60 days to permit the FDA to take any action necessary to address the Court’s ruling regarding the patent certification in connection with the Company’s 505(b)(2) NDA. On March 18, 2021, the FDA filed a status report with the Court re-affirming the Company’s 505(b)(2) approval and on March 26, 2021 the Court vacated the earlier order that had vacated the Company’s approval. On April 5, 2021, the competitor filed an amended complaint seeking to require the FDA to withdraw the Company’s 505(b)(2) approval and, on April 12, 2021, the competitor filed a motion for summary judgment. The FDA and Company’s opposition and cross motion for summary judgment were filed on April 30, 2021.

43

On November 12, 2020, the competitor filed a second lawsuit against the FDA in the United States District Court for the District of Maryland, seeking an order requiring the FDA to initiate proceedings to withdraw the Company’s NDA for alleged false statements in the NDA application. The Company denies that it made any false statements in the NDA application and filed a motion to intervene. Following the Court granting the motion to intervene, on January 15, 2021, both the Company and the FDA filed separate motions to dismiss the second lawsuit.

On June 6, 2020, the competitor filed a patent infringement complaint in the United States District Court for the District of Delaware, asserting that the Company’s approved cocaine hydrochloride product infringes three patents issued to the competitor. On June 19, 2020, the Company filed an answer and counterclaim, alleging that the Company either does not infringe or the three asserted patents are invalid. In addition, the Company sought a declaration that, as to the competitor’s three additional patents not asserted against the Company, they are either not infringed or invalid. The competitor filed a motion to dismiss a portion of the counterclaim and the Company filed a response in opposition to the motion. The competitor subsequently filed an amended complaint asserting additional patents against the Company. The Company is in the process of filing an answer and counterclaim, asserting, among other things, that the patents are invalid. The Company continues to market its approved cocaine hydrochloride product.

Thalomid®

The Company filed with the FDA an ANDA No. 206601, along with a paragraph IV certification, alleging that the fifteen patents associated with the Thalomid drug product are invalid, unenforceable and/or not infringed. On January 30, 2015, Celgene Corporation and Children’s Medical Center Corporation filed a patent infringement lawsuit in the United States District Court for the District of New Jersey, alleging that the Company’s filing of ANDA No. 206601 constitutes an act of patent infringement and seeking a declaration that the patents at issue are valid and infringed. A settlement agreement was reached, and the Court dismissed the lawsuit in October 2017. Pursuant to the settlement agreement, the Company entered into a license agreement that permitted Lannett to manufacture and market in the U.S. its generic thalidomide product as of August 1, 2019 or earlier under certain circumstances. In the second quarter of Fiscal 2019, the Company received a Major Complete Response Letter (“CRL”) related to issues at its API supplier. The Company filed a response to the CRL. The Company received a second Major CRL in the first quarter of Fiscal 2020 related to continued issues at the API supplier, as well as issues with the Risk Evaluation and Mitigation Strategy (“REMS”) program hosted by Celgene. On March 26, 2021, the Company received a third Major CRL from the FDA relating to continuing issues with the API supplier. The Company is working on addressing the FDA comments and cannot reasonably predict timing of the product launch.

Ranitidine Oral Solution, USP

As part of an industry-wide action, the Company issued a voluntary recall on all lots within expiry of Ranitidine Syrup (Ranitidine Oral Solution, USP), 15mg/mL to the consumer level due to levels of N-Nitrosodimethylamine (“NDMA”), a probable human carcinogen, above the levels recently established by the FDA. On September 17, 2019, the FDA notified the Company about the possible presence of NDMA in its Ranitidine Oral Solution product and the Company immediately commenced testing and analysis of the active pharmaceutical ingredient (“API”) and drug product and confirmed the presence of NDMA. The Company’s net sales of Ranitidine Oral Solution in the fourth quarter of fiscal year 2019 totaled $1.9 million. On April 1, 2020, the FDA ordered all Ranitidine products (including the Company’s product) withdrawn from the US market and provided guidance on the requirements for submitting additional information to the FDA in order to re-introduce the product to the market. Since initiating the voluntary recall, the Company has not been marketing its Ranitidine Oral Solution product and has no future plans to attempt to re-introduce the product at this time. The Company does not believe the recall will have a significant impact on our future expected financial position, results of operations and cash flows.

44

On June 1, 2020, a class action complaint was served upon the Company and approximately forty-five (45) other companies asserting claims for personal injury arising from the presence of NDMA in Ranitidine products. The complaint is consolidated in a multidistrict litigation (“MDL”) pending in the United States District Court for the Southern District of Florida. Similar complaints were filed in state court in New Mexico and state court in Maryland and served upon the Company. Subsequently, a number of similar complaints were served on the Company. The Company has filed a motion to dismiss the complaint filed in the MDL and has filed a motion to transfer the complaint filed in the New Mexico state court to the MDL. On December 31, 2020, the Court granted the Company’s motion to dismiss Master Personal Injury Complaint, Consolidated Consumer Class Action Complaint and Consolidated third Party Payor Class Complaint, all based on federal preemption. The Court dismissed some of the claims with prejudice and others with leave to amend. The plaintiffs filed an amended complaint on February 9, 2021, and the Company along with the other generic defendants recently filed a joint motion to dismiss these claims. Separately, the New Mexico case was conditionally transferred to the MDL and the plaintiff filed a motion to vacate the conditional transfer, which the Company has opposed. These motions were recently granted and the case has been transferred back to state court in New Mexico. The plaintiffs filed their First Amended Complaint on April 16, 2021 and defendants will have 30 days thereafter to file substantive and jurisdictional motions to dismiss. Since the Company was not licensed to do business in New Mexico and, based upon the information received to date, did not sell Ranitidine in New Mexico, we plan to join both arguments. The Company filed a notice to remove and transfer the Maryland case to the MDL which the plaintiff has opposed. The Company has placed its insurance carrier on notice of the claim and the carrier has appointed counsel to defend the Company.

Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the third quarter of Fiscal Year 2021 decreased 16% to $85.9 million from $102.7 million in the same prior-year period. The decrease was primarily attributable to lower volumes due to the Company’s decision to discontinue lower margin products in the second quarter of Fiscal Year 2021, partially offset by additional volumes from new product launches. Product royalties expense included in cost of sales totaled $12.6 million for the third quarter of Fiscal Year 2021 and $21.4 million for the third quarter of Fiscal Year 2020 primarily attributable to lower sales of Posaconazole. Amortization expense included in cost of sales totaled $3.9 million for the third quarter of Fiscal 2021 and $8.3 million for the third quarter of Fiscal 2020.

Gross Profit. Gross profit for the third quarter of Fiscal 2021 decreased 37% to $26.5 million or 24% of net sales. In comparison, gross profit for the third quarter of Fiscal 2020 was $41.7 million or 29% of net sales. The decrease in gross profit percentage was primarily attributable to lower volumes of Fluphenazine, which had higher than average gross profit margins, as well as overall lower average selling prices of our products.

Research and Development Expenses. Research and development expenses for the third quarter of Fiscal 2021 decreased 20% to $6.0 million from $7.4 million in Fiscal Year 2020. The decrease was primarily due to lower R&D expenses as a result of timing of certain milestones related to product development projects.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 20% to $17.6 million in the third quarter of Fiscal Year 2021 compared with $22.1 million in Fiscal Year 2020. The decrease was primarily driven by a lower branded prescription drug fee, lower incentive-based compensation and other cost reduction initiatives, partially offset by higher legal expenses.

Asset impairment charges. In the third quarter of Fiscal 2020, the Company performed an impairment analysis of its AB-rated Methylphenidate Hydrochloride product, which is distributed under a license agreement with Andor Pharmaceuticals, LLC (“Andor”), due to significant declines in the projected profitability of the distribution arrangement. As a result of the analysis, the Company recorded a $14.0 million impairment charge.

Other Loss. Interest expense for the three months ended March 31, 2021 totaled $12.6 million compared to $16.2 million for the three months ended March 31, 2020. The decrease was due to a lower average debt balance in the third quarter of Fiscal 2021 as compared to the prior-year period as well as a lower weighted-average interest rate due to the full repayment of the outstanding Term Loan A balance. The weighted average interest rate for the third quarter of Fiscal 2021 and 2020 was 7.9% and 8.6%, respectively.

45

Income Tax. The Company recorded an income tax benefit of $2.5 million in the third quarter of Fiscal Year 2021 as compared to an income tax benefit of $1.7 million in the third quarter of Fiscal Year 2020. The effective tax rate for the three months ended March 31, 2021 was 26.3%, compared to 9.1% for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 was higher compared to the three months ended March 31, 2020 primarily due to the relative impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Net Loss. For the three months ended March 31, 2021, the Company reported net loss of $7.1 million, or $(0.18) per diluted share. Comparatively, net loss in the corresponding prior-year period was $16.6 million, or $(0.43) per diluted share.

Results of Operations - Nine months ended March 31, 2021 compared with the nine months ended March 31, 2020

Net sales decreased to $372.8 million for the nine months ended March 31, 2021. The table below identifies the Company's net product sales by medical indication for the nine months ended March 31, 2021 and 2020.

(In thousands)	Nine Months Ended March 31,
Medical Indication	2021		2020
Analgesic	$	10,528	$	6,806
Anti-Psychosis		38,023		78,588
Cardiovascular		52,623		67,325
Central Nervous System		71,648		57,154
Endocrinology		19,551		—
Gastrointestinal		52,492		56,020
Infectious Disease		55,586		51,722
Migraine		20,942		32,907
Respiratory/Allergy/Cough/Cold		6,241		8,747
Urinary		4,385		2,817
Other		24,661		27,847
Contract manufacturing revenue		16,089		17,891
Total net sales	$	372,769	$	407,824

The decrease in net sales was driven by a decrease in the selling price of products of $64.8 million partially offset by increased volumes of $29.7 million. The decrease in the selling price of products was primarily driven by lower sales prices of Fluphenazine, which is included within the Anti-Psychosis medical indication, and Posaconazole, which is included in Infectious Disease medical indication, due to new competitors entering the market, as well as lower average selling price across the remaining medical indications. Overall volumes increased primarily due to increased volumes of Posaconazole and from new product launches, including Levothyroxine Tablets and Capsules, partially offset by lower volumes of Fluphenazine.

In January 2017, a provision in the Bipartisan Budget Act of 2015 required drug manufacturers to pay additional rebates to state Medicaid programs if the prices of their generic drugs rise at a rate faster than inflation. The provision negatively impacted the Company’s net sales by $12.6 million and $31.9 million during the nine months ended March 31, 2021 and 2020, respectively.

46

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

	Sales volume		Sales price
Medical indication	change %		change %
Analgesic	60	%	(5)	%
Anti-Psychosis	(25)	%	(27)	%
Cardiovascular	(13)	%	(9)	%
Central Nervous System	49	%	(24)	%
Endocrinology	100	%	—	%
Gastrointestinal	2	%	(8)	%
Infectious Disease	26	%	(19)	%
Migraine	(13)	%	(23)	%
Respiratory/Allergy/Cough/Cold	(25)	%	(4)	%
Urinary	39	%	17	%

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

(In thousands)	March 31,		March 31,
Customer Distribution Channel	2021		2020
Wholesaler/Distributor	$	302,711	$	321,953
Retail Chain		45,588		59,132
Mail-Order Pharmacy		8,381		8,848
Contract manufacturing revenue		16,089		17,891
Total net sales	$	372,769	$	407,824

The overall decrease in sales was primarily driven by lower sales of Fluphenazine and Posaconazole due to new competitors entering the market partially offset by sales from new product launches.

Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the first nine months of Fiscal Year 2021 increased 13% to $319.8 million from $282.2 million in the same prior-year period. The increase was primarily attributable to additional volumes from new product launches as well as an increase of $15.1 million in write-downs for excess and obsolete inventory, which primarily relates to the Company’s decision to discontinue 23 lower margin product lines. The Company also recorded $5.0 million in consideration to renew the Company’s distribution agreement with Recro Gainesville, LLC (“Recro”) during the second quarter of Fiscal Year 2021. Product royalties expense included in cost of sales totaled $49.6 million for the first nine months of Fiscal Year 2021 and $57.7 million for the first nine months of Fiscal Year 2020. Amortization expense included in cost of sales totaled $21.1 million for the first nine months of Fiscal 2021 and $23.5 million for the first nine months of Fiscal 2020.

Gross Profit. Gross profit for the first nine months of Fiscal 2021 decreased 58% to $52.9 million or 14% of net sales. In comparison, gross profit for the first nine months of Fiscal 2020 was $125.6 million or 31% of net sales. The decrease in gross profit percentage was primarily attributable to lower volumes of Fluphenazine, which had higher than average gross profit margins, as well as overall lower average selling prices of our products. The Company also recorded an increase in the write-downs for excess and obsolete inventory as well as consideration to renew the distribution agreement with Recro in the second quarter of Fiscal 2021.

Research and Development Expenses. Research and development expenses for the first nine months of Fiscal 2021 decreased 22% to $18.2 million from $23.3 million in Fiscal Year 2020. The decrease was primarily due to lower R&D expenses as a result of timing of certain milestones related to product development projects as well as employee headcount reductions related to the 2020 Restructuring Plan.

47

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 24% to $46.5 million in the first nine months of Fiscal Year 2021 compared with $60.9 million in Fiscal Year 2020. The decrease was primarily driven by a lower branded prescription drug fee, lower incentive-based compensation, lower expenses at the Company’s Cody Labs subsidiary and other cost reduction initiatives.

Asset impairment charges. In December 2020, the Company reviewed its product portfolio and decided to discontinue 23 lower gross margin product lines, including product lines that were acquired through various past business and product acquisitions. As a result of the discontinuance and the reduction in net sales and gross margin of certain other product lines, the Company recorded an impairment charge of $193.0 million related to the KUPI product rights intangible assets during the second quarter of Fiscal 2021. The impairment charge is primarily a result of the decline in net sales and gross margin of certain product lines acquired in connection with the KUPI acquisition, including those product lines being discontinued.

In the second quarter of Fiscal 2021, the Company also recorded a $5.0 million impairment charge to its KUPI in-process research and development intangible asset due to delays in the expected launch of a product within the portfolio, which results in reduced projected cash flows.

In the first nine months of Fiscal 2020, the Company recorded a ROU lease asset totaling $1.2 million related to an existing lease at Cody Labs upon adoption of ASU No. 2016-02. The Company subsequently recorded a full impairment of the asset as a result of the decision to cease operations at Cody Labs.

In the third quarter of Fiscal 2020, the Company performed an impairment analysis of its AB-rated Methylphenidate Hydrochloride product, which is distributed under a license agreement with Andor, due to significant declines in the projected profitability of the distribution arrangement. As a result of the analysis, the Company recorded a $14.0 million impairment charge.

Other Loss. Interest expense for the nine months ended March 31, 2021 totaled $40.6 million compared to $52.2 million for the nine months ended March 31, 2020. The decrease was due to a lower average debt balance in the first nine months of Fiscal 2021 as compared to the prior-year period as well as a lower weighted-average interest rate due to the full repayment of the outstanding Term Loan A. The weighted average interest rate for the first nine months of Fiscal 2021 and 2020 was 7.9% and 9.0%, respectively.

Income Tax. The Company recorded an income tax benefit of $68.6 million in the first nine months of Fiscal Year 2021 as compared to an income tax benefit of $5.2 million in the first nine months of Fiscal Year 2020. The effective tax rate for the nine months ended March 31, 2021 was 27.0%, compared to 18.0% for the nine months ended March 31, 2020. The effective tax rate for the nine months ended March 31, 2021 was higher compared to the nine months ended March 31, 2020 primarily due to the impact of the CARES Act, which increased the interest expense deductibility limitation in the current year and also allowed the Company to carry back its taxable loss into a prior fiscal year, where the statutory tax rate was 35 %. The impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the nine months ended March 31, 2020 relative to expected pre-tax loss also contributed to a lower effective tax rate as compared to the nine months ended March 31, 2021.

Net Loss. For the nine months ended March 31, 2021, the Company reported net loss of $185.6 million, or $(4.72) per diluted share. Comparatively, net loss in the corresponding prior-year period was $23.7 million, or $(0.61) per diluted share.

48

Liquidity and Capital Resources

Cash Flow

The Company has historically financed its operations with cash flow generated from operations supplemented with borrowings from various government agencies and financial institutions. At March 31, 2021, working capital was $272.8 million as compared to $228.3 million at June 30, 2020, an increase of $44.5 million. Current product portfolio sales as well as sales related to future product approvals are anticipated to generate positive cash flow from operations.

Net cash provided by operating activities of $34.2 million for the nine months ended March 31, 2021 reflected net loss of $185.6 million, adjustments for non-cash items of $256.9 million, as well as cash used through changes in operating assets and liabilities of $37.1 million. In comparison, net cash provided by operating activities of $50.4 million for the nine months ended March 31, 2020 reflected net loss of $23.7 million, adjustments for non-cash items of $76.6 million, as well as cash used through changes in operating assets and liabilities of $2.5 million.

Significant changes in operating assets and liabilities from June 30, 2020 to March 31, 2021 were comprised of:

● A decrease in accounts receivable of $11.0 million mainly due to the timing of sales and cash receipts. The Company’s days sales outstanding (“DSO”) at March 31, 2021, based on gross sales for the nine months ended March 31, 2021 and gross accounts receivable at March 31, 2021, was 67 days. The level of DSO at March 31, 2021 was lower than the Company’s expectation that DSO will be in the 70 to 85-day range based on customer payment terms, primarily due to higher gross sales in the three months ended December 31, 2020 compared to the three months ended March 31, 2021.

● An increase in income taxes receivable totaling $25.4 million primarily due to additional estimated tax refunds related to provisions of the CARES Act and an anticipated Fiscal 2021 taxable loss, partially offset by income tax receipts of $23.1 million.

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

● A decrease in accrued payroll and payroll-related costs of $6.5 million primarily related to payments made in August 2020 in connection with incentive-based compensation accrued in Fiscal Year 2020 as well as the timing of payroll payments.

Significant changes in operating assets and liabilities from June 30, 2019 to March 31, 2020 were comprised of:

● An increase in accounts receivable of $15.6 million mainly due to the timing of receipts. The Company’s DSO at March 31, 2020, based on gross sales for the nine months ended March 31, 2020 and gross accounts receivable at March 31, 2020, was 78 days. The level of DSO at March 31, 2020 was comparable to the Company’s expectation that DSO will be in the 70 to 85-day range based on customer payment terms.

● An increase in prepaid income taxes totaling $10.5 million primarily due to estimated tax payments made in the first nine months of Fiscal 2020.

● A decrease in accrued payroll and payroll-related costs of $6.8 million primarily related to payments made in August 2019 in connection with incentive compensation accrued in Fiscal Year 2019, partially offset by the timing of payroll payments.

● An increase in accounts payable totaling $20.3 million primarily due to the timing of vendor invoices and payments.

49

Net cash used in investing activities of $11.0 million for the nine months ended March 31, 2021 was mainly the result of purchases of property, plant and equipment of $6.6 million and purchases of intangible assets of $4.5 million. Net cash used in investing activities of $33.8 million for the nine months ended March 31, 2020 was mainly the result of purchases of intangible assets of $27.8 million and purchases of property, plant and equipment of $13.1 million, partially offset by proceeds from the sale of property, plant and equipment of $7.3 million.

Net cash used in financing activities of $81.2 million for the nine months ended March 31, 2021 was due to debt repayments of $78.4 million, payment of debt issuance costs of $2.4 million, and purchases of treasury stock totaling $1.0 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of $0.6 million. Net cash used in financing activities of $55.4 million for the nine months ended March 31, 2020 was due to debt repayments of $130.0 million, purchase of a capped call in connection with the 4.50% Convertible Senior Notes offering totaling $7.1 million, payments of debt issuance costs totaling $3.5 million, and purchases of treasury stock totaling $1.9 million, partially offset by proceeds from the issuance of 4.50% Convertible Senior Notes of $86.3 million and proceeds from issuance of stock pursuant to stock compensation plans of $0.8 million.

Credit Facility and Other Indebtedness

The Company has previously entered into and may enter future agreements with various government agencies and financial institutions to provide additional cash to help finance the Company’s acquisitions, various capital investments and potential strategic opportunities. These borrowing arrangements as of March 31, 2021 are as follows:

Amended Senior Secured Credit Facility

On November 25, 2015, in connection with its acquisition of KUPI, Lannett entered into a credit and guaranty agreement (the “Credit and Guaranty Agreement”) among certain of its wholly-owned domestic subsidiaries, as guarantors, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent and other lenders providing for a senior secured credit facility (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility consisted of Term Loan A in an aggregate principal amount of $275.0 million, Term Loan B in an aggregate principal amount of $635.0 million and a revolving credit facility providing for revolving loans in an aggregate principal amount of up to $125.0 million.

On June 17, 2016, Lannett amended the Senior Secured Credit Facility and the Credit and Guaranty Agreement to raise an incremental term loan in the principal amount of $150.0 million (the “Incremental Term Loan”) and amended certain sections of the agreement (the “Amended Senior Secured Credit Facility”). The terms of this Incremental Term Loan are substantially the same as those applicable to the Term Loan B. The Company used the proceeds of the Incremental Term Loan and cash on hand to repurchase the outstanding $250.0 million aggregate principal amount of Lannett’s 12.0% Senior Notes due 2023 (the “Senior Notes”) issued in connection with the KUPI acquisition.

On December 10, 2018, the Company entered into a third amendment to the Senior Secured Credit Facility and the Credit and Guaranty Agreement. Pursuant to the amendment, the Secured Net Leverage Ratio applicable to the financial leverage ratio covenant was increased from 3.25:1.00 to 4.25:1.00 as of December 31, 2019 and prior to September 30, 2020, and then to 4.00:1.00 as of September 30, 2020. The Amended Senior Secured Credit Facility is also subject to a minimum liquidity covenant, which provides that the Company shall not permit its liquidity as of the last day of any fiscal quarter to be less than $75.0 million. On November 25, 2020, the Company repaid the remaining $42 million outstanding balance of its Term A Loans with cash on hand and, upon repayment, the Company is no longer obligated to comply with the financial leverage ratio and minimum liquidity covenants described above.

On December 7, 2020, the Company entered into Amendment No. 4 to the Credit and Guaranty Agreement, which amends the Term Loan B Facility to permit the incurrence of the ABL Credit Facility, which is discussed further below, and requires the Company to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent, and a minimum cash balance of $15 million as of the last day of each month. At March 31, 2021, the Company classified the $5 million required deposit account balance as restricted cash, which is included in other assets. The amendment also replaced Morgan Stanley Senior Funding, Inc. with Alter Domus (US) LLC as administrative agent and collateral agent under the Term Loan B Facility.

50

On April 22, 2021, the Company used the net proceeds of the 7.750% Senior Secured Notes offering and Second Lien Secured Loan Facility, in addition to cash on hand, to pay off the existing Term Loan B Facility in full.

Refer to the Company’s Form 10-K for the fiscal year ended June 30, 2020 for further details on the Amended Senior Secured Credit Facility.

ABL Credit Facility

On December 7, 2020, the Company entered into a credit and guaranty agreement, which provides for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $30 million, subject to borrowing base availability, and includes letter of credit and swing line sub-facilities. Borrowing availability under the ABL Credit Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of eligible accounts receivable less certain reserves and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings.

Loans outstanding under the ABL Credit Agreement bear interest at a floating rate measured by reference to an adjusted London Inter-Bank Offered Rate (“LIBOR”), subject to a floor of 0.75%, plus an applicable margin of 2.50% per annum. Unused commitments under the ABL Credit Facility are subject to a per annum fee of 0.50%. The obligations under the ABL Credit Agreement are guaranteed by the Company and all of the Company’s existing and future subsidiaries, subject to certain exceptions (collectively, the “Guarantors”), and such obligations and the obligations of the Guarantors are secured by:

● a perfected security interest in all present and after-acquired accounts receivable, payment intangibles, inventory, deposit accounts, securities accounts, and any cash, cash equivalents or other assets in such accounts and other related assets owned by each Guarantor and the proceeds of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral (as defined below), and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the ABL Priority Collateral securing the Company’s existing Term Loan B Facility; and

● a perfected security interest in substantially all present and after-acquired tangible and intangible assets of each Guarantor other than the ABL Priority Collateral (the “Cash Flow Priority Collateral”), which security interest is junior to the security interest in the Cash Flow Priority Collateral securing the Term Loan B Facility.

The ABL Credit Agreement contains customary representations and warranties and customary affirmative covenants and negative covenants. The negative covenants include restrictions on, among other things: the incurrence of additional indebtedness; the incurrence of additional liens; dividends or other distributions on equity; the purchase, redemption or retirement of capital stock; the payment or redemption of certain indebtedness; the nature of the business activity of the Company and its subsidiaries; loans, guarantees and other investments; entering into other agreements that create restrictions on the ability to pay dividends or make other distributions on equity or create or incur certain liens; asset sales; consolidations or mergers; amendment of certain material documents; changes in fiscal year; and affiliate transactions. The negative covenants are subject to customary exceptions and also permit dividends and other distributions on equity, consolidations, mergers and asset sales, certain acquisitions and other investments, and payments or redemptions of certain indebtedness, in each case upon satisfaction of the “payment conditions”. The payment conditions are deemed satisfied upon Excess Availability (as defined in the ABL Credit Agreement) on the date of the designated action and Excess Availability for the prior 30-day period exceeding agreed-upon thresholds, the absence of the occurrence and continuance of any event of default and, in certain cases, pro forma compliance with a fixed charge coverage ratio of no less than 1.10 to 1.00.

The ABL Credit Agreement includes a minimum fixed charge coverage ratio of no less than 1.10 to 1.00, which is tested only when Excess Availability is less than 15.0% of the lesser of (A) the borrowing base and (B) the then effective commitments under the ABL Credit Facility for three consecutive business days, and continuing until the first day immediately succeeding the last day of 30 consecutive days on which Excess Availability is in excess of such threshold.

51

The ABL Credit Agreement provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the ABL Credit Facility to be due and payable immediately and the commitments under the ABL Credit Facility to be terminated.

On April 22, 2021, the Company entered into an amendment (the “Amended ABL Credit Agreement”) to that certain Credit and Guaranty Agreement, dated as of December 7, 2020, among the Company, certain of its wholly-owned domestic subsidiaries party thereto, as borrowers or as guarantors, Wells Fargo Bank, National Association, as administrative agent and as collateral agent and the other lenders party thereto, for the purpose of, among other things, increasing the aggregate amount of the revolving credit facility to $45.0 million and extending the maturity thereof to the fifth anniversary of the closing date of the offering of the Notes (subject to a springing maturity as set forth therein). The ABL Credit Facility was undrawn as of March 31, 2021.

7.750% Senior Secured Notes due 2026

On April 22, 2021, the Company issued $350.0 million aggregate principal amount of 7.750% senior secured notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States to persons other than U.S. persons in reliance upon Regulation S under the Securities Act. The Notes will pay interest semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021, at a rate of 7.750% per annum in cash. The Notes will mature on April 15, 2026, unless earlier redeemed or repurchased in accordance with their terms. The Notes will be secured by first priority liens on substantially all of the assets of the Company and the guarantors, other than working capital assets pledged to secure the Company’s asset-based credit facility, as to which the Notes will be secured on a second lien basis.

Second Lien Secured Loan Facility

On April 5, 2021, the Company entered into an Exchange Agreement with certain Participating Lenders to exchange a portion of their existing Term B Loans for Second Lien Loans pursuant to a new $190.0 million Second Lien Secured Loan Facility (“Second Lien Facility”). On April 22, 2021, in connection with the issuance of the Notes and the entrance into the Amended ABL Facility, the exchange between the Company and the Participating Lenders was consummated. From the Closing Date until the 1-year anniversary of the Closing Date, the Second Lien Facility will pay 10% paid-in-kind interest. Thereafter, the Second Lien notes will pay 5% cash interest and 5% paid-in-kind interest until maturity. The Second Lien Loans will mature on July 15, 2026. In connection with the Second Lien Facility, the Company issued to the Participating Lenders warrants to purchase up to 8,280,000 shares of common stock of the Company (the “Warrants”) at an exercise price of $6.88 per share. The Warrants will have a term of 8 years from issuance and the Participating Lenders will receive registration rights with respect to the shares of common stock of the Company to be received upon exercise of the Warrants.

52

4.50% Convertible Senior Notes due 2026

On September 27, 2019, the Company issued $86.3 million aggregate principal amount of the 4.50% Convertible Senior Notes (“the Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and used the net proceeds to repay a portion of the outstanding Term Loan A balance. The Convertible Notes bear interest at an annual rate of 4.50% payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2020. The Convertible Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted in accordance with their terms. The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 65.4022 shares per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $15.29 per share), subject to adjustments upon the occurrence of certain events (but will not be adjusted for any accrued and unpaid interest). The Company may redeem all or a part of the Convertible Notes on or after October 6, 2023 at a redemption price equal to 100% of the principal amount of the Convertible Notes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, subject to certain conditions relating to the Company’s stock price having been met. Following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or notice of redemption. The indenture covering the Convertible Notes contains certain other customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Convertible Notes to be due and payable.

In connection with the offering of the Convertible Notes, the Company also entered into privately negotiated “capped call” transactions with several counterparties. The capped call transaction will initially cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Convertible Notes. The capped call transactions are expected to generally reduce the potential dilutive effect on the Company’s common stock upon any conversion of the Convertible Notes with such reduction subject to a cap which is initially $19.46 per share.

Other Liquidity Matters

Refer to the “Impact of COVID-19 Pandemic” section above for the impact on our future liquidity.

Future Acquisitions

We are continuously evaluating the potential for product and company acquisitions as a part of our future growth strategy. In conjunction with a potential acquisition, the Company may utilize current resources or seek additional sources of capital to finance any such acquisition, which could have an impact on future liquidity.

We may also from time to time depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to prepay outstanding debt or repurchase our outstanding debt through open market purchases, privately negotiated purchases, or otherwise. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings.

53

Research and Development Arrangements

In the normal course of business, the Company has entered into certain research and development and other arrangements. As part of these arrangements, the Company has agreed to certain contingent payments which generally become due and payable only upon the achievement of certain developmental, regulatory, commercial and/or other milestones. In addition, under certain arrangements, we may be required to make royalty payments based on a percentage of future sales, or other metric, for products currently in development in the event that the Company begins to market and sell the product. Due to the inherent uncertainty related to these developmental, regulatory, commercial and/or other milestones, it is unclear if the Company will ever be required to make such payments.

Critical Accounting Policies

The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States and the rules and regulations of the U.S. Securities & Exchange Commission requires the use of estimates and assumptions. A listing of the Company’s significant accounting policies is detailed in Note 3 “Summary of Significant Accounting Policies.” A subsection of these accounting policies has been identified by management as “Critical Accounting Policies.” Critical accounting policies are those which require management to make estimates using assumptions that were uncertain at the time the estimates were made and for which the use of different assumptions, which reasonably could have been used, could have a material impact on the financial condition or results of operations.

Management has identified the following as “Critical Accounting Policies”: Revenue Recognition, Inventories, Income Taxes, Valuation of Long-Lived Assets, including Intangible Assets, In-Process Research and Development and Share-based Compensation.

Revenue Recognition

The Company complies with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when (or as) we satisfy our performance obligations by transferring a promised good or service to a customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. The new revenue standard also impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time”. However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position. The Company adopted ASC 606 using the modified retrospective method.

When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments. These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual. Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.

Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity. While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions. Each major category is discussed in detail below:

54

Chargebacks

The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health, AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a new cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their FDA approval was granted under a NDA or 505(b) NDA versus an ANDA. Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

Returns

Consistent with industry practice, the Company has a product returns policy that allows customers to return product within a specified time period prior to and subsequent to the product’s expiration date in exchange for a credit to be applied to future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices, credit terms and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve for returns increases as net sales increase.

55

Other Adjustments

Other adjustments consist primarily of “price adjustments, also known as “shelf-stock adjustments” and “price protections,” which are both credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available. Other adjustments also include prompt payment discounts and “failure-to-supply” adjustments. If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.

Refer to the Company’s Form 10-K for the fiscal year ended June 30, 2020 for a description of our remaining Critical Accounting Policies.

56

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On November 25, 2015, in connection with the acquisition of KUPI, the Company entered into a Senior Secured Credit Facility, which was subsequently amended in June 2016. Based on the variable-rate debt outstanding at March 31, 2021, each 1/8% increase in interest rates would yield $0.7 million of incremental annual interest expense. The Company’s variable-rate debt is subject to a 1.0% London Inter-bank Offered Rate (“LIBOR”) floor. On April 22, 2021, the Company paid off our existing Term Loan B Facility with the proceeds from new fixed-rate debt.

The Company has historically invested in equity securities, U.S. government agency securities and corporate bonds, which are exposed to market and interest rate fluctuations. The market value, interest and dividends earned on these investments may vary based on fluctuations in interest rate and market conditions.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Lannett’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Change in Internal Control Over Financial Reporting

There has been no change in Lannett’s internal control over financial reporting during the nine months ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

57

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in Note 11 “Legal, Regulatory Matters and Contingencies” of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

Lannett Company, Inc’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 includes a detailed description of its risk factors. Refer to the Form 10-Q for the quarterly period ended September 30, 2020 for a detailed description of an additional risk factor identified by the Company since filing of the Form 10-K.

58

ITEM 6. EXHIBITS

(a) A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-Q is shown on the Exhibit Index filed herewith.

Exhibit Index

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith
32**	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Herewith
10.88+*	Collaboration and License Agreement by and among Lannett Company, Inc. and Sunshine Lake Pharma Co., Ltd.	Filed Herewith
10.89+*	Supply Agreement by and among Lannett Company, Inc. and Sunshine Lake Pharma Co., Ltd.	Filed Herewith
101.INS	XBRL Instance Document – the instance document does not appear within the Interactive Data File because its XRBL tags are embedded within the Inline XRBL Document	Filed Herewith
101.SCH	XBRL Taxonomy Extension Schema Document	Filed Herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed Herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed Herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed Herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed Herewith
104	Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XRBL tags are embedded within the Inline XRBL document	Filed Herewith

* Certain portions of this Exhibit have been redacted to preserve confidentiality. The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request.

+ Certain portions of this Exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to provide further information regarding such omitted materials to the Commission upon request.

** Furnished Herewith

59

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		LANNETT COMPANY, INC.
Dated: May 6, 2021	By:	/s/ Timothy Crew
		Timothy Crew
		Chief Executive Officer
Dated: May 6, 2021	By:	/s/ John Kozlowski
		John Kozlowski
		Vice President of Finance, Chief Financial Officer and Principal Accounting Officer

60

EX-10.88

EXECUTION VERSION

CERTAIN INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.
[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

Exhibit 10.88

COLLABORATION AND LICENSE AGREEMENT

by and among

LANNETT COMPANY, INC.

and

SUNSHINE LAKE PHARMA CO., LTD.

Dated as of February 5, 2021

121186093.v1

TABLE OF CONTENTS

‌Page        

Article IDefinitions‌1

Article IIGovernance; Collaboration‌15

Article IIIDevelopment‌16

Article IVManufacture and Supply‌20

Article VRegulatory Matters‌21

Article VICommercialization‌23

Article VIIDiligence‌24

Article VIIIGrant of Rights; Exclusivity‌25

Article IXFinancial Provisions‌31

Article XIntellectual Property Ownership, Protection and Related Matters‌35

Article XIConfidentiality and Antitrust Compliance‌42

Article XIIRepresentations and Warranties‌49

Article XIIIIndemnification; Product Liabilities‌55

Article XIVTerm and Termination‌58

Article XVMiscellaneous‌63

i

121186093.v1

Exhibits
Exhibit A+ Exhibit AA+ Exhibit B+	Insulin Aspart Insulin Glargine Lannett Patents, HEC Patents and HEC Collaboration Patents (as of the Effective Date)
Exhibit C+	Third Party Agreements
Exhibit D+	Profit & Loss Share
Exhibit E+	Partnership Tax Matters
Exhibit F*	Pen Development Plan
Exhibit G**	Form of Supply Agreement
Exhibit H*	New Facility No. 1 Timeline
Exhibit I*	New Facility No. 2 Timeline

Schedules

Schedule 3.2(a)*Development Plan

Schedule 3.5+Record Maintenance Timelines

Schedule 12.2(i)+Patents (HEC)

Schedule 12.2(j)+ Third Party Agreements (HEC)

Schedule 12.3(h)+ Patents (Lannett)

Schedule 12.3(i)+ Third Party Agreements (Lannett)

*This Exhibit or Schedule has been redacted to preserve confidentiality.  The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request.

**Filed as Exhibit 10.89 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.

ii

121186093.v1

+ This Exhibit or Schedule has been omitted pursuant to Item 601(a)(5) of Regulation S-K.  The registrant undertakes to provide further information regarding such omitted materials to the Commission upon request.

- iii -

25427706.BUSINESS 11/18/2019

121186093.v1

COLLABORATION AND LICENSE AGREEMENT

This Collaboration and License Agreement (this “Agreement”) is entered into as of February 5, 2021 (the “Effective Date”), by and among Lannett Company, Inc., a Delaware corporation (“Lannett”), Sunshine Lake Pharma Co., Ltd., a  corporation organized and existing under the laws of the People’s Republic of China, ( “HEC”). Lannett and HEC are each referred to herein by name or as a “Party”, or, collectively, as the “Parties”.

Recitals

WHEREAS, HEC and Lannett entered into a Collaboration and License Agreement for Insulin Glargine dated November 21, 2019; and

WHEREAS, HEC has been Developing Insulin Aspart for the Product (as defined below); and

WHEREAS, pursuant to this Agreement, HEC hereby grants to Lannett co-exclusive rights for the US with respect to Development of the Product and exclusive rights for the US regarding Commercialization of the Product, on the terms and subject to the conditions set forth herein, and HEC retains Development and Commercialization rights to the Product in the ROW.

NOW, THEREFORE, in consideration of the foregoing and the mutual agreements set forth below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

Article I
Definitions

Section 1.1Definitions.  When used in this Agreement, each of the following terms shall have the meanings set forth in this Article I.

“Accounting Standards” means (a) GAAP (United States Generally Accepted Accounting Principles); or (b) IFRS (International Financial Reporting Standards); and (c) CAS (Chinese Accounting Standards), in either case, consistently applied.

“Affiliate” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person, as the case may be, for so long as such control exists.  As used in this definition, “control” means:  (a) to possess, directly or indirectly, the power to direct the management and policies of a Person, whether through ownership of voting securities or by contract relating to voting rights or corporate governance; or (b) direct or indirect beneficial ownership of at least fifty percent (50%) (or such lesser percentage that is the maximum allowed to be owned by a foreign Person in a particular jurisdiction and is sufficient to grant the holder of such voting stock or interest the power to direct the management and policies of such entity) of the voting share capital in a Person.  For purposes of this Agreement, neither HEC nor Lannett shall be deemed an Affiliate of the other Party.

121186093.v1

“Annual Net Sales” means total Net Sales by Lannett, its Affiliates or Licensee Partners of Products in a particular Calendar Year in the US.

“Antitrust Law” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder (the “HSR Act”), the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other Laws of the United States, a state or territory thereof, or any foreign government that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade.

“Biologics License Application” or “BLA” means a Biologics License Application (as more fully described in U.S. 21 C.F.R. Part 601.20 or, as of March 23, 2020, Section 351(k) of the Public Health Service Act, or any other successor regulation) and all amendments and supplements thereto submitted to the FDA, or any equivalent filing in a country or regulatory jurisdiction other than the U.S. with the applicable Regulatory Authority, or any similar application or submission for Regulatory Approval filed with a Regulatory Authority to obtain marketing approval for a biologic product in a country or in a group of countries.

“Biosimilar Product” means a biological product pursuant to the Biologics Price Competition and Innovation Act (BPCI Act) of 2009 that (a) is highly similar to and has no clinically meaningful differences to NovoLog® FlexPen®, including the active ingredient and drug product, (b) for which Regulatory Approval is obtained by referencing NovoLog® FlexPen®, and (c) is approved for use in the US pursuant to a Regulatory Approval process governing approval of interchangeable or biosimilar biologics as described in 42 U.S.C. §§ 262, or any other similar provision that comes into force, or is the subject of a notice with respect to NovoLog® FlexPen® under 42 U.S.C. § 262(l)(2).

“Biosimilar User Fee” means the fees for developing and maintaining a Biosimilar Product owed with respect to the Product pursuant to FDA’s Biosimilars User Fee Program (BsUFA) pursuant to the Federal Food, Drug, and Cosmetic Act, as amended by the Biosimilar User Fee Act, which authorizes FDA to assess and collect fees for biosimilar biological products to expedite the review process for these products.

“BLA Filing” means the filing of a BLA for the Product in the US.

“Business Day” means a day other than a Saturday or Sunday or any other day on which commercial banks in Philadelphia, Pennsylvania, or China are authorized or required by applicable Law to close.

“Calendar Quarter” means a calendar quarter ending on the last day of March, June, September or December; provided, however, that the first Calendar Quarter shall begin on the Effective Date and end on the last day of the calendar quarter during which the Effective Date occurs.

“Calendar Year” means a period of time commencing on January 1 and ending on the following December 31; provided, however, that the first Calendar Year shall begin on the Effective Date and end on December 31 of the calendar year during which the Effective Date occurs.

- 2 -

121186093.v1

“Change of Control” of a Party means any of the following, in a single transaction or a series of related transactions:  (a) the sale or disposition of all or substantially all of the assets of such Party to a Third Party, (b) the direct or indirect acquisition by a Third Party (other than an employee benefit plan (or related trust) sponsored or maintained by such Party or any of its Affiliates) of beneficial ownership of more than fifty percent (50%) of the then-outstanding common shares or voting power of such Party or any direct or indirect entity which holds, directly or indirectly, beneficial ownership of more than fifty percent (50%) of the then-outstanding common shares or voting power of such Party (a “Parent Entity”), or (c) the merger or consolidation of such Party or any Parent Entity with or into a Third Party, unless, following such merger or consolidation, the stockholders of such Party or Parent Entity immediately prior to such merger or consolidation beneficially own directly or indirectly more than fifty percent (50%) of the then-outstanding common shares or voting power of the entity resulting from such merger or consolidation.

“Chemistry, Manufacturing and Controls” or “CMC” means the part of pharmaceutical development that is directed to the Development and Manufacture of products, the specifications therefor, and other parameters which indicate that the finished drug or biologic product and the manufacturing process are consistent and controlled, in each case, as specified by the FDA or other applicable Regulatory Authorities in the chemistry, manufacturing and controls section of a BLA or other regulatory filing in the United States, or the equivalent section of regulatory filings made outside of the United States.

“Clinical Trial” means a Phase I Study, a Phase II Study, a Phase III Study, a Pivotal Clinical Trial, a Phase IV Study or a combination of any of the foregoing studies.

“Code” means the United States Internal Revenue Code of 1986, as amended.

“Collaboration” means the activities performed or to be performed by a Party or Parties, as the case may be, relating to the Development, Manufacture or Commercialization of the Products under this Agreement, including in the exercise of any license granted under this Agreement relating to the Products.

“Collaboration Intellectual Property” means Collaboration Know-How and Collaboration Patents, collectively.

“Collaboration Know-How” means any Know-How or interest therein that is discovered, developed, generated or invented on or after the Effective Date, either (a) solely by or on behalf of HEC or its Affiliates, (b) solely by or on behalf of Lannett or its Affiliates or (c) jointly by or on behalf of Persons described in the foregoing clauses (a) and (b), in the conduct of the Collaboration activities pursuant to this Agreement, including Joint Know-How and Joint Inventions, but excluding, in all cases, Pen Know-How.

“Collaboration Patents” means any Patents or interest therein that: (a) result from the conduct of the Collaboration activities pursuant to this Agreement, (b) are filed on or after the Effective Date, (c) are Controlled solely by HEC or Lannett or Controlled jointly by any of such Persons and (d) Cover Collaboration Know-How, including Joint Patents, but excluding, in all cases, Pen Patents.

“Commercialization” or “Commercialize” means any activities directed to using, marketing, promoting, advertising, distributing, importing, exporting, offering to sell or selling a product, after

- 3 -

121186093.v1

or in expectation of receipt of Regulatory Approval in the applicable country for such product (butexcluding Development).

“Commercially Reasonable Efforts” means, with respect to the performing Party under this Agreement, the carrying out of obligations of such Party in a diligent, expeditious and sustained manner with efforts that are consistent with the efforts used by a biopharmaceutical company of similar size and market capitalization as such Party in the exercise of its commercially reasonable business practices relating to an exercise of a right or performance of an obligation under this Agreement, including the Development, Manufacture and Commercialization of a pharmaceutical or biologic compound or product, as applicable, at a similar stage in its research, development or commercial life as the relevant Program Compound(s) or Program Product(s), and that has commercial and market potential similar to the relevant Program Compound(s) or Program Product(s), taking into account issues of intellectual property coverage, safety and efficacy, stage of development, product profile, competitiveness of the marketplace, proprietary position, regulatory exclusivity, anticipated or approved labeling, present and future market and commercial potential, the likelihood of receipt of Regulatory Approval and other regulatory requirements, profitability (including pricing and reimbursement status achieved or likely to be achieved), amounts payable to licensors of patent or other intellectual property rights, legal issues, Manufacturing, difficulty in Manufacturing the Program Compound(s) or Program Product(s) and alternative Third Party products in the marketplace of the Program Compound(s) or Program Product(s) to be marketed.

“Confidential Information” means, subject to Sections 11.1(a), 11.1(b), 11.1(c) and 11.1(d), (a) all confidential or proprietary information relating to the Collaboration, and (b) all other confidential or proprietary documents, technology, Know-How or other information (whether or not patentable) actually disclosed by one Party or any of its Affiliates to the other Party or any of its Affiliates pursuant to this Agreement relating to the Products and all proprietary biological materials of a Party.

“Control” or “Controlled” means, with respect to any intellectual property, Patents, Know-How, inventions, Data or Confidential Information, the possession (whether by license (other than a license granted under this Agreement) or ownership) by a Party of the ability to grant to the other Party access or a license, as provided herein, without violating the terms of any agreement with any Third Party existing as of the Effective Date or thereafter during the Term.  Notwithstanding the foregoing, for the purpose of defining whether intellectual property, Patents, Know-How, inventions, Data or Confidential Information is Controlled by a Party, if such intellectual property, Patents, Know-How, inventions, Data or Confidential Information is first acquired, licensed or otherwise made available to such Party after the Effective Date and if the use, practice or exploitation thereof by or on behalf of the other Party, its Affiliates or sublicensees would require the first Party to pay any amounts to the Third Party from which the first Party acquired, licensed or otherwise obtained such intellectual property, Patents, Know-How, inventions, Data or Confidential Information (“Additional Amounts”), such intellectual property, Patents, Know-How, inventions, Data or Confidential Information shall be deemed to be Controlled by the first Party only if such Additional Amounts are reflected in the Profit & Loss Share with respect to the Parties’ use of or license to such intellectual property, Patents, Know-How, inventions, Data or Confidential Information to the extent specified in this Agreement.  

- 4 -

121186093.v1

“Cover,” “Covering” or “Covered” means that, with respect to a product or technology and a Patent, but for ownership of or a license under such Patent, the Development, Manufacture, Commercialization or other use of such product or practice of such technology by a Person would infringe a claim of such Patent or, with respect to a claim included in any patent application, would infringe such claim if such patent application were to issue as a patent.

“Damages” means all claims, threatened claims, damages, losses, suits, proceedings, liabilities, costs (including reasonable legal expenses, costs of litigation and reasonable attorney’s fees), or judgments, whether for money or equitable relief, of any kind and is not limited to matters asserted by Third Parties against a Party, but includes claims, threatened claims, damages, losses, suits, proceedings, liabilities, costs (including reasonable legal expenses, costs of litigation and reasonable attorney’s fees) or judgments incurred or sustained by a Party in the absence of Third Party claims; providedthat no Party shall be liable to hold harmless or indemnify the HEC Indemnified Parties or Lannett Indemnified Parties, as applicable, for any claims, threatened claims, damages, losses, suits, proceedings, liabilities, costs or judgments for punitive or exemplary damages, except to the extent the Party seeking indemnification is actually liable to a Third Party for such punitive or exemplary damages in connection with a Claim by such Third Party.

“Data” means any and all research data, results, pharmacology data, medicinal chemistry data, preclinical data, market research, clinical data (including investigator reports (both preliminary and final), statistical analysis, expert opinions and reports, safety and other electronic databases), pharmacovigilance data generated in the Territory, and the Sales data in the US, in any and all forms, including files, reports, raw data, source data (including patient medical records and original patient report forms, but excluding patient-specific data to the extent required by applicable Laws) and the like, in each case directed to, or used in, the Development or Commercialization of the Products for US or the Manufacture of the Pen for the US.

“Develop” or “Development” means discovery, research, preclinical, non-clinical and clinical development activities, including activities relating to screening, assays, test method development and stability testing, toxicology, pharmacology, formulation, quality assurance/quality control development, clinical trials (including Phase IV Studies), technology transfer, statistical analysis, process development and scale-up, pharmacokinetic studies, data collection and management, report writing and other pre-Regulatory Approval activities.

“Development Costs” means the costs actually incurred by the Parties or their Affiliates including any Manufacturing Costs associated with the clinical supply of Product for Clinical Trials, in accordance with the Development Budget with respect to those Development activities performed pursuant to the Development Plan, the results of which will include all the activities associated with Commercialization of the Product in the US, including but not limited to the development regulatory filing and manufacture, after the Effective Date.  It being understood that “Development Costs” in no event shall include any costs actually incurred by HEC or its Affiliates solely for Clinical Trials designed to support Regulatory Approval in the ROW (even, for the avoidance of doubt, in the case where the safety data for such Clinical Trials designed to support Regulatory Approvals in the ROW are included in Regulatory Documentation to support Regulatory Approval in the US). The “Development Cost” shall exclude any costs of the employment of the outside

- 5 -

121186093.v1

representative in the Insulin Aspart Manufacturing Site and the consultant(s) for the management of the Development from Lannett.

“Direct Cost” means, with respect to certain activities hereunder, direct expenses paid or payable by either Party or its Affiliates to Third Parties that are specifically identifiable and incurred to conduct such activities for the Collaboration hereunder and have been recorded in accordance with the Accounting Standards.

“Executive Officers” means HEC’s President of HEC Pharm USA (or the officer or employee of HEC then serving in a substantially equivalent capacity) or his designee and Lannett’s Vice President of Business Development (or the officer or employee of Lannett then serving in a substantially equivalent capacity) or his designee; providedthat any such designee must have decision-making authority on behalf of the applicable Party.

“Failure to Ensure Minimum Supply” means HEC’s failure to achieve the Minimum Supply.

“FDA” means the United States Food and Drug Administration, or any successor agency thereof.

“Field” means the diagnosis, prevention, palliation or treatment of diseases in humans or animals.

“First Commercial Sale” means the first commercial sale of a Product by Lannett, its Affiliates or Licensee Partners in the US in an arms’ length transaction to a Third Party following receipt of applicable Regulatory Approval of such Product in the US.  Sales for test marketing or Clinical Trial purposes shall not constitute a First Commercial Sale.

“Good Manufacturing Practices” or “GMP” means all applicable standards relating to manufacturing practices for fine chemicals, intermediates, bulk products and/or finished pharmaceutical products, including (a) all applicable requirements set forth in the quality systems regulations for drugs and biological products contained in 21 C.F.R. Parts 210 and 211 and 600 and 610 as well as the FDA’s current Good Manufacturing Practices regulations, U.S. 21 C.F.R. Parts 210 and 211 as each may be amended from time to time, and (b) all applicable Laws promulgated by any governmental authority having jurisdiction over the manufacture of Insulin Aspart.

“HEC Collaboration Intellectual Property” means HEC Collaboration Know-How and HEC Collaboration Patents, collectively.

“HEC Collaboration Know-How” means, Collaboration Know-How Controlled by HEC (including HEC’s interest in the Joint Know-How and Joint Inventions).

“HEC Collaboration Patents” means Collaboration Patents Controlled by HEC (including HEC’s interest in the Joint Patents).

“HEC Intellectual Property” means HEC Know-How and HEC Patents, collectively.  

“HEC Know-How” means any Know-How that is (a) related to the Development or Manufacture of the Products Controlled by HEC as of the Effective Date or during the Term; and (b) necessary

- 6 -

121186093.v1

or useful for the Development or Commercialization of the Products, but excluding HEC Collaboration Know-How.

“HEC Patents” means any Patents that (a) are in relation to the Development or Manufacture of the Products Controlled by HEC provided by HEC to Lannett in the due diligence or as of the Effective Date or during the Term; and (b) Cover HEC Know-How or the Products, but excluding HEC Collaboration Patents.  HEC Patents as of the Effective Date are as set forth on Exhibit B to this Agreement.  

“IND” means any Investigational New Drug application, filed with the FDA pursuant to Part 312 of Title 21 of the U.S. Code of Federal Regulations, including any supplements or amendments thereto and any foreign equivalents thereof.

“Insulin Aspart” means the recombinant insulin aspart having a molecular formula and sequence as set forth on Exhibit A.

“Insulin Aspart Manufacturing Site” means the New Facility No. 1 and New Facility No. 2 (if applicable).

“Insulin Glargine” means the recombinant insulin glargine having a molecular formula and sequence as set forth on Exhibit AA and subject to the Collaboration and License Agreement and Supply Agreement dated between HEC and Lannett on November 19, 2019.

“Insulin Glargine Manufacturing Site” means the New Facility No. 1 and New Facility No. 2 (if applicable).

“Joint IP” means, collectively:

“Joint Know-How” which means all Know-How, including physical embodiments of Product(s), that is discovered, developed, generated or invented by or on behalf of both Parties or their respective Affiliates, whether solely or jointly with any Third Party, pursuant to the conduct of activities under the Collaboration at any time during the Term, including Joint Inventions; and

“Joint Patents” which means Patents that: (a) result from the conduct of the Collaboration activities pursuant to this Agreement, (b) are filed on or after the Effective Date, and (c) Cover any Joint Know-How or Joint Patents or the Product.

“Know-How” means any tangible or intangible trade secrets, know-how, expertise, discoveries, inventions, information, Data or materials, including ideas, concepts, formulas, methods, procedures, designs, technologies, compositions, plans, applications, technical data, assays, manufacturing information or data, samples, chemical and biological materials and all derivatives, modifications and improvements thereof.

“Lannett Collaboration Intellectual Property” means Lannett Collaboration Know-How and Lannett Collaboration Patents, collectively.

- 7 -

121186093.v1

“Lannett Collaboration Know-How” means the Collaboration Know-How Controlled by Lannett (including Lannett’s interest in the Joint Know-How and Joint Inventions).

“Lannett Collaboration Patents” means the Collaboration Patents Controlled by Lannett (including Lannett’s interest in the Joint Patents).

“Lannett Intellectual Property” means Lannett Know-How and Lannett Patents, collectively.  

“Lannett Know-How” means any Know-How that is (a) related to the Development or Manufacture of the Products Controlled by Lannett as of the Effective Date or during the Term, and (b) necessary or useful for the Development or Commercialization of the Products, but excluding Collaboration Know-How.

“Lannett Patents” means any Patents that (a) are related to the Development or Manufacture of the Products Controlled by Lannett as of the Effective Date or during the Term, and (b) Cover Lannett Know-How or the Products, but excluding Lannett Collaboration Patents. Lannett Patents as of the Effective Date are as set forth on Exhibit B to this Agreement.

“Law” means any law, statute, rule, regulation, ordinance or other pronouncement having the effect of law, of any federal, national, multinational, state, provincial, county, city or other political subdivision, as from time to time enacted, repealed or amended, including Good Clinical Practices and adverse event reporting requirements, guidance from the International Conference on Harmonization or other generally accepted conventions, the United States Federal Food, Drug, and Cosmetic Act and similar laws and regulations in countries outside the United States, and all other rules, regulations and requirements of the FDA and other applicable Regulatory Authorities.

“Licensee Partner” means any Third Party to whom a Party or any of its Affiliates or any other Licensee Partner grants a sublicense or license with respect to the Development or Commercialization of Products in the Field under rights to Lannett Intellectual Property, HEC Intellectual Property, HEC Collaboration Intellectual Property, Lannett Collaboration Intellectual Property or Joint IP, as the case may be, granted to such Party or Affiliate hereunder, in each case excluding (a) Third Party Contractors and (b) wholesale distributors or any other Third Party that purchases any Product in an arm’s-length transaction, where such Third Party does not have a sublicense to Develop, Manufacture or Commercialize any Product except for a limited sublicense to the extent required to enable such Third Party to perform final packaging for such Product for local distribution.

“Manufacture” or “Manufacturing” means, as applicable, all activities associated with the production, manufacture, processing, filling, packaging, labeling, shipping and storage of a drug substance or drug product, or any components thereof, including process and formulation development, process validation, stability testing, manufacturing scale-up, preclinical, clinical and commercial manufacture and analytical methods development and validation, product characterization, quality assurance and quality control development, testing and release in the Territory.

- 8 -

121186093.v1

“Minimum Supply” means, by [***] January 1, 2024 and at any time thereafter during the Term, HEC’s ability to manufacture, or capability reserved to manufacture the Insulin Aspart for the production of the Products supplying to Lannett for the US market each Calendar Year the greater of (a) [***] or (b) [***].

“Net Sales” means, with respect to the Product, the gross amounts invoiced by Lannett, its Affiliates and Licensee Partners (each, a “Selling Party”) to Third Parties (that are not Licensee Partners) for sales or other commercial dispositions of such Product in the US, less the following deductions actually incurred, allowed, paid, accrued or specifically allocated in its financial statements and calculated in accordance with the Accounting Standards as consistently applied, for:

(a)discounts (including trade, quantity and cash discounts), cash and non-cash coupons, retroactive price reductions, and charge-back payments and rebates granted to any Third Party (including to governmental authorities, purchasers, reimbursers, customers, distributors, wholesalers, and group purchasing and managed care organizations or entities (and other similar entities and institutions));

(b)credits or allowances, if any, on account of price adjustments,recalls, claims, damagedgoods, rejections or returns of items previously sold (including Products returned in connection with recalls or withdrawals) and amounts written off by reason of uncollectible debt; providedthat, if the debt is thereafter paid, the corresponding amount shall be added to the Net Sales of the period during which it is paid;

(c)rebates (or their equivalent), administrative fees,chargebacks and retroactive price adjustments and any other similar allowances granted by a Selling Party (including to governmental authorities, purchasers, reimbursers, customers, distributors, wholesalers, and group purchasing and managed care organizations and entities (and other equivalent entities and institutions)) which effectively reduce the selling price or gross sales of the Product, normal and customary inventory management fees and other bona fide service fees paid to distributors and wholesalers;

(d)insurance, customs charges, freight, postage, shipping, handling, and other transportation costs incurred by a Selling Party in shipping Product to a Third Party; and

(e)import taxes, export taxes, excise taxes (including annual fees due under Section 9008 of the United States Patient Protection and Affordable Care Act of 2010 (Pub. L. No. 111-48) and other comparable Laws), sales tax, value-added taxes, consumption taxes, duties or other taxes levied on, absorbed, determined or imposed with respect to such sales (excluding income or net profit taxes or franchise taxes of any kind).

There should be no double counting in determining the foregoing deductions from gross amounts invoiced to calculate “Net Sales” hereunder. The calculations set forth in this definition shall be determined in accordance with Accounting Standards consistently applied.

If non-monetary consideration is received by a Selling Party for any Product in the relevant country, Net Sales will be calculated based on the average price charged for such Product during the preceding royalty period, or in the absence of such sales, the fair market value of the Product as

- 9 -

121186093.v1

determined by the Parties in good faith.  Notwithstanding the foregoing, Net Sales shall not be imputed to transfers of Products for use in Clinical Trials, non-clinical development activities or other development activities with respect to Products by or on behalf of the Parties, for bona fide charitable purposes or for compassionate use or for Product samples, if no monetary consideration is received for such transfers.

Net Sales shall be determined on, and only on, the first sale by a Selling Party or any of its Affiliates or (sub)licensees to a non-(sub)licensee Third Party.

“New Facility No.1” means [***].

“New Facility No. 2” means [***].

“NMPA” means the National Medical Products Administration of China, or any successor agency thereof.

“Operational Qualification” means the demonstration of whether a facility, process equipment and sub-systems are capable of consistently operating within established limits and tolerances by testing (at upper and lower operating limits) compliance with the requirements identified in the corresponding design specifications for such facility, individual equipment, or sub-system and confirming whether any newly acquired equipment (or facilities, services or systems) functions as expected, that all parts and components operate correctly, that all controls perform the intended function and that all gauges and indicators are calibrated and display the correct value. Operational Qualification should follow on from the installation of the equipment and sub-systems and should include tests that have been developed based on detailed knowledge of equipment, systems or processes.

“Out-of-Pocket Costs” means, with respect to certain activities hereunder, direct expenses paid or payable by either Party or its Affiliates to Third Parties (other than employees of such Party or its Affiliates) that are specifically identifiable and incurred to Develop the Product hereunder and have been recorded in accordance with the Accounting Standards.

“Patent” means any (a) patent or patent application anywhere in the world, (b) divisional, continuation, continuation in-part thereof or any other patent application claiming priority, or entitled to claim priority, directly or indirectly to (i) any such patent or patent application or (ii) any patent or patent application from which such patent or patent application claims, or is entitled to claim, direct or indirect priority, and (c) patent issuing on any of the foregoing anywhere in the world, together with any registration, reissue, re-examination, patent of addition, renewal, patent term extension, supplemental protection certificate, or extension of any of the foregoing anywhere in the world.

“Pen” means the variable dose, multi-dose disposal injection drug delivery device(s) (including autoinjectors and other needle-based and needle-free devices) customized by a Third Party and assembled by HEC that are used in the US during the Term to deliver formulated Insulin Aspart in the Product intradermally, transdermally, subcutaneously or intramuscularly, but excluding transdermal patch technology.

- 10 -

121186093.v1

“Pen Know-How” means any Know-How that is (a) Controlled by Lannett and/or HEC as of the Effective Date or during the Term; and (b) necessary or useful for the Development, Manufacture or Commercialization of the Pen.

“Pen Patents” means any Patents that (a) are Controlled by Lannett and/or HEC as of the Effective Date or during the Term; and (b) Cover the Pen.

“Person” means any corporation, limited or general partnership, limited liability company, joint venture, trust, unincorporated association, governmental body, authority, bureau or agency, any other entity or body, or an individual.

“Phase I Study” means a human clinical trial of a Product, the principal purpose of which is a preliminary determination of safety, tolerability, pharmacokinetics and pharmacodynamics in study subjects where potential pharmacological activity may be determined or a similar clinical study prescribed by any applicable Regulatory Authority, from time to time, pursuant to applicable Law or otherwise, including for example the trials referred to in 21 C.F.R. §312.21(a), as amended (or the non-United States equivalent thereof).

“Phase II Study” means a human clinical trial of a Product intended to explore a variety of doses, dose response, and duration of effect, and to generate evidence of clinical safety and effectiveness for a particular indication or indications in a target patient population, or a similar clinical study prescribed by any applicable Regulatory Authority, from time to time, pursuant to applicable Law or otherwise, including for example the trials referred to in 21 C.F.R. §312.21(b), as amended (or the non-United States equivalent thereof).

“Phase III Study” means a human clinical trial of a Product in any country that would satisfy the requirements of 21 C.F.R. §312.21(c), as amended (or the non-United States equivalent thereof) and is intended to (a) establish that the product is safe and efficacious for its intended use, (b) define contraindications, warnings, precautions and adverse reactions that are associated with the product in the dosage range to be prescribed, and (c) support Regulatory Approval for such product.

“Phase IV Study” means a human clinical trial of a product which is (a) conducted to satisfy a requirement of a Regulatory Authority in order to maintain a Regulatory Approval or (b) conducted voluntarily after Regulatory Approval of the product has been obtained from an appropriate Regulatory Authority for enhancing marketing or scientific knowledge of an approved indication.

“Pivotal Clinical Trial” means a human clinical trial of a Product on a sufficient number of subjects that satisfies both of the following ((a) and (b)):

(a) such trial is designed to establish (with one or more other Pivotal Clinical Trials, if applicable) that such product has an acceptable safety and efficacy profile for its intended use, and to determine warnings, precautions, and adverse reactions that are associated with such product in the dosage range to be prescribed, which trial is intended to support Regulatory Approval of such product, or a similar clinical study prescribed by the FDA; and

- 11 -

121186093.v1

(b) such trial is a registration trial designed to be sufficient (with one or more other Pivotal Clinical Trials, if applicable) to support the filing of an application for a Regulatory Approval for such product in the U.S., as evidenced by (i) an agreement with or statement from the FDA on a Special Protocol Assessment or equivalent, or (ii) other guidance or minutes issued by the FDA, for such registration trial.

“Product” means the Insulin Aspart as the sole active ingredient and in all forms, presentations, and formulations (including manner of delivery and dosage), which is co-Developed by HEC and Lannett for US market, manufactured by HEC in the Territory and Commercialized by Lannett or any of its Affiliates or Licensee Partners in the US pursuant to this Agreement, as sold in combination with the Pen (whether or not co-packaged).

“Product Data” means all relevant Data included in the Know-How Controlled by either Party in relation to Products for use in the Field either: (a) as of the Effective Date or during the Term; or (b) generated from activities conducted by or on behalf of a Party under the Development Plan;  (c) that otherwise specifically relates to Products and is necessary or useful for applications for Regulatory Approval, or Regulatory Approvals; or (d) are recorded during the Commercialization activities  for Products in the Field and in the US.

“Product Liabilities” means all losses, damages, fees, costs (including medical monitoring) and other liabilities incurred by a Party, its Affiliate(s) or its Licensee Partner(s) and resulting from or relating to the use of a Product in a human (including clinical trials or Commercialization) in the Territory incurred after the Effective Date. For the avoidance of doubt, Product Liabilities include reasonable attorneys’ and experts’ fees and costs relating to any claim or potential claim against a Party, its Affiliate(s), or its Licensee Partner(s) and all losses, damages, fees and costs associated therewith.  Product Liabilities shall include liabilities associated with recalls or the voluntary or involuntary withdrawal of any Product.

“Prosecution” or “Prosecute” means the filing, preparation, prosecution and maintenance of Patents, including any and all pre-grant proceedings before any patent authority, such as interferences.

“Publication” means any publication in a scientific journal, any scientific abstract to be presented to any audience, any presentation at any scientific conference, including slides and texts of oral or other public presentations, any other scientific presentation and any other oral, written or electronic scientific disclosure directed to any audience that pertains to any Product, or the use of any of the foregoing, or the data or results from any work under the Collaboration.

“Regulatory Approval” means all approvals of each applicable Regulatory Authority necessary for the commercial marketing and sale of a product for a particular indication in a country (including separate Regulatory Authority pricing or reimbursement approvals whether or not legally required in order to sell the product in such country).

“Regulatory Authority” means a federal, national, multinational, state, provincial or local regulatory agency, department, bureau or other governmental entity with authority over the testing,

- 12 -

121186093.v1

manufacture, use, storage, import, promotion, marketing or sale (including pricing and reimbursement approval) of a product in a country or territory.

“Regulatory Documentation” means, with respect to the Collaboration, all INDs, BLAs and other regulatory applications submitted to any Regulatory Authority, Regulatory Approvals, pre-clinical and clinical data and information, regulatory materials, drug dossiers, master files (including Drug Master Files, as defined in 21 C.F.R. 314.420 and any non-United States equivalents), and any other data, reports, records, regulatory correspondence and other materials relating to Development or Regulatory Approval of the Products, or required to Manufacture, distribute or sell the Products, including any information that relates to pharmacology, toxicology, chemistry, Manufacturing and controls data, batch records, safety and efficacy, and any safety database.

“Right of Reference or Use” means a “Right of Reference or Use” as that term is defined in 21 C.F.R. §314.3(b), and any non-United States equivalents.

“ROW” means all countries in the world other than the US.

[***]

“Territory” means the US and the ROW, collectively.

“Third Party” means any Person other than HEC or Lannett that is not an Affiliate of HEC or Lannett.

“Third Party Agreement” means any agreement listed on Exhibit C, Schedule 12.2 (j) and Schedule 12.3 (i) to this Agreement.

“Third Party Rights” means, with respect to a Party, any rights of, and any limitations, restrictions or obligations imposed by, Third Parties pursuant to any Third Party Agreements.

“US” means the United States of America, including its territories, possessions and Puerto Rico.

“Validation Batch” means a batch or lot produced from a validation run. Each Validation Batch is intended to produce Product that is or is expected to be (following Regulatory Approval) commercially saleable.

Section 1.2Additional Definitions.  Each of the following definitions is set forth in the section of this Agreement indicated below:

DEFINITION	SECTION
35 U.S.C. § 102(c) Patent	Section 10.7
Acquirer Program	Section 8.6(b)(iii)(B)
Agreement	Preamble
Allocable Overhead	Exhibit D
Allowable Expenses	Exhibit D
Audit Rights Holder	Section 9.4(e)

- 13 -

121186093.v1

DEFINITION	SECTION
Audit Team	Section 9.4(a)
Auditee	Section 9.4(e)
Bankruptcy Code	Section 8.8
China	Section 3.1(b)
Claim	Section 13.1
Competitive Infringement	Section 10.3(b)
Competitive Program	Section 8.6(b)(ii)
Competitive Program Party	Section 8.6(b)(ii)
Cooperating Party	Section 11.3(b)(iii)
Costs of Goods Sold or COGs	Exhibit D
Cure Period	Section 14.2(a)(i)
Development Budget	Section 3.2(b)
Development Cost Share	Section 9.1(a)
Development Plan	Section 3.2(a)
Disclosing Party	Section 11.1
Dispute	Section 15.1
Distribution Costs	Exhibit D
DOJ	Section 11.7(b)
Earlier Patent	Section 10.7
Effective Date	Preamble
Electronic Delivery	Section 15.16
Finance Working Group	Exhibit D
force majeureevent	Section 15.7
FTC	Section 11.7(b)
Global Safety Database	Section 5.3
Gross Profit	Exhibit D
HEC	Preamble
HEC Indemnified Parties	Section 13.2
HEC’s Financial Responsibility	Section 3.2(b)
HSR Act	Definition of Antitrust Law
HSR Clearance Date	Section 11.7(b)
HSR Filing	Section 11.7(b)
Implementation Date	Section 11.7(b)
Indemnified Party	Section 13.3
Indemnitor	Section 13.3
Indirect Taxes	Section 9.5(b)(iii)
[***]	[***]
Joint Inventions	Section 10.1(c)
Joint Patents	Section 10.1(c)
Lannett	Preamble
Lannett Indemnified Parties	Section 13.1
Lannett’s Financial Responsibility	Section 3.2(b)
Licensed Branding	Section 6.4(c)
Licensed Party	Section 10.2(e)
Manufacturing Costs	Exhibit D

- 14 -

121186093.v1

DEFINITION	SECTION
Marketing Costs	Exhibit D
Material Breach	Section 14.2(a)(i)
Operating Profits or Losses	Exhibit D
Other Operating Income/Expense	Exhibit D
Party or Parties	Preamble
Patent Prosecution Expenses	Section 10.2(c)
Payee Party	Section 9.5(b)(i)
Paying Party	Section 9.5(b)(i)
Pen Development Plan	Section 3.6(b)
[***]	[***]
Pen Presentation	Section 3.6(a)
Pharmacovigilance Expenses	Exhibit D
Product Assets	Section 12.5(a)
Product Recall Expenses	Exhibit D
Production Commitment	Section 4.3
Profit & Loss Share	Section 9.2(a)
Prosecuting Party	Section 10.2(d)(ii)
Receiving Party	Section 11.1
Redacted Version	Section 11.3(b)(i)
Regulatory Expenses	Exhibit D
Regulatory Interactions	Section 5.1(b)
Report	Exhibit D
Requesting Party	Section 11.3(b)(iii)
Sales Costs	Exhibit D
SEC	Section 11.3(b)(i)
Selling Party	Definition of Net Sales
Sublicense Revenues	Exhibit D
Supply Agreement	Section 4.1
Term	Section 14.1(a)
Third Party Contractors	Section 8.2(a)(ii)
Third Party Infringement	Section 10.3(a)
Third Party Infringement Action	Section 10.4
Third Party Products Liability Action	Section 13.5(a)
US Product Trademarks	Section 6.4(a)

Article II
Governance; Collaboration

Section 2.1Lannett Authority.  Lannett shall have sole decision-making authority with respect to the (a) Development activities assigned to Lannett under the Development Plan and Commercialization of the Product for the US and (b) Development of the Pen in the Territory.

Section 2.2HEC Authority.HEC shall have sole decision-making authority with respect to the (a) Development and Commercialization of the Product (other than the Pen) in the

- 15 -

121186093.v1

ROW, (b) Development activities assigned to HEC under the Development Plan of the Product for the US and (c) subject to Section 4.3, Manufacture of the Product in the Territory.

Section 2.3Exceptions.  Notwithstanding the foregoing, no Party shall have the right to finally resolve a dispute: (a) in a manner that excuses such Party from any of its obligations specifically enumerated under this Agreement; (b) in a manner that negates any consent rights or other rights specifically allocated to the other Party under this Agreement; (c) to resolve any dispute involving the breach or alleged breach of this Agreement; (d) to resolve a matter if the provisions of this Agreement specify that unanimous or mutual agreement of the Parties, or consent of the other Party, is required for such matter; (e) in a manner that would require the other Party to perform any act that is inconsistent with any Law; or (f) otherwise expand a Party’s rights or reduce or increase a Party’s obligations under this Agreement.

Article III
Development

Section 3.1Roles and Responsibilities.

(a)Roles.

(i)US.  As of and after the Effective Date, subject to the terms and conditions of this Agreement (including Sections 2.1 and 2.2), the Parties will share responsibility for, and control of, Developing the Product in the Field for the US pursuant to the Development Plan (whether or not conducted in the US or in the ROW) and Lannett will assume sole responsibility for, and control of, Commercializing the Product in the Field in the US.

(ii)ROW.  As of and after the Effective Date, subject to the terms and conditions of this Agreement, HEC will assume sole responsibility for, and control of, Developing and Commercializing the Product in the Field in the ROW and Manufacturing the Product inthe Territory.

(b)Diligence.  Lannett, directly or through one or more of its Affiliates or (sub)licensees, will use Commercially Reasonable Efforts to Develop and Commercialize the Product in the Field in the US and otherwise to perform its obligations under the Development Plan. HEC directly or through one or more of its Affiliates or (sub)licensees, will use Commercially Reasonable Efforts to (a) Manufacture the Product in the Territory and otherwise to perform its obligations under the Development Plan and (b) obtain Regulatory Approval for the Product in the US, subject to Section 3.2(a)(i).  HEC will reasonably cooperate with Lannett in performing the foregoing obligations.  [***]

(c)Assistance.  During the Term, each Party will cooperate with the other Party to provide reasonable assistance requested by such other Party, to facilitate the Development, Manufacture and Commercialization efforts related to the Products in the US, including assistance with respect to regulatory and Clinical Trial transition matters, and the transfer to the other Party of any Know-How licensed to such other Party under this Agreement.  Such cooperation will include providing the other Party with reasonable access, in person or by teleconference, to such Party’s personnel involved in the Development and Manufacture of the Product.

- 16 -

121186093.v1

Section 3.2Development of Product.

(a)Development Plan.

(i)Initial Plan.  Subject to Section 2.1 and Section 2.2, Development of the Product for the US shall be governed by the development plan attached hereto as Schedule 3.2(a) (as amended from time to time in accordance with this Agreement, the “Development Plan”), which includes (a) Lannett’s annual budget of Development Costs attached as Appendix 1, which shall be paid pursuant to Section 3.2(b), and (b) anticipated timelines for performance.  The Direct Costs of conducting Development activities in relation to a Product for the US shall be reflected in the Development Budget and allocated and paid as set forth in HEC’s Financial Responsibility and Lannett’s Financial Responsibility (as defined below). Pursuant to the Development Plan, (a) Lannett shall (i) be the sponsor for and design all Clinical Trials for the Product for the US commenced prior to the submission of the BLA Filing and (ii) be responsible for preparing the BLA Filing and (b) HEC shall be responsible for submitting the BLA Filing to the FDA.

(ii)Updates.  Following the initial preparation of the Development Plan as set forth in Section 3.2(a)(i), the Parties shall mutually agree in writing to any amendments to the Development Plan prior to the grant of Regulatory Approval for the Product in the US; provided that, Lannett shall be entitled, with HEC’s prior written consent not to be unreasonably withheld, to amend the Development Plan solely in order to (x) comply with FDA guidance with respect to the Product, (y) achieve Regulatory Approval in the US and (z) designate Third Party contract research organizations from time to time. In addition, either Party may reasonably request at any time that the other Party consider, review and approve, other updates to the Development Plan for Development activities to support Regulatory Approval on a global basis. Subject to this Section 3.2(a)(ii), neither Party (itself or by or through any others, including any Affiliates or (sub)licensees) will take any material action regarding the Development of the Product for the US (whether or not conducted in the US or in the ROW) unless described in the Development Plan or as required by applicable Laws or applicable Regulatory Authorities or independent monitoring boards for Clinical Trials.

(b)Development Budgets.  Subject to this Section 3.2(b) and Article IX, HEC shall be solely responsible for paying the Development Costs incurred by HEC to conduct the activities set forth in Appendix 2 of the Development Plan (“HEC’s Financial Responsibility”) and Lannett shall pay Thirty-Two Million U.S. Dollars ($32,000,000) for Development Costs (excluding HEC’s Financial Responsibility) pursuant to the following schedule:  (a) Five Million U.S. Dollars ($5,000,000) at the earlier of (1) successful completion of manufacturing of a cGMP batch of Insulin Aspart, or (2) July 30, 2021, provided that such payment shall be fully refundable in the event HEC is unable to successfully complete manufacturing of a cGMP batch of Insulin Aspart; and (b) the remaining balance between Thirty-Two Million U.S. Dollars ($32,000,000) minus the amount paid by Lannett for Development activities plus the Five Million U.S. Dollars ($5,000,000) to be paid by Lannett to HEC in two equal payments, with the first payment occurring at the First Commercial Sale of the Product and the second payment occurring twelve (12) months after the first payment (“Lannett’s Financial Responsibility”).. Each Calendar Quarter, Lannett shall provide to HEC a written summary report of the Development activities conducted by Lannett in the previous Calendar Quarter pursuant to the Development Plan

- 17 -

121186093.v1

(including the portion of Lannett’s Financial Responsibility expended in the previous Calendar Quarter) and the Parties shall arrange a mutually convenient time to discuss each such report.  Until such time as Lannett has fulfilled Lannett’s Financial Responsibility, an annual budget (to be incurred by both parties) for the Product as provided in this Section 3.2(b) (the “Development Budget”) shall be prepared as follows: (x) before such time as Lannett has fulfilled Lannett’s Financial Responsibility, Lannett shall prepare the Development Budget (provided that, Lannett shall not be entitled to amend HEC’s Financial Responsibility) and (y) after such time Lannett has fulfilled Lannett’s Financial Responsibility, the Parties shall jointly prepare the Development Budget (provided that, neither party shall be entitled to amend Lannett’s Financial Responsibility or HEC’s Financial Responsibility). For Development Costs to be incurred from and after the Effective Date, the Parties will review and approve the Development Budget reasonably in advance of the applicable Development Costs being incurred (with the intent being to obtain such approval at least six (6) months in advance of such costs being incurred, where practicable).  Thereafter, Lannett will update and provide HEC with a copy of the Development Budget, including the budgeted, each Calendar Year sufficiently in advance of the next Calendar Year so as to provide the Parties with an opportunity approve the Development Budget and to budget accordingly, but in any event no later than November 1st of each Calendar Year during the Term.  HEC may request at any time that Lannett consider other updates to the Development Budget.

Section 3.3Coordination and Reports.  Each Party shall keep the other Party informed with respect to activities assigned to such Party under the Development Plan, including the conduct of any applicable Clinical Trials. Lannett shall provide HEC with regular quarterly written reports on Lannett’s Development activities relating to the US, including a summary of results, information, and data generated, any activities planned with respect to Development going forward (including, for example, updates regarding regulatory matters and Development activities for the next Calendar Quarter), challenges anticipated and updates regarding intellectual property issues relating to the Collaboration. In addition, upon receipt of HEC’s reasonable written request, Lannett shall provide HEC such written reports within fifteen (15) days.Such written reports may be discussed by telephone or video-conference between the Parties. HEC shall have the right to access to the original records and data that support the Reports within forty-five (45) days after the receipt of Lannett’s prior written consent, if applicable.

Section 3.4Rights to Use Product Data.

(a)Each Party, in a given country for Development or Commercialization of Product in such country, shall keep accurate records of all Product Data generated as a result of all activities by or on behalf of such Party in performing Development and Commercialization in relation to Product.  Each Party shall provide the other Party with copies of all such Product Data Controlled by the Party during the Term that is necessary for or reasonably related to the Development and Commercialization of Product promptly following the generation of such Product Data.  Product DataControlled by Lannett shall be included in the Lannett Know-How and licensed to HEC pursuant to Section 8.1(b), and Product Data Controlled by HEC shall be included in the HEC Know-How and licensed to Lannett pursuant to Section 8.1(a).  

(b)Notwithstanding anything to the contrary in this Agreement, each Party shall promptly provide to the other Party, free of charge, copies of and rights of reference to and use of all Product Data that is Controlled by such Party, and that is relevant to or necessary to

- 18 -

121186093.v1

address issues relating to: (i) the safety of Products inthe Territory, including Data that is related to adverse effects experienced with Products, or (ii) all activities relating to CMC regarding Products, and in each case of (i) and (ii), that are required to be reported or made available to Regulatory Authorities inthe Territory during the Term, when and as such data become available.

Section 3.5Records; Tech Transfer.

(a)Maintenance of Records.  Each Party shall maintain in all material respects, and shall require its Licensee Partners and Third Party Contractors to maintain in all material respects, complete and accurate records in segregated books of all Development work conducted in furtherance of the Collaboration and all results, data and developments made in conducting such activities. Such records shall be (i) complete and accurate and shall fully and properly reflect all such work done and results achieved in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes and (ii) in the case of HEC, available in English on a timely basis, unless otherwise agreed by both Parties.  Each Party shall require the applicable study sites to maintain original source documents from Clinical Trials of the Products for at least five (5) years following the launch of the Product in the US and in accordance with relevant and local site International Council for Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use guidelines.

(b)Inspection.  Each Party shall have the right, during normal business hours and upon reasonable written notice, to inspect and copy (or request the other Party to copy) all records of the other Party or its Licensee Partners or Third Party Contractors in relation to the Development of the Product for the US, as applicable, maintained in connection with the work done and results achieved in the performance of Development activities under the Collaboration, but solely to the extent access to such records is necessary for such Party to exercise its rights under this Agreement.

(c)Tech Transfer.  As soon as reasonably practical after the Effective Date and thereafter upon Lannett’s reasonable request during the Term, HEC shall transfer to Lannett, at no cost to Lannett, copies of all HEC Know-How, HECCollaboration Know-How and HEC’sinterest in the Joint Know-How related to the Product, to the extent not previously transferred to Lannett.  Upon HEC’s reasonable request during the Term, Lannett shall transfer to HEC, at no cost to HEC, copies of all Lannett Know-How, LannettCollaboration Know-How, Lannett’sinterest in the Joint Know-How and Pen Know-How related to the Product, to the extent not previously transferred to HEC.  In addition, each Party shall provide reasonable assistance, including making its personnel reasonably available for meetings or teleconferences to answer questions and provide technical support to the other Party with respect to the use of such transferred Know-How in the Development, Manufacture and Commercialization of Products.   The costs and expenses incurred by either Party in connection with such assistance shall be solely borne by such Party.  Any documents (excluding the documentation or records for deviations during the manufacture process, such as the out of specification results) provided by HEC to Lannett pursuant to this Section 3.5(c) shall be: (i) originally documented in English; or (ii) translated into English and accompanied by a certified English translation at HEC’s sole cost.

Section 3.6Pen Development.

- 19 -

121186093.v1

(a)Pen Development Plan.  Lannett shall use its Commercially Reasonable Efforts to Develop Pens for the Product with any Third Party, which are to be used in the administration of the formulation of Insulin Aspart (each form of such Pen, a “Pen Presentation”).

(b)As soon as practicable after the Effective Date, Lannett shall use its Commercially Reasonable Efforts to submit to HEC a proposed detailed development program and timeline for any Pen Presentation, such proposal to include (x) details regarding the timing of any required documentation for inclusion in applications for Regulatory Approval of Pens with Regulatory Authorities in the US, and (y) requirements that design changes to the Pen(s) be made if necessary to address any handling issues identified during initial user handling studies of such Pen(s). HEC shall review such proposal and the Parties shall discuss and revise such proposal in good faith until agreed upon by the Parties, at which time it will be appended to, and made a part of, this Agreement as Exhibit F and become a “Pen Development Plan” hereunder; provided that, any amendments to the Pen Development Plan shall be mutually agreed by the Parties in writing.[***].

(c)Lannett shall develop the Pen Presentations in accordance with the Pen Development Plan and all such development costs shall be included as part of Lannett’s Financial Responsibility in accordance with Section 9.1(a) (other than manufacturing implementation, costs of producing samples of the Pen Presentations for Clinical Trials, qualifying the manufacturing process for Pen Presentation assembly, CMC Development work, and equipment by HEC at HEC’s facilities, which shall be at HEC’s sole expense). Lannett shall use its Commercially Reasonable Efforts to enter into all necessary agreements with Third Parties, including any Third Party manufacturers and suppliers of the Pen.

Article IV
Manufacture and Supply

Section 4.1Generally.  Subject to the terms and conditions of this Agreement, HEC will assume sole responsibility for the Manufacture of Insulin Aspart for Development and Commercialization of the Product in the US, including final assembly of the Pen and primary and secondary packaging, all in accordance with FDA requirements for pharmaceutical serialization. On the Effective Date, the Parties shall enter into the supply agreement for the Manufacture and supply of the Product substantially in the form set forth on Exhibit G (the “Supply Agreement”) for (a) subject to Section 4.2, Clinical Trials for purposes of obtaining Regulatory Approval in the US and (b) Commercialization of the Product in the US.

Section 4.2Manufacturing Costs.  All Manufacturing Costs incurred by HEC pursuant to the Development Plan shall be borne solely by HEC. The costs of any raw materials and other production materials (including the manufacture of the clinical samples of the Product for Clinical Trial purposes) required by Lannett to conduct Clinical Trials for the Product for the US (whether or not conducted in the US or in the ROW) shall be borne solely by HECas part of HEC’sFinancial Responsibility.

Section 4.3New Facility.

(a)[***].

- 20 -

121186093.v1

(b)[***].

Representative in Insulin Aspart Manufacturing Site. [***]. Lannett’s representative will, strictly for the purpose of ensuring compliance with GMPs: (i) have full access to the validation master plan for the Insulin Aspart Manufacturing Site and the manufacturing operations and laboratories (including facilities, equipment, documentation, and personnel) utilized for the Manufacture of Insulin Aspart when Insulin Aspart is being produced, tested, or released, (ii) have the option to participate in batch record reviews, deviation investigations, customer complaints, quality incidents, and other such activities related to the release of Insulin Aspart, (iii) will have the ability to convene periodic meetings with representatives of HEC with respect to Manufacture of Insulin Aspart, (iv) participate in routine and for-cause quality audits, (v) review validation data for systems and processes relevant to Insulin Aspart, (vi) ensure appropriate quality metrics are tracked and trended to identify adverse quality trends in both Insulin Aspart and systems, (vii) participate in scheduled periodic GMP audits, (viii) participate with the site supply chain team to review manufacturing schedules and provide input, and (ix) participate in joint capacity review meetings to be conducted at least annually based on HEC’s forecasts. All the documents and written or electronic records related to the clauses (i) through (ix) shall not be copied or sent in their electronic version by email, or in the printed or writing version by mail or express courier service to Lannett, its Affiliates or sublicensees. The costs or expenses incurred by Lannett from the outside representative of Lannett or its Affiliates that are involved in the activities listed in clauses (i) through (ix) above, if applicable, shall be borne solely by Lannett and, for clarity, not part of Lannett’s Financial Responsibility or Profit & Loss Share.

Article V
Regulatory Matters

Section 5.1Lead Responsibility for Regulatory Interactions.  Except as may otherwise be mutually agreed by the Parties:

(a)Lead Responsibility.  Subject to Section 5.4, (i) prior to submission of the BLA Filing by HEC, Lannett shall have lead responsibility for all Regulatory Interactions with Regulatory Authorities in the US for each Product and (ii) following submission of the BLA Filing by HEC, HEC shall have lead responsibility for all Regulatory Interactions with Regulatory Authorities in the US for each Product.  

(b)Regulatory Interactions Defined.  For purposes of this Agreement, “Regulatory Interactions” means (i) monitoring and coordinating all regulatory actions, preparing, submitting and coordinating all communications and filings with, and submissions to, all Regulatory Authorities with respect to the Products and (ii) interfacing, corresponding and meeting with the Regulatory Authorities with respect to the Products.

(c)Regulatory Responsibilities.

(i)Lannett shall be responsible for, and have final decision-making authority over, preparing the IND and BLA Filing.

- 21 -

121186093.v1

(ii)Subject to Section 5.1(c)(i) above, HEC shall be responsible for (x) submitting the BLA Filing prepared by Lannett in the name of HEC or an Affiliate with the FDA and (y) paying all Biosimilar User Fees for the Product as part of HEC’s Financial Responsibility set forth in Appendix 2 of the Development Plan and (z) preparing and submitting all other regulatory filings with respect to any Development, Manufacturing or Commercialization for Products (other than filings with respect to clinical trials for the Product).

(iii)Each Partyshall provide the other Partywith all relevant clinical and nonclinical data requested by a Regulatory Authority, including pharmacology and toxicology data generated by such Partywith respect to each Product. Unless otherwise agreed upon by all of the Parties, any documents provided by HEC to Lannett pursuant to this Section 5.1(c)(ii) shall be: (x) documented in English; or (y) translated into English and accompanied by a certified English translation at HEC’s sole cost. The documents and data that have been translated by Lannett at Lannett’s costs according to the Appendix 2 of the Development Plan shall be excluded.

Section 5.2Participation Rights.

(a)Review of Regulatory Documentation.  Each Party shall keep the other Party reasonably informed in connection with all Regulatory Interactions, preparation of all Regulatory Documentation, Regulatory Authority review of Regulatory Documentation, Regulatory Approvals, annual reports, including periodic safety reports to the respective health authorities, annual re-assessments, and any subsequent variations and changes to labeling, in each case with respect to the Products.  Each Party shall respond within a reasonable time frame to all reasonable inquiries by the other Party with respect to any information provided pursuant to this Section 5.2(a) (and sufficiently promptly for the other Party to provide meaningful input with respect to responses to Regulatory Authorities).

(b)Participation in Meetings.  Each Party shall have the right to participate in material or scheduled face-to-face meetings, video conferences and teleconferences with all applicable Regulatory Authorities relating to any Product, and shall be provided with advance access to the other Party’s material documentation prepared for such meetings.

(c)Review.  Prior to submission of material correspondence to any Regulatory Authority with respect to the Products, each Party shall, sufficiently in advance for the other Party to review and comment, provide the other Party any material correspondence with the Regulatory Authority related to such meetings. Each Party shall also provide the other Party with copies of any material correspondence with Regulatory Authorities relating to Development of, or the process of obtaining Regulatory Approval for, the Products and respond within a reasonable time frame to all reasonable inquiries by the other Party with respect thereto.

Section 5.3Global Safety Data Sharing Program and Database.  At a time to be mutually agreed by the Parties, HEC shall establish, hold and maintain a single electronic system and program for the collection, storage and sharing of all safety information for the Products in the Territory (the “Global Safety Data Sharing Program and Database”). Such database and program shall comply in all material respects with all Laws reasonably applicable to pharmacovigilance anywhere where the Products are being or have been Developed or Commercialized. Unless the Parties otherwise agree in writing, HEC shall be responsible for operating the Global Safety Data

- 22 -

121186093.v1

Sharing Programand Database for the Products; provided, that Lannett may hold and maintain a parallel safety database for the Products as needed or required according to applicable Laws. The costs and expenses for establishing and operating such Program and Database (including the pharmacovigilance expenses of the Product in China and US) shall be included in the Shared Development Cost or the Profit & Loss Share.

Section 5.4Recalls, Market Withdrawals or Corrective Actions.

(a)In the event that any Regulatory Authority issues or requests a recall, market withdrawal, clinical hold involving discontinuation of use of the Product or similar action in connection with a Product in any portion of the Territory, or in the event either Party determines that an event, incident or circumstance has occurred that may result in the need for a recall, market withdrawal or similar action in any country in the Territory, the Party notified of such recall, market withdrawal or similar action, or the Party that desires such recall, market withdrawal or similar action, shall within twenty-four (24) hours advise the other Party thereof by telephone.  Lannett shall, after reasonable consultation with HEC, decide whether to conduct a recall, market withdrawal or similar action in the US and the manner in which any such recall, market withdrawal or similar action shall be conducted.  Each Party will make available to the other Party, upon request, all of such Party’s (and its Affiliates’) pertinent records that such other Party may reasonably request to assist such other Party in effecting any recall, market withdrawal or similar action.

(b)Subject to Article XIII, the costs and expenses incurred relating to a recall, market withdrawal, clinical hold involving discontinuation of use of the Product or similar action of any Product(s) inthe Territoryshall be (I) taken into account in determining the Development Cost Share if incurred prior to First Commercial Sale of the applicable Product in the US or (II) taken into account in determining the Profit & Loss Share if incurred in the US after the First Commercial Sale of the applicable Product in the US (in each case, as, and to the extent, provided in Section 9.1, Section 9.2 and Exhibit D).  

Article VI
Commercialization

Section 6.1Commercialization Responsibilities for Products in the US.

(a)Responsibility.  Subject to the terms and conditions of this Agreement, Lannett will have sole responsibility, and shall be the Commercialization lead Party, for all Commercialization activities for Products in the US and Lannett shall have final decision-making authority with respect to all matters that relate to Commercialization of Products in the US, in accordance with Section 2.1.  

(b)Sales.  Lannett will book and recordall sales of the Product in the US, and will have the sole responsibility for the processing of orders, invoicing, terms of sale, and distribution of the Products throughout the US.

Section 6.2 Acknowledgement.  Each Party hereby acknowledges and agrees that it will not convey, transfer, license or lease any of its rights or obligations under this Agreement,

- 23 -

121186093.v1

except as expressly permitted in this Agreement, including as set forth in Section 8.2, Section 12.5 or Section 15.4.

Section 6.3 Commercialization Costs.During the Term, all Commercialization costs in the US that constitute Allowable Expenses and are incurred by Lannett shall be included in the Profit & Loss Share. Subject to the terms and conditions of this Agreement, all Commercialization costs in the ROW shall be borne one hundred percent (100%) by HEC.

Section 6.4 Trademarks.

(a)Selection of Trademarks.  Lannett shall select the trademark(s) to be used in connection with the marketing and sale of the Products solely in the US (such marks, together with registrations, applications for registration and common law rights therein, collectively, “US Product Trademarks”).  

(b)Ownership.  Lannett and HEC shall jointly own all US Product Trademarks.  Lannett shall solely own all trademarks used solely in connection with the marketing and sale of the Pen (together with registrations, applications for registration and common law rights therein). HEC shall solely own all trademarks used solely in connection with the marketing and sale of Insulin Aspart (together with registrations, applications for registration and common law rights therein). Each Party will execute and deliver any further document reasonably requested by the other Party to further document or record any such assignment.

(c)Branding.  From time to time, the Parties shall discuss in good faith any branding or co-branding of the Products (the “Licensed Branding”), and the Parties will enter into appropriate trademark licensing agreements to achieve the foregoing.  For the avoidance of doubt, nothing in this Agreement shall be construed to grant either Party any rights in or to any of the other Party’s trademarks, tradenames, logos, or other marks (other than US Product Trademarks), including use thereof, absent a separate trademark licensing agreement entered into by the Parties.  Notwithstanding the foregoing, subject to any restrictions on the form or content of the Licensed Branding imposed by any Regulatory Authority, unless the Parties mutually agree otherwise in writing, the Licensed Branding used with respect to Products shall feature the logos of Lannett and HEC with approximately equal sizing and similar prominence, with Lannett’s name first, on all packaging and materials used for Commercialization of such Products in the US, to the extent permitted by applicable Law.

Article VII
Diligence

Section 7.1Collaboration Activities.

(a)General.  Each Party shall use Commercially Reasonable Efforts to perform all Development, Manufacturing and Commercialization activities for which such Party is responsible hereunder and, as applicable, shall perform such activities in compliance with the applicable Development Plan, including any budget(s) and timeframe(s) set forth therein and including making available those resources set forth in any applicable Development Plan and the terms of this Agreement.

- 24 -

121186093.v1

(b)Compliance with Laws.  Each Party shall (i) perform its obligations under this Agreement in a scientifically sound and workmanlike manner and (ii) carry out all work done in the course of the Collaboration in compliance with all applicable Laws governing the conduct of such work.

Section 7.2Day-to-Day Responsibility.  Each Party shall be responsible for day-to-day implementation of the Development, Manufacturing and Commercialization activities for which it (or its Affiliate) has been, or otherwise is, assigned responsibility under this Agreement or, as applicable, the Development Plan, and shall keep the other Party reasonably informed as to the progress of such activities.

Article VIII
Grant of Rights; Exclusivity

Section 8.1

(a)License Granted to Lannett.  Subject to the terms and conditions of this Agreement, during the Term, HEC hereby grants to Lannett (i) a co-exclusive (with HEC and its Affiliates and sublicensees) license, with the right to grant sublicenses (subject to Section 8.2 and Section 8.3), under and to the HEC Intellectual Property and HEC Collaboration Intellectual Property to Develop the Products for the US and (ii) an exclusive license, with the right to grant sublicenses (subject to Section 8.2 and Section 8.3), under and to the HEC Intellectual Property and HEC Collaboration Intellectual Property to offer for sale, sell, import and otherwise Commercialize the Products for the US.  

(b)License Granted to HEC.  Subject to the terms and conditions of this Agreement, during the Term, Lannett hereby grants to HEC a co-exclusive license, with the right to grant sublicenses (subject to Section 8.2 and Section 8.3), under and to the Lannett Intellectual Property andLannett Collaboration Intellectual Property to (i) Develop the Products for the US and(ii) Manufacture the Products in the Territory solelyfor sale ofProducts to Lannettin the US. Lannett also grants HEC a non-exclusive license under and to the Pen Intellectual Property to assemble the Pen in the Territory for the Manufacture of the Product for Commercialization in the US.  Notwithstanding the foregoing, HEC will not conduct any clinical trials for the Product in the Territory without Lannett’s consent.

Section 8.2Sublicense Rights.  Subject to Section 8.3, the Parties have the following sublicensing rights.

(a)Sublicenses to Affiliates and Subcontractors.  Each Party shall have the right to grant sublicenses within the scope of the licenses and sublicense under Section 8.1:

(i)to such Party’s Affiliates; and

(ii)to Third Parties for the purpose of (X) with respect to HEC, Commercializing any Product in the ROW or (Y) engaging Third Parties as contract research organizations, contract manufacturers, contract sales forces, consultants, academic researchers and the like (“Third Party Contractors”) in connection with Development, Manufacturing or Commercialization activities throughout the Territory (to the extent such Party is permitted to

- 25 -

121186093.v1

engage in such activities in any applicable country) on behalf of such Party or its Affiliates with respect to the Collaboration under this Agreement, subject to the following:

(A)unless otherwise mutually agreed by the Parties, each Party shall require any such Third Party to whom such Party discloses Confidential Information to enter into an appropriate written agreement obligating such Third Party to be bound by obligations of confidentiality and restrictions on use of such Confidential Information that are no less restrictive than the obligations set forth in Article XI, including requiring such Third Party to agree in writing not to issue any Publications except in compliance with the terms of this Agreement (including the obligations set forth in Section 11.4, except that Publications by academic collaborators shall be permitted if the academic collaborator (i) provides an advance copy of the proposed Publication (under the same time periods as described in Section 11.4(a)), which must be shared with the other Party, (ii) agrees to delay such Publication sufficiently long enough to permit the timely preparation and filing of a patent application, and (iii) upon the request of either Party, removes from such Publication any Confidential Information of such Party);

(B)unless otherwise mutually agreed by the Parties, each Party will obligate such Third Party to agree in writing to assign ownership of, or grant an exclusive, royalty-free, worldwide, perpetual and irrevocable license (with the right to grant sublicenses) to, any inventions arising under its agreement with such Third Party to the extent related to Development, Manufacturing or Commercialization with respect to the Products in the Field; and such Party shall structure such assignment or exclusive license so as to enable such Party to sublicense such Third Party inventions to the other Party pursuant to Section 8.1 (including permitting such other Party to grant further sublicenses); providedthat, in connection with any academic collaborator performing research work with respect to the Product that is not reasonably expected by the applicable Party to result in inventions related to composition of matter or methods of use, it shall be sufficient for such Party to obtain a non-exclusive, worldwide, royalty-free, perpetual license (with the right to grant sublicenses) to, and a right to negotiate for an exclusive license, with the right to grant sublicenses, to, any inventions resulting from such research work, which sublicensing rights must permit sublicensing to the other Party pursuant to Section 8.1 (including permitting such other Party to grant further sublicenses);

(C)each Party shall notify the other Party in writing of the execution of any such agreement with any such Third Party and, if requested, shall provide the other Party with a copy of such agreement, which copy may be redacted with respect to matters that do not relate to the Collaboration; and

(D)unless otherwise mutually agreed by the Parties, each Party will require any such Third Party to grant to the other Party access to all confidential protocols and data generated by such Third Party’s work with respect to the Products to the same extent as such other Party’s grant of licenses under Section 8.1, and grant the other Party the right to audit the records of such Third Party.

(b)Other Sublicenses.  Except as provided in Section 8.2(a), any other sublicense by either Party under the licenses and sublicenses set forth in Section 8.1 shall require the prior written consent of the other Party, which consent shall not be unreasonably withheld.

- 26 -

121186093.v1

Section 8.3Sublicense Requirements.  Any sublicense granted by a Party pursuant to this Agreement shall be subject to the following:

(a)each sublicense granted hereunder by a Party or its Affiliates shall be consistent with the requirements of this Agreement;

(b)any transfer of rights between a Party and its Affiliates shall not be deemed a sublicense by such Party but shall be deemed a direct license by the other Party to such Party’s Affiliate; it being understood and agreed that such Party shall remain responsible for the activities of its Affiliate;

(c)a Party’s or its Affiliates’ Licensee Partners or Third Party Contractors shall have no right to grant further sublicenses without the other Party’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed;

(d)such Party shall be primarily liable for any failure by its Affiliates and Licensee Partners and Third Party Contractors to comply with all relevant restrictions, limitations and obligations in this Agreement; and

(e)such sublicense must be granted pursuant to a written sublicense agreement and, with respect to any sublicense other than a sublicense by a Party to an Affiliate of such Party, such Party must provide the other Party with a copy of any sublicense agreement entered into under Section 8.2 above within thirty (30) days after the execution of such sublicense agreement; providedthat any such copy may be reasonably redacted to remove any confidential, proprietary or competitive information, but such copy shall not be redacted to the extent that it impairs the other Party’s ability to ensure compliance with this Agreement. Such sublicense agreement shall be treated as Confidential Information of the sublicensing Party.

Section 8.4Affiliates and Third Party Contractors.  Either Party may exercise its rights and perform its obligations hereunder itself or through its Affiliates and (sub)licensees. Each Party shall be primarily liable for any failure by its Affiliates and (sub)licensees (including Third Party Contractors) to comply with all relevant restrictions, limitations and obligations in this Agreement.  If either Party desires to use any Person to conduct any of its Development, Commercialization, Manufacture or other Collaboration activities hereunder, such Party must comply with the obligations of Section 8.2(a)(ii)(A) through (D), even to the extent no sublicense of rights is granted to such Third Party.

Section 8.5Third Party Agreements.

(a)Acknowledgement.  Each Party acknowledges that either party shall be responsible for the fulfillment of its obligations under each Third Party Agreement between such party and the Third Party.  

(b)Covenants Regarding Third Party Agreements.  One Party agrees that during the Term:

- 27 -

121186093.v1

(i)One Party shall not modify or amend any Third Party Agreement in any way that adversely affects the other Party’s rights hereunder without the other Party’s prior written consent;

(ii)One Party shall not terminate any Third Party Agreement in whole or in part, without the other Party’s prior written consent;

(iii)One Party shall be solely responsible for, and shall make, all royalty payments, milestone payments, yearly fees, sublicensee fees, Prosecution fees, and all other payments owed to any Third Party under and pursuant to any Third Party Agreement;

(iv)One Party shall not waive or fail to exercise any of its rights, or fail to perform any of its obligations, under any Third Party Agreement where such waiver or failure to exercise or perform would adversely affect the other Party’s rights hereunder, without the prior written consent of the other Party, including rights with respect to including applicable improvements within the licenses granted under such Third Party Agreement; and, at the reasonable request of the other Party, such Party shall exercise such rights and make such requests described above as are permitted under such Third Party Agreement;

(v)One Party shall promptly furnish the other Party with copies of all reports and other communications that such Party furnishes to any Third Party under any Third Party Agreement to the extent that such reports relate to this Agreement;

(vi)One Party shall promptly furnish the other Party with copies of all reports and other communications that such Party receives from any Third Party under any Third Party Agreement that relate to this Agreement (including notices relating to applicable improvements under such Third Party Agreement);

(vii)One Party shall furnish the other Party with copies of all notices received by such Party relating to any alleged breach or default by such Party under any Third Party Agreement within two (2) Business Days after such Party’s receipt thereof; in addition, if such Party should at any time breach a Third Party Agreement or become unable to timely perform its obligations thereunder, such Party shall immediately notify the other Party; and

(viii)If one Party cannot or chooses not to cure or otherwise resolve any alleged breach or default under any Third Party Agreement (A) such Party shall so notify the other Party within two (2) Business Days of such decision, which shall not be less than fifteen (15) Business Days prior to the expiration of the cure period under such Third Party Agreement; providedthat such Party shall use Commercially Reasonable Efforts to cure any such breach or default; and (B) the other Party, in its sole discretion, shall be permitted (but shall not be obligated), on behalf of such Party, to cure any breach or default under such Third Party Agreement in accordance with the terms and conditions of such Third Party Agreement or otherwise resolve such breach directly with the applicable Third Party under such Third Party Agreement; and (C) if the other Party pays any such Third Party any amounts owed by such Party under such Third Party Agreement, then the other Party may deduct such Party’s share of such amounts from payments the other Party is required to make thereafter to such Party hereunder or, at the other Party’s election, may otherwise seek reimbursement of such amounts from such Party.

- 28 -

121186093.v1

(c)Termination of Third Party Agreements.  The Parties agree that voluntary termination, without both Parties’ prior written consent, of any Third Party Agreement with respect to any Patent or Know-How that is necessary to Develop, Manufacture or Commercialize the Products shall be deemed a breach of this Agreement by the Party that is the licensee under such Third Party Agreement;providedthat (i) if the other Party’s breach of this Agreement results in a breach of any Third Party Agreement, such other Party agrees to use Commercially Reasonable Efforts to assist the Party that is the licensee under such Third Party Agreement in curing such breach of such Third Party Agreement and (ii) if the other Party’s breach of this Agreement results in a termination of any Third Party Agreement, such termination of such Third Party Agreement shall not be deemed a breach of this Agreement by the Party that is the licensee under such Third Party Agreement.

Section 8.6Exclusivity.

(a)Exclusivity Obligations.  During the Term, each of the Parties covenants and agrees, solely on behalf of itself and its respective Affiliates, that it shall not (except as otherwise expressly permitted in this Section 8.6): (i) alone or with or for any Third Party, Develop or Commercialize for the US any formulations of Insulin Aspart administered with a Pen that would be a Biosimilar Product or (ii) license, authorize, appoint or otherwise willfully or intentionally enable, whether directly or indirectly, a Third Party to conduct any of the activities described in clause (i).

(b)Exceptions.

(i)Incidental Discoveries.  A Party shall be deemed not to be, directly or indirectly (whether such activities are conducted internally or with or through a Third Party), Developing or Commercializing in violation of the provisions of Section 8.6(a) as a result of conducting a research program or discovery effort (or Developing, Commercializing a molecule resulting from such research program or discovery effort) that has as its specified and primary goal, as evidenced by items such as laboratory notebooks or other relevant documents contemporaneously kept, taken as a whole, to discover or Develop any compound that is not a Product.

(ii)Competitive Programs. Section 8.6(a) shall not apply to the applicable Party if, during the Term, such Party or any of its Affiliates (other than in a Change of Control transaction with respect to such Party) merges or consolidates with, or otherwise acquires, a Third Party that is then engaged in activities that would otherwise constitute a breach of this Section 8.6 by such Party or its Affiliates (a “Competitive Program”); it being understood and agreed that, unless the Parties agree otherwise in writing, such Party that is engaged in a Competitive Program (the “Competitive Program Party”) shall, within ninety (90) days after the date of such merger, consolidation or acquisition, notify the other Party that it intends to either:  (A) terminate, or cause its relevant Affiliate to terminate, the Competitive Program or (B) divest, or cause its relevant Affiliate to divest, whether by license or otherwise, the Competitive Program.  If the Competitive Program Party notifies the other Party within such ninety (90) day period that it intends to terminate, or cause its relevant Affiliate to terminate, such Competitive Program, the Competitive Program Party or its relevant Affiliate, shall (X) terminate such Competitive Program as quickly as possible, and in any event within one hundred and eighty (180) days (unless

- 29 -

121186093.v1

applicable Law requires a longer termination period) after the Competitive Program Party delivers such notice to the other Party; and (Y) confirm to the other Party when such termination has been completed, and the Competitive Program Party’s continuation of the Competitive Program during such one hundred and eighty (180) day (or, as required by applicable Law, longer) period shall not constitute a breach of the Competitive Program Party’s exclusivity obligations under Section 8.6(a).  If the Competitive Program Party notifies the other Party within such ninety (90) day period that it intends to divest such Competitive Program, the Competitive Program Party or its relevant Affiliate shall use all reasonable efforts to effect such divestiture as quickly as possible, and in any event within one hundred eighty (180) days after the Competitive Program Party delivers such notice to the other Party, and shall confirm to the other Party when such divestiture has been completed.  If the Competitive Program Party or its relevant Affiliate fails to complete such divestiture within such one hundred eighty (180) day period, but has used reasonable efforts to effect such divestiture within such one hundred eighty (180) day period, then, unless otherwise required by applicable Law, such one hundred eighty (180) day period shall be extended for such additional reasonable period thereafter as is necessary to enable such Competitive Program to be in fact divested, not to exceed an additional one hundred eighty (180) days; provided, however, that such additional one hundred eighty (180) day period shall be extended for such period as is necessary to obtain any governmental or regulatory approvals required to complete such divestiture if the Competitive Program Party or its relevant Affiliate is using good faith efforts to obtain such approvals.  The Competitive Program Party’s continuation of the Competitive Program during such divestiture period shall not constitute a breach of the Competitive Program Party’s exclusivity obligations under Section 8.6(a).

(iii)Certain Permitted Activities.

(A)The restrictions set forth in Section 8.6(a) shall not be deemed to prevent either Party or its respective Affiliates from (1) fulfilling its obligations under this Agreement, or (2) engaging any subcontractors in accordance with Section 8.2(a)(ii) of this Agreement.

(B)If a Change of Control occurs with respect to either Party with a Third Party and the Third Party already is conducting or is planning to conduct activities that would cause a Party or an Affiliate to violate Section 8.6(a) (an “Acquirer Program”), then such Third Party will be permitted to initiate or continue such Acquirer Program and such initiation or continuation will not constitute a violation of Section 8.6(a); providedthat (1) none of the Lannett Collaboration Intellectual Property, HEC Collaboration Intellectual Property or Joint IP will be used in any Acquirer Program, (2) none of the other Patents or Know-How licensed by either Party to the other Party pursuant to this Agreement will be used in any Acquirer Program, (3) no Confidential Information of the other Party will be used in any such Acquirer Program, and (4) the Development and Commercialization activities required under this Agreement will be conducted separately from any Development and Commercialization activities directed to such Acquirer Program, including by the maintenance of separate lab notebooks and records, commercial records (password-protected to the extent kept on a computer network) and the use of separate personnel working on each of the activities under this Agreement, and the activities covered under such Acquirer Program (except that this requirement shall not apply to personnel who have senior research management roles and not project level research roles, provided such

- 30 -

121186093.v1

personnel in senior research management roles are not directly involved in the day-to-day activities under such Acquirer Program).

Section 8.7No Implied Licenses Rights.  Except as expressly provided in Section 8.1, and subject to Section 8.6, all rights in and to the HEC Intellectual Property, HEC’s and its Affiliates’ interests in HEC Collaboration Intellectual Property, Joint IP and any other Patents or Know-How of HEC and its Affiliates, are hereby retained by HEC and its Affiliates.  Except as expressly provided in Section 8.1, and subject to Section 8.6, all rights in and to the Lannett Intellectual Property, Lannett’s and its Affiliates’ interests in Lannett Collaboration Intellectual Property and any other Patents or Know-How of Lannett and its Affiliates, are hereby retained by Lannett and its Affiliates.

Section 8.8Section 365(n) of the Bankruptcy Code.  All rights and licenses granted under or pursuant to any section of this Agreement are and will otherwise be deemed to be for purposes of Section 365(n) of the United States Bankruptcy Code (Title 11, US Code), as amended (the “Bankruptcy Code”), licenses of rights to “intellectual property” as defined in Section 101(35A) of the Bankruptcy Code.  The Parties will retain and may fully exercise all of their respective rights and elections under the Bankruptcy Code.  The Parties agree that each Party, as licensee of such rights under this Agreement, will retain and may fully exercise all of its rights and elections under the Bankruptcy Code or any other provisions of applicable Law outside the US that provide similar protection for “intellectual property.”  The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against a Party under the Bankruptcy Code or analogous provisions of applicable Law outside the US, the Party that is not subject to such proceeding will be entitled to a complete duplicate of (or complete access to, as appropriate) such intellectual property and all embodiments of such intellectual property, which, if not already in the non-subject Party’s possession, will be promptly delivered to it upon the non-subject Party’s written request thereof.  Any agreements supplemental hereto will be deemed to be “agreements supplementary to” this Agreement for purposes of Section 365(n) of the Bankruptcy Code.

Article IX
Financial Provisions

Section 9.1Development Costs.

(a)During the Term, a Financial Working Group (as defined in Exhibit D) shall be established as of the Effective Date and responsible for management of the Development Costs. All reasonable Direct Costs incurred by either Party or its Affiliates in conducting Development activities for the Product solely for the US pursuant to the Development Plan (including any Clinical Trials but excluding any Phase IV Studies conducted following Regulatory Approval which shall be included in the determination of Operating Profits or Losses) in accordance with terms and conditions of this Agreement will be paid by the respective party incurring the costs.  Lannett’s total Financial Responsibility for activities under the Development Plan shall not exceed [***] which includes the [***].  If Lannett believes activities for which Lannett is responsible to do under the Development Plan will exceed this limit, HEC and Lannett will negotiate in good faith, to determine how to continue development of Insulin Aspart for the U.S.  Lannett’s total Financial Responsibility does not include any costs incurred by Lannett for work performed by [***].

- 31 -

121186093.v1

Section 9.2Profit & Loss Share. Subject to Section 3.2:

(a)Profit & Loss Share.  

(i)Subject to Section 9.2(a)(ii) below, the Parties will share in (and bear) Operating Profits or Losses with respect to the Development and Commercialization of Product(s) in the US as follows: (i) commencing on the initiation of the Profit & Loss Share and until the earlier to occur of (x) the tenth (10^th) anniversary of the First Commercial Sale or (y) termination of the Term, HEC will bear (and be entitled to) fifty percent (50%) of such Operating Profits or Losses and Lannett will bear (and be entitled to) fifty percent (50%) of such Operating Profits or Losses, in each case with respect to any such period ending on the earlier of subclauses(x) or (y) of this clause (i), and (ii) beginning immediately after the last day of the period described in clause(i),until the earlier to occur of (x) the fifteenth (15^th) anniversary of the First Commercial Sale or (y) expiration or termination of the Term, HEC will bear (and be entitled to) sixty percent (60%) of such Operating Profits or Losses, and Lannett will bear (and be entitled to) forty percent (40%) of such Operating Profits or Losses, in each case with respect to any such period ending on the earlier of subclauses(x) or (y) of this clause (ii)(clauses (i) and (ii), as applicable, the “Profit & Loss Share”).

(ii)Notwithstanding anything to the contrary, the Parties understand and agree that, if a Failure to Ensure Minimum Supply occurs, then the Profit & Loss Share shall be revised such that HEC will be entitled to forty percent (40%) of the Operating Profits and Lannett will be entitled to sixty percent (60%) of the Operating Profits, in each case, on and from the date of the Failure to Ensure Minimum Supply until the date on which Lannett recovers all expended amounts of Lannett’s Financial Responsibility;  it being understood and agreed that the allocation of the Operating Losses for each Party shall correspond to the percentage allocations set forth in Section 9.2(a)(i) above, provided that HEC has not cured such Failure to Ensure Minimum Supply within ninety (90) days.

(b)Quarterly Reconciliation and Payments.  Unless the Parties otherwise agree in advance in writing, reconciliation and payments of the Profit & Loss Share shall be conducted as set forth in Exhibit D.

Section 9.3Financial Records.  The Parties shall keep, and shall require their respective Affiliates and (sub)licensees to keep, complete and accurate books and records in accordance with the applicable Accounting Standards.  The Parties shall keep, and shall require their respective Affiliates and (sub)licensees to keep, such books and records for at least five (5) years following the end of the Calendar Year to which they pertain.  Such books of accounts shall be kept at the principal place of business of the financial personnel with responsibility for preparing and maintaining such records.  The Parties shall also keep, and require their respective Affiliates and (sub)licensees to keep, complete and accurate records and books of accounts containing all data reasonably required for the calculation and verification of the Profit & Loss Share.

Section 9.4Audits.

(a)Audit Team.  Each Party may, upon reasonable request and at its expense (except as provided for herein), cause an internationally recognized independent accounting firm

- 32 -

121186093.v1

selected by it (except one to whom the Auditee has a reasonable objection) (the “Audit Team”) to audit during ordinary business hours the books and records of the other Party and the correctness of any payment made or required to be made to or by such Party, and any report underlying such payment (or lack thereof), pursuant to the terms of this Agreement.  Prior to commencing its work pursuant to this Agreement, the Audit Team shall enter into an appropriate confidentiality agreement with the Auditee obligating the Audit Team to be bound by obligations of confidentiality and restrictions on use of confidential information that are no less restrictive than the obligations set forth in Article XI.

(b)Limitations.  In respect of each audit of the Auditee’s books and records:  (i) the Auditee may be audited no more than once per year, (ii) no records for any given year for an Auditee may be audited more than once; providedthat the Auditee’s records shall still be made available if such records impact another financial year which is being audited, and (iii) the Audit Rights Holder shall only be entitled to audit books and records of an Auditee from the three (3) Calendar Years prior to the Calendar Year in which the audit request is made.

(c)Audit Notice.  In order to initiate an audit for a particular Calendar Year, the Audit Rights Holder must provide written notice to the Auditee.  The Audit Rights Holder exercising its audit rights shall provide the Auditee with notice of one or more proposed dates of the audit not less than sixty (60) days prior to the first proposed date.  The Auditee will reasonably accommodate the scheduling of such audit.  The Auditee shall provide such Audit Team(s) with full and complete access to the applicable books and records and otherwise reasonably cooperate with such audit, pursuant to the terms of this Agreement.

(d)Payments.  If the audit, which takes into consideration of the local laws, regulations and practices (including but not limit to CAS) of the portion(s) of the Territory in which the audit is conducted, shows any under-reporting or underpayment, or overcharging or overpayment by any Party, that under-reporting, underpayment, overpayment or overcharging shall be reported to the Audit Rights Holder and the underpaying or overcharging Party shall remit the applicable underpayment amount or reimburse the applicable overpayment amount (together with interest at the rate set forth in Section 9.7) to the underpaid or overcharged Party within forty-five (45) days after receiving the audit report.  Further, if the audit for an annual period shows an under-reporting or underpayment or an overcharge by any Party for that period in excess of five percent (5%) of the amounts properly determined, the underpaying or overcharging Party, as the case may be, shall reimburse the applicable underpaid or overcharged Audit Rights Holder conducting the audit, for its respective audit fees and reasonable Out-of-Pocket Costs in connection with said audit, which reimbursement shall be made within forty-five (45) days after receiving appropriate invoices and other support for such audit-related costs.

(e)Definitions.  For the purposes of the audit rights described herein, an individual Party subject to an audit in any given year will be referred to as the “Auditee” and the other Party who has certain and respective rights to audit the books and records of the Auditee will be referred to as the “Audit Rights Holder.”

Section 9.5Tax Matters.

- 33 -

121186093.v1

(a)General.  The Parties acknowledge that the rights and obligations imposed on each of them pursuant to this Agreement that relate to the sharing of profits from the Development and Commercialization of the Products in the US and the collaborative relationship formed between them in connection therewith, gives rise to a partnership for US federal (and, to the extent applicable, state) income tax purposes (but not for any non-tax or non-US purpose) upon initiation of the Profit & Loss Share, and the Parties shall act in accordance with Exhibit E.

(b)Withholding and Indirect Taxes.

(i)Each Party shall be entitled to deduct and withhold from any amounts payable under this Agreement (or allocable to another Party pursuant to Exhibit E) such taxes as are required to be deducted or withheld therefrom under any provision of applicable Law.  The Party that is required to make such withholding (the “Paying Party”) will:  (A) deduct those taxes from such payment, (B) timely remit the taxes to the proper taxing authority, and (C) send evidence of the obligation together with proof of tax payment to the recipient Party (the “Payee Party”) on a timely basis following that tax payment; provided, however, that before making any such deduction or withholding, the Paying Party shall give the Payee Party written notice of the intention to make such deduction or withholding (and such notice, which shall set forth in reasonable detail the authority, basis and method of calculation for the proposed deduction or withholding, shall be given at least a reasonable period of time before such deduction or withholding is required, in order for such Payee Party to obtain reduction of or relief from such deduction or withholding). Each Party agrees to cooperate with the other Parties in claiming refunds or exemptions from, or reductions in, such deductions or withholdings under any applicable Law or treaty to ensure that any amounts required to be withheld pursuant to this Section 9.5(b)(i) are reduced to the fullest extent permitted by applicable Law.

(ii)Each Party agrees to cooperate with the “Partnership Representative” of such Partnership (as defined in Exhibit E) and with the other Party in claiming refunds or exemptions from, or reductions in, any deductions or withholdings, including pursuant to Code Section 1446(f), required to be made by an acquirer of an interest in the partnership described in Section 9.5(a) and in reducing or eliminating such withholdings to the fullest extent permitted by applicable Law.

(iii)The Parties shall cooperate to minimize value added tax, sales and use tax, consumption tax and other similar taxes (“Indirect Taxes”) imposed in connection with this Agreement, as applicable.If any taxing authority imposes an Indirect Tax with respect to the work undertaken under this Agreement, then: (A) to the extent the Party required to pay such Indirect Tax is entitled to recover such Indirect Tax from the applicable taxing authority or otherwise obtain credit for such Indirect Tax against sums payable to such taxing authority, that Party shall bear and pay that amount; or (B) to the extent the Party required to pay such Indirect Tax is not entitled to recover such Indirect Tax from the applicable taxing authority or otherwise obtain credit for such Indirect Tax against sums payable to such taxing authority, such Indirect Tax shall constitute a Shared Development Cost.

(iv)Each Party has provided a properly completed and duly executed IRS Form W-9 or Form W-8, as applicable, to the other Party. Each Party and any other recipient of payments described in this Section 9.5(b) shall provide to the other Party (including where the

- 34 -

121186093.v1

other Party is acting in its capacity as Partnership Representative (as defined in Exhibit E)), at the time or times reasonably requested by such other Parties or as required by applicable Law, such other properly completed and duly executed documentation as will permit payments made under this Agreement to be made without, or at a reduced rate of, withholding for taxes, and the applicable payment shall be made without (or at a reduced rate of) withholding to the extent permitted by such documentation, as reasonably determined by the Paying Party.

Section 9.6Currency Exchange. Unless otherwise expressly stated in this Agreement, all amounts specified in, and all payments made under, this Agreement shall be in United States Dollars.  If any currency conversion shall be required in connection with the calculation of amounts payable under this Agreement, such conversion shall be performed in a manner consistent with the paying Party’s normal practices used to prepare its audited financial statements for internal and external reporting purposes.  

Section 9.7Late Payments. Any payments that are not paid on or before the date such payments are due under this Agreement shall bear interest at an annual rate equal to the lesser of (x) the “prime rate”, as reported by The Wall Street Journal, plus five percent (5%), or (y) the highest rate permitted by applicable Law; in each case calculated on the number of days such payment is delinquent, compounded monthly;providedthat, with respect to any disputed payments, no interest payment shall be due until such dispute is resolved and the interest which shall be payable thereon shall be based on the finally-resolved amount of such payment, calculated from the original date on which the disputed payment was due through the date on which payment is actually made.

Article X
Intellectual Property Ownership, Protection and Related Matters

Section 10.1Ownership of Inventions.

(a)Non-Collaboration Know-How.  Any Know-How discovered, developed, generated or invented by HEC or its Affiliates or Lannett or its Affiliates prior to or outside the Collaboration shall remain the sole property of such Party or its applicable Affiliate(s), except as otherwise agreed by the Parties.

(b)Sole Inventions.  All Collaboration Know-How discovered, developed, generated or invented solely by employees, agents and consultants of a Party or its Affiliates shall be owned exclusively by such Party or its applicable Affiliate(s).  All Pen Know-How and Pen Patents Developed pursuant to the Collaborationshall be owned exclusively by Lannett or its designees subject to the agreement in connection to Pen Development between Lannett and the designated Third Party involved in the work of Pen Development.

(c)Joint Inventions.  Subject to Sections 10.1(a) and 10.1(b), allCollaboration Know-How discovered, developed, generated or invented jointly by employees, agents and consultants of HEC or its Affiliates, on the one hand, and employees, agents and consultants of Lannett or its Affiliates, on the other hand, in the conduct of activities under this Agreementor such Collaboration Know-How arising from the activities supported by the costs and expenses incurred by both Parties under this Agreement (“Joint Inventions”) shall be owned jointly on the basis of each Party (or its applicable Affiliate(s)) having an undivided interest without a duty to

- 35 -

121186093.v1

account to the other Party (or its applicable Affiliate(s)) and shall be deemed to be Controlled by each Party.  Each Party shall have the right to (i) use such Joint Inventions individually, and (ii) non-exclusively license, or sell or otherwise transfer its interest in such Joint Inventions to its Affiliates, in each case without the consent of the other Party or its applicable Affiliate(s). With the other Party’s prior written consent, which is not to be unreasonably withheld, each Party shall have the right to exclusively license such Joint Inventions to any Third Party, or sell or otherwise transfer its interest in such Joint Inventions to a Third Party, so long as such use, sale, license or transfer is subject to Section 8.6 and the licenses granted pursuant to this Agreement and is otherwise consistent with this Agreement.

(d)Notice.  Each Party agrees to provide, at the request of the other Party and no more than once per Calendar Quarter, reports disclosing to the other Party all Collaboration Intellectual Property discovered, developed, generated or invented by employees, agents and consultants of such Party and all Lannett Intellectual Property and HEC Intellectual Property that becomes subject to this Agreement, which disclosures may be made in connection with the updates to the Development Plan made in accordance with Section 3.2.

(e)Inventorship.  For purposes of determining ownership hereunder, the determination of inventorship shall be made in accordance with United States patent laws.  In the event of a dispute regarding inventorship, if the Parties are unable to resolve the dispute, the Parties shall jointly engage mutually acceptable independent patent counsel not regularly employed by either Party to resolve such dispute.  The decision of such independent patent counsel shall be binding on the Parties with respect to the issue of inventorship.

(f)Further Actions and Assignments.  Each Party shall take all further actions and execute all assignments requested by the other Party and reasonably necessary or desirable to vest in the other Party the ownership rights set forth in this Article X.

Section 10.2Prosecution of Patents.  Subject to the terms and conditions of any Third Party Agreement to the extent such agreement applies to the Lannett Patents, Lannett Collaboration Patents, HEC Patents or HEC Collaboration Patents, the following provisions shall apply with respect to the Lannett Patents, HEC Patents, HEC Collaboration Patents, Lannett Collaboration Patents, and Joint Patents in the US:

(a)General.  Lannett shall have the initial right and option to Prosecute the Lannett Collaboration Patents, HEC Collaboration Patents, and Joint Patents in the US.  In the event that Lannett declines to Prosecute such Patents in the US, Lannett shall give HEC reasonable notice to this effect, sufficiently in advance to permit HEC to undertake such Prosecution in the US without a loss of rights, and thereafter HEC may, upon written notice to Lannett and receipt of Lannett’s prior written consent (not to be unreasonably withheld), Prosecute such Patents in the owning Party(ies)’s name(s).

(b)Sole Prosecution right.  HEC shall have the sole right and option to Prosecute the HEC Patents at its sole expense. Lannett shall have the sole right and option to Prosecute the Lannett Patents at its sole expense.

- 36 -

121186093.v1

(c)Costs and Expenses.  All costs and expenses in Prosecuting Lannett Collaboration Patents, HEC Collaboration Patents, and Joint Patents (collectively, “Patent Prosecution Expenses”) in the US, shall be shared equally by the Parties (to the extent incurred in the US prior to the First Commercial Sale of the first Product in the US) or be included as Commercialization expenses as part of the Profit & Loss (if incurred after First Commercial Sale of the first Product in the US) excluding the costs and expenses (i) of Prosecuting HEC Patents or Lannett Patents, which shall be borne by the Party authorized to conduct prosecution pursuant to Section 10.2(a) or Section 10.2(b) at the relevant time (as applicable, the “Prosecuting Party”) and (ii) of the litigation of the Pen infringement, which shall be borne as provided in Section 9.1(a).

(d)Strategy; Failure of Parties to Agree; Diligence and Cooperation.

(i)The Parties shall attempt to agree upon a strategy (which may be updated from time to time) for Prosecution of HEC Collaboration Patents, Lannett Collaboration Patents, and Joint Patents, including the scope and priority of the claims to be pursued within such Patents and to maximize the value of such Patents, on a global basis.  As part of such strategy, the Parties shall discuss and consider in good faith filing separate Patents that include claims that Cover Products specifically or generically and claims that Cover only other compounds.  Any failure by the Parties to agree by unanimous vote with respect to such strategy or any other Prosecution matter will be resolved by the Prosecuting Party.  The Prosecuting Party with respect to any such Patent shall follow such strategy in connection with all Prosecution of such Patent unless the Parties mutually agree on a divergence from such strategy.

(ii)The Party authorized to conduct prosecution pursuant toSection 10.2(a)orSection 10.2(b)at the relevant time (as applicable, the “Prosecuting Party”)shall be entitled to use patent counsel selected by it and reasonably acceptable to the non-Prosecuting Party (including in-house patent counsel as well as outside patent counsel) for the Prosecution of the Patents subject to Section 10.2(a) and Section 10.2(b).  Each Party agrees to cooperate with the other with respect to the Prosecution of such Patents pursuant to this Section 10.2, including (X) executing all such documents and instruments and performing such acts as may be reasonably necessary in order to permit the other Party to undertake any Prosecution of Patents that such other Party is entitled, and has elected, to Prosecute, as provided for in Section 10.2(a) and Section 10.2(b) and (Y) giving consideration to the proper scope of Patents.  The Prosecuting Party shall:

(A)use Commercially Reasonable Efforts to regularly provide the non-Prosecuting Party in advance with reasonable information relating to the Prosecuting Party’s Prosecution of Patents hereunder, including by providing copies of substantive communications, notices and actions submitted to or received from the relevant patent authorities and copies of drafts of filings and correspondence that the Prosecuting Party proposes to submit to such patent authorities, each of which shall be provided as far in advance as is practicable but with sufficient time for the non-Prosecuting party to provide meaningful input;

(B)use Commercially Reasonable Efforts to consider in good faith and consult with the non-Prosecuting Party regarding its timely comments with respect to the same; and

- 37 -

121186093.v1

(C)consult with non-Prosecuting Party before taking any action that would have a material adverse impact on the scope of claims within the HEC Collaboration Patents or Lannett Collaboration Patents (including the Joint Patents), as applicable.

(iii)The Prosecuting Party may abandon the subject matter of a claim in a HEC Collaboration Patent, Lannett Collaboration Patent or Joint Collaboration Patent in response to an office action from the applicable patent office if, in the Prosecuting Party’s reasonable judgment after consultation with the non-Prosecuting Party, such Patent requires such abandonment; provided, however, that, prior to such abandonment, if feasible, the Parties will cooperate to file divisional or continuation applications to separate such claim. The Prosecuting Party agrees not to otherwise abandon any HEC Collaboration Patent, Lannett Collaboration Patent or Joint Collaboration Patent without filing a divisional or continuation application in respect thereof unless it provides the non-Prosecuting Party with reasonable notice to this effect, sufficiently in advance to permit the non-Prosecuting Party to undertake such Prosecution of such HEC Collaboration Patent, Lannett Collaboration Patent or Joint Collaboration Patent, and thereafter such non-Prosecuting Party may, upon written notice to the Prosecuting Party and, in the case of HEC, receipt of Lannett’s prior written consent (not to be unreasonably withheld), Prosecute such HEC Collaboration Patent, Lannett Collaboration Patent or Joint Collaboration Patent at such non-Prosecuting Party’s own expense with counsel of its choice.

(e)Third Party Rights.  Each Party covenants and agrees that it shall not grant any Third Party any right to control the Prosecution of HEC Collaboration Patents or Lannett Collaboration Patents or Joint Collaboration Patents or to approve or consult with respect to any such Patents licensed to the other Party (the “Licensed Party”) hereunder, in any case, that is more favorable to the Third Party than the rights granted to the Licensed Party hereunder or that otherwise conflicts with the Licensed Party’s rights hereunder.

Section 10.3Third Party Infringement and Challenges of HEC Patents, Lannett Patents, HEC Collaboration Patents, Lannett Collaboration Patents, and Joint Patents.  The following provisions shall apply with respect to the Lannett Patents, Lannett Collaboration Patents, HEC Patent, HEC Collaboration Patents, Joint Patents, Lannett Know-How, Lannett Collaboration Know-How, HEC Know-How, HEC Collaboration Know-How, Joint Know-How, and Joint Inventions.

(a)Notice.  Each Party shall immediately provide the other Party with written notice reasonably detailing any (i) known or alleged infringement of any Lannett Patents, HEC Patents, HEC Collaboration Patents, Lannett Collaboration Patents, Joint Patents, or known or alleged misappropriation of any Lannett Know-How, HEC Know-How, HEC Collaboration Know-How, Lannett Collaboration Know-How, Joint Know-How, or Joint Inventions, by a Third Party, (ii) “patent certification” filed in the US under 21 U.S.C. §355(b)(2) or 21 U.S.C. §355(j)(2) or similar provisions in other jurisdictions, and (iii) any declaratory judgment, opposition, or similar action alleging the invalidity, unenforceability or non-infringement of any such intellectual property rights (collectively “Third Party Infringement”).

(b)First Right to Initiate Infringement Actions.  Lannett shall have the initial right throughout the US, but not the obligation, to initiate a suit or take other appropriate action that Lannett believes is reasonably required to protect the Lannett Intellectual Property, HEC

- 38 -

121186093.v1

Collaboration Intellectual Property, Lannett Collaboration Intellectual Property, Joint IP, Joint Patents or Joint Inventions against any infringement or challenge (including any Third Party Infringement), unauthorized use or misappropriation by a Third Party that relates to a Product in such part of the Territory(“Competitive Infringement”).  Lannett shall give HEC advance notice of Lannett’s intent to file any such suit or take any such action and the reasons therefor, and shall provide HEC with an opportunity to make suggestions and comments regarding such suit or action.  Thereafter, Lannett shall keep HEC promptly informed, and shall from time to time consult with HEC regarding the status of any such suit or action and shall provide HEC with copies of all material documents (e.g., complaints, answers, counterclaims, material motions, orders of the court, memoranda of law and legal briefs, interrogatory responses, depositions, material pre-trial filings, expert reports, affidavits filed in court, transcripts of hearings and trial testimony, trial exhibits and notices of appeal) filed in, or otherwise relating to, such suit or action.  Without limiting the generality of the foregoing, the Parties shall discuss in good faith Lannett’s intended response to a Competitive Infringement.

(c)Step-in Rights.  Lannett shall have sixty (60) days after becoming aware of any Competitive Infringement to elect to so enforce the applicable Patent(s) in the applicable jurisdiction(s) (or settle or otherwise secure the abatement of such Competitive Infringement); provided, however, that (i) such period will be more than sixty (60) days to the extent applicable Law prevents earlier enforcement of the applicable Patent(s) and provided further that if such period is extended because applicable Law prevents earlier enforcement, Lannett shall have until the date that is thirty (30) days following the date upon which applicable Law first permits such enforcement proceeding to elect to so enforce the applicable Patent(s), and (ii) Lannett shall have less than sixty (60) days (or, as applicable, less than the thirty (30) day period described in clause(i)) to elect to so enforce the applicable Patent(s) to the extent that a delay in bringing such enforcement proceeding against such alleged Third Party infringer would limit or compromise the remedies (including monetary relief and stay of regulatory approval) available against such alleged Third Party infringer.  In the event Lannett does not so elect to enforce or settle or otherwise secure the abatement of such Competitive Infringement in the US before the first to occur of (A) the expiration of the applicable period of time set forth in above, or (B) thirty (30) days before the expiration of any time period under applicable Law, that would, if an enforcement proceeding was not filed within such time period, limit or compromise the remedies available from such an enforcement proceeding, Lannett will so notify HEC in writing and in the case where HEC then desires to commence a suit or take action to enforce the applicable Patent(s) with respect to such Competitive Infringement in the US, HEC will, subject to this Section 10.3(c) and Section ‎10.3(d), thereafter have the right to commence such a suit or take such action to enforce the applicable Patent(s) in the applicable jurisdiction(s).  HEC shall give Lannett advance notice of HEC’s intent to file any such suit or take any such action and the reasons therefor and shall provide Lannett with an opportunity to make suggestions and comments regarding such suit or action.  Thereafter, HEC shall keep Lannett promptly informed and shall from time to time consult with HEC regarding the status of any such suit or action and shall provide Lannett with copies of all material documents (e.g., complaints, answers, counterclaims, material motions, orders of the court, memoranda of law and legal briefs, interrogatory responses, depositions, material pre-trial filings, expert reports, affidavits filed in court, transcripts of hearings and trial testimony, trial exhibits and notices of appeal) filed in, or otherwise relating to, such suit or action.  Notwithstanding anything in this Section 10.3 to the contrary if Lannett has a reasonable, good faith concern that HEC’s exercise of its backup enforcement or defense rights with respect to any

- 39 -

121186093.v1

Patent would be detrimental to the overall patent protection of the Products, then HEC shall not be permitted to enforce or defend such Patent without the prior consent of Lannett, and in no event shall HEC ever be entitled to enforce or defend any Lannett Intellectual Property.

(d)Conduct of Action.  The Party initiating suit shall have the sole and exclusive right to select counsel for any suit initiated by it under this Section 10.3, which counsel must be reasonably acceptable to the other Party.  If required under applicable Law in order for such Party to initiate or maintain such suit, the other Party shall join as a party to the suit.  If requested by the Party initiating suit, the other Party shall provide reasonable assistance to the Party initiating suit in connection therewith at no charge to such Party except that the initiating Party shall reimburse the other Party for Out-of-Pocket Costs, other than outside counsel expenses, incurred in rendering such assistance.  The Party initiating suit shall assume and pay all of its own Out-of-Pocket Costs incurred in connection with any litigation or proceedings described in this Section 10.3, including the fees and expenses of the counsel selected by it, providedthat, if any, such fees and expenses shall be (i) included in the calculation of Development Costs (if incurred prior to the First Commercial Sale of the Product in the US, except the fees and expenses incurred in connection with any litigation or proceedings regarding the Pen, shall be calculated pursuant to Section 9.1(a)) and (ii) if incurred after the First Commercial Sale of the first Product in the US, shared by the Parties pursuant to the Profit & Loss Share.  The other Party shall have the right to participate and be represented in any such suit by its own counsel at its own expense (which shall not be included in the calculation of the Development Costs or the Profit & Loss Share), providedthat, if the other Party is required to join as a party to the suit under applicable Law, the fees and expenses incurred by such Party shall be included in the calculation of Development Costs or shared by the Parties pursuant to the Profit & Loss Share. The Party initiating the suit and the outside counsel shall control and direct all aspects of such action, suit or proceeding.

(e)Costs of Enforcement.  Except as otherwise set forth in this Section ‎10.3 or in this Agreement, all Direct Costs and reasonable and documented external costs and expenses incurred by either Party in pursuing any enforcement proceeding of the Lannett Intellectual Property, HEC Intellectual Property, HEC Collaboration Intellectual Property, Lannett Collaboration Intellectual Property, Joint IP, or Joint Inventions in the US in accordance with this Section ‎10.3 shall be shared equally by the Parties (if incurred prior to the First Commercial Sale of the first Product in the US) or shall be shared by the Parties in accordance with the Profit & Loss Share (if incurred after the First Commercial Sale of the first Product in the US).

(f)Recoveries. Any damages or other monetary awards recovered in any action, suit or proceeding brought under this Section ‎10.3 shall be shared as follows:

(i)Initial Allocation.  Such damages or other sums recovered shall first be applied to reimburse each Party for all of the costs and expenses it incurred in connection with such action, and if such recovery is insufficient to cover all such costs and expenses of both Parties, it shall be shared in proportion to the total of such costs and expenses incurred by each Party; and

(ii)Remaining Proceeds.  Any remaining proceeds in case of suits with respect to an enforcement proceeding relating to any Product under this Section ‎10.3, shall be shared by the Parties in accordance with the Profit & Loss Share.

- 40 -

121186093.v1

Section 10.4Claimed Infringement.  Each Party shall promptly notify the other Party in writing of any allegation by a Third Party that the activity of either Party or their Affiliates or Licensee Partners under this Agreement infringes or misappropriates, or may infringe or misappropriate, the intellectual property rights of such Third Party.  If a Third Party asserts or files against a Party or its Affiliates any claim of infringement or misappropriation of the intellectual property rights of such Third Party or other action relating to alleged infringement or misappropriation of such intellectual property rights (“Third Party Infringement Action”), then, unless otherwise agreed by the Parties:

(a)Notice and Defense.  If a Party becomes aware of any actual or potential claim that the Development, Manufacture or Commercialization of any Product infringes or misappropriates the intellectual property rights of any Third Party, such Party shall promptly notify the other Party. In any such instance, the Parties shall as soon as practicable thereafter meet to discuss in good faith regarding the best response to such notice. With respect to any such claim by a Third Party described in this Section 10.4(a),Lannett shall have the sole right, but not the obligation, to defend and dispose (including through settlement or license) such claim in the US; it being understood and agreed that HEC shall be entitled to defend itself with respect to any such Third Party claim in the US to the extent that HEC’s responses and admissions in conducting such defense do not interfere with ability of HEC to defend such Third Party claim.  

(b)Costs.  Subject to Article XIII, the costs and expenses incurred by the Parties in connection with defense of any claim described in Section 10.4(a) (excluding any costs incurred by Lannett for any litigation of the Pen infringement claims, and any costs incurred by HEC for any litigation of Insulin Aspart infringement claims) in the US shall be shared by the Parties in accordance with the Profit & Loss Share.

Section 10.5Patent Term Extensions.  The Parties shall, as necessary and appropriate, use reasonable efforts to agree upon a joint strategy for obtaining, and cooperate with each other in obtaining, patent term extensions for Lannett Patents, Lannett Collaboration Patents, HEC Patents, HEC Collaboration Patents, and Joint Patents that Cover Products.  If the Parties are unable to agree upon which of such Patents should be extended, then Lannett shall have the right to resolve the dispute.

Section 10.6Patent Marking.  Each Party shall comply with the patent marking statutes in each country in which any Product is Manufactured or Commercialized by or on behalf of a Party or their respective Affiliates or (sub)licensees, as applicable, hereunder.

Section 10.7Application of 35 U.S.C. § 102(c).  It is agreed and acknowledged that this Agreement establishes a qualifying collaboration within the scope of 35 U.S.C. § 102(c) and, accordingly, shall be deemed to constitute a “Joint Research Agreement” for all purposes under 35 U.S.C. § 102(c).  Neither Party shall invoke the provisions of 35 U.S.C. § 102(c), or file this Agreement, in connection with the prosecution of any patent application claiming, in whole or in part, any 35 U.S.C. § 102(c) invention without the prior written consent of the other Party.  In the event that a Party, during the course of prosecuting a patent application claiming a 35 U.S.C. § 102(c) invention (a “35 U.S.C. § 102(c) Patent”), deems it necessary to file a terminal disclaimer to overcome an obviousness type double patenting rejection in view of an earlier filed patent held by the other Party (the “Earlier Patent”), then, if the Parties agree, the Parties shall coordinate the

- 41 -

121186093.v1

filing of such terminal disclaimer in good faith, and, to the extent required under 35 U.S.C. § 102(c), both Parties shall agree, in such terminal disclaimer, that they shall not separately enforce 35 U.S.C. § 102(c) Patent independently from the Earlier Patent.  To this end, to the extent required under 35 U.S.C. § 102(c), following the filing of such terminal disclaimer, the Parties shall, in good faith, coordinate all enforcement actions with respect to 35 U.S.C. § 102(c) Patent.

Article XI
Confidentiality and Antitrust Compliance

Section 11.1Confidential Information.  Each Party agrees that a Party (the “Receiving Party”) or any of its Affiliates receiving Confidential Information of any other Party (the “Disclosing Party”) or any of its Affiliates shall (a) maintain in confidence such Confidential Information using not less than the efforts such Receiving Party uses to maintain in confidence its own proprietary information of similar kind and value, but in no event less than a reasonable degree of effort, (b) not disclose such Confidential Information to any Third Party without the prior written consent of the Disclosing Party, except for disclosures expressly permitted below, and (c) not use such Confidential Information for any purpose except those permitted by this Agreement (it being understood that this clause (c) shall not create or imply any rights or licenses not expressly granted under this Agreement).  No Confidential Information of the Disclosing Party or any of its Affiliates shall be used by the Receiving Party or any of its Affiliates except in performing the Receiving Party’s obligations or exercising rights explicitly granted to the Receiving Party under this Agreement.  “Confidential Information” shall exclude any information that:

(a)was legally known by the Receiving Party or any of its Affiliates prior to its date of disclosure to the Receiving Party or any of its Affiliates by or on behalf of the Disclosing Party or any of its Affiliates, as established by written evidence; or

(b)is lawfully disclosed to the Receiving Party or any of its Affiliates by sources other than the Disclosing Party or any of its Affiliates rightfully in possession of the Confidential Information; or

(c)is or becomes published or generally known to the public through no fault or misconduct on the part of the Receiving Party or any of its Affiliates or (sub)licensees; or

(d)is independently developed by or for the Receiving Party or any of its Affiliates without reference to or reliance upon such Confidential Information, as established by written records.

Section 11.2Permitted Disclosure.  The Receiving Party may provide the Disclosing Party’s or any of the Disclosing Party’s Affiliates’ Confidential Information:

(a)to the Receiving Party’s employees, consultants and advisors, and to the employees, consultants and advisors of such Party’s Affiliates, who have a need to know such information and materials for performing obligations or exercising rights expressly granted under this Agreement and have an obligation to treat such information and materials as confidential under obligations of confidentiality and non-use no less stringent than those set forth in this Article XI (provided that legal counsel shall not be required to execute any written confidentiality agreements), and the Receiving Party shall be liable to the Disclosing Party for any the Receiving

- 42 -

121186093.v1

Party’s employees, consultants and advisors, and the employers, consultants and advisors of such Party’s Affiliates in violation of the confidentiality obligations in this Agreement;

(b)to patent offices in order to seek or obtain Patents or to Regulatory Authorities in order to seek or obtain approval to conduct Clinical Trials or to gain Regulatory Approval with respect to the Products as contemplated by this Agreement; providedthat such disclosure may be made only following reasonable notice to the Disclosing Party and to the extent reasonably necessary to seek or obtain such Patents or Regulatory Approvals; or

(c)if such disclosure is required by judicial order or applicable Law or to defend or prosecute litigation or arbitration; providedthat, prior to such disclosure, to the extent permitted by Law, the Receiving Party promptly notifies the Disclosing Party of such requirement, cooperates with the Disclosing Party to take whatever action it may deem appropriate to protect the confidentiality of the information and furnishes only that portion of the Disclosing Party’s (or its applicable Affiliates’) Confidential Information that the Receiving Party is legally required to furnish.

Section 11.3Publicity; Terms of this Agreement; Non-Use of Names.

(a)Public Announcements.  Except as required by judicial order or applicable Law (in which case, Section 11.3(b) must be complied with) or as explicitly permitted by this Article XI, neither Party shall make any public announcement concerning this Agreement without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed.  The Party preparing any such public announcement shall provide the other Party with a draft thereof at least three (3) Business Days prior to the date on which such Party would like to make the public announcement (or, in extraordinary circumstances, such shorter period as required to comply with applicable Law).  Neither Party shall use the name, trademark, trade name or logo of the other Party or its employees in any publicity or news release relating to this Agreement or its subject matter, without the prior express written permission of the other Party.  

(b)Notwithstanding the terms of this Article XI:

(i)Either Party shall be permitted to disclose the existence and terms of this Agreement to the extent required, in the reasonable opinion of such Party’s legal counsel, to comply with applicable Laws, including the rules and regulations promulgated by the US Securities and Exchange Commission (“SEC”) or any other governmental authority.  Notwithstanding the foregoing, before disclosing this Agreement or any of the terms hereof pursuant to this Section 11.3(b)(i), the Parties will coordinate in advance with each other in connection with the redaction of certain provisions of this Agreement (together with all exhibits and schedules) with respect to any filings with the SEC, The Stock Exchange of Hong Kong Limited, Shanghai Stock Exchange, Shenzhen Stock Exchange, NYSE, the NASDAQ Stock Market or any other stock exchange on which securities issued by a Party or a Party’s Affiliate are traded (the “Redacted Version”), and each Party will use commercially reasonable efforts to seek confidential treatment for such terms as may be reasonably requested by the other Party, and the Parties will use commercially reasonable efforts to file redacted versions with any governing bodies which are consistent with the Redacted Version.

- 43 -

121186093.v1

(ii)Notwithstanding Section 11.1, the Receiving Party may disclose Confidential Information belonging to the Disclosing Party (or any of its Affiliates), and Confidential Information deemed to belong to both the Disclosing Party (or any of its Affiliates) and the Receiving Party (or any of its Affiliates), to the extent (and only to the extent) such disclosure is reasonably necessary in the following instances:

(A)complying with applicable Laws (including the rules and regulations of the SEC or any national securities exchange) and with judicial process, if in the reasonable opinion of the Receiving Party’s counsel, such disclosure is necessary for such compliance;

(B)disclosure, solely on a “need to know basis,” to (1) Affiliates, subcontractors, advisors (including attorneys and accountants), (2) subject to Section 11.3(b)(ii)(C), investment bankers, and (3) in each case of (1) and (2), such Affiliates’, subcontractors’, advisors’ and investment bankers’, and each of the Parties’, respective directors, employees, contractors and agents; providedthat, in all cases of (1), (2) and (3), prior to any such disclosure, each disclosee must be bound by written obligations of confidentiality, non-disclosure and non-use no less restrictive than the obligations set forth in this Article XI (provided, however, that in the case of legal advisors, no written agreement shall be required), which for the avoidance of doubt, will not permit use of such Confidential Information for any purpose except those permitted by this Agreement; provided, however, that, in each of the above situations, the Receiving Party shall remain responsible for any failure by any Person who receives Confidential Information pursuant to this Section 11.3(b)(ii)(B) or Section 11.3(b)(ii)(C) to treat such Confidential Information as required under this Article XI; and

(C)in the case of any disclosure of this Agreement to any actual or potential acquirer, assignee, licensee, licensor, investment banker, institutional investor, lender or other financial partners, such disclosure shall solely be of the Redacted Version, in each case, which version shall be agreed upon by the Parties in good faith; it being understood and agreed that, in connection with a proposed Change of Control with respect to such Party, only after negotiations with a proposed Third Party acquirer have progressed so that such Party reasonably and in good faith believes it is in the final round of negotiations with such Third Party regarding execution of a definitive agreement with such Third Party with respect to the proposed transaction, only then may such Party provide an unredacted version of this Agreement as applicable, to such Third Party; providedthat a Party may also disclose an unredacted version of this Agreement to Third Party attorneys, professional accountants and auditors who are engaged by licensors and lenders and who are under obligations of confidentiality not to disclose the unredacted terms of this Agreement to such licensors or lenders for the purpose of confirming such Party’s compliance with the terms of its applicable license and loan agreements with such licensors and lenders.  

(iii)The Parties acknowledge the importance of supporting each other’s efforts to publicly disclose results and significant developments regarding the Product and other activities in connection with this Agreement that may include information that is not otherwise permitted to be disclosed under this Article XI, and that may be beyond what is required by applicable Law.  Such disclosures may include achievement of milestones, significant events in the development and regulatory process, commercialization activities and the like.  A Party (the “Requesting Party”) may elect to make any such public disclosure of such achievement of

- 44 -

121186093.v1

milestones, significant events in the development and regulatory process and commercialization activities, and in such event it shall first notify the other Party (the “Cooperating Party”) of such planned press release or public announcement and provide a draft for review at least five (5) Business Days in advance of issuing such press release or making such public announcement (or, with respect to press releases and public announcements that are required by applicable Law, or by regulation or rule of any public stock exchange (including NASDAQ), with as much advance notice as possible under the circumstances if it is not possible to provide notice at least five (5) Business Days in advance); provided, however, that a Party may issue such press release or public announcement without such prior review by the other Party if (A) the contents of such press release or public announcement have previously been made public other than through a breach of this Agreement by the issuing Party and (B) such press release or public announcement does not materially differ from the previously issued press release or other publicly available information.  The Cooperating Party may notify the Requesting Party of any reasonable objections or suggestions that the Cooperating Party may have regarding the proposed press release or public announcement, and the Requesting Party shall reasonably consider any such objections or suggestions that are provided in a timely manner.  The principles to be observed in such disclosures shall include accuracy, compliance with applicable Law and regulatory guidance documents, reasonable sensitivity to potential negative reactions of the FDA (and its foreign counterparts) and the need to keep investors informed regarding the Requesting Party’s business.

Section 11.4Publications.  The Parties agree that neither Party nor its Affiliates shall have the right to make Publications pertaining to the Collaboration except as provided under this Article XI.  If a Party or its Affiliates desire to make a Publication, such Party must comply with the following procedure:

(a)Review.  The publishing Party shall provide the non-publishing Party with an advance copy of the proposed Publication, and the non-publishing Party shall then have forty-five (45) days prior to submission for any Publication (ten (10) days in the case of an abstract or oral presentation) in which to reasonably determine whether the Publication may be published and under what conditions, including (i) delaying sufficiently long to permit the timely preparation and filing of a patent application or (ii) specifying changes the non-publishing Party reasonably believes are necessary to preserve any Patents or Know-How belonging (whether through ownership or license, including under this Agreement) in whole or in part to the non-publishing Party.

(b)Removal of Confidential Information.  In addition, if the non-publishing Party informs the publishing Party that such Publication, in the non-publishing Party’s reasonable judgment, discloses any Confidential Information of the non-publishing Party or could be expected to have a material adverse effect on any Know-How which is Confidential Information of the non-publishing Party, such Confidential Information or Know-How shall be deleted from the Publication.

(c)Scientific Conferences.  Each Party shall have the right to present its Publications approved pursuant to this Section 11.4 at scientific conferences, including at any conferences in any country in the world.

- 45 -

121186093.v1

(d)Academic Publications.  Notwithstanding the foregoing, the Parties acknowledge that, to the extent that any Publication relates to Lannett Intellectual Property that is subject to an Third Party Agreement, the parties to such Third Party Agreement may have retained the right to publish certain information, and nothing in this Section 11.4 is intended to restrict the exercise of such rights; providedthat, to the extent that Lannett has the right to review and comment on any such publications, Lannett shall, to the extent permissible under such Third Party Agreement, exercise such rights after consultation with HEC.

Section 11.5Term.  All obligations under Sections 11.1, 11.2, 11.3 and 11.6 shall survive termination or expiration of this Agreement and shall expire five (5) years following termination or expiration of this Agreement.

Section 11.6Return of Confidential Information.

(a)Obligations to Return or Destroy.  Upon the expiration or termination of this Agreement, the Receiving Party shall return to the Disclosing Party all Confidential Information received by the Receiving Party or any of its Affiliates from the Disclosing Party or any of its Affiliates (and all copies and reproductions thereof).  In addition, the Receiving Party shall destroy:

(i)any notes, reports or other documents prepared by the Receiving Party or any of its Affiliates which contain Confidential Information of the Disclosing Party or any of its Affiliates; and

(ii)any Confidential Information of the Disclosing Party or any of its Affiliates (and all copies and reproductions thereof) which is in electronic form or cannot otherwise be returned to the Disclosing Party.

(b)Destruction.  Alternatively, upon written request of the Disclosing Party, the Receiving Party shall destroy all Confidential Information received by the Receiving Party or any of its Affiliates from the Disclosing Party or any of its Affiliates (and all copies and reproductions thereof) and any notes, reports or other documents prepared by the Receiving Party or any of its Affiliates which contain Confidential Information of the Disclosing Party or any of its Affiliates.  Any requested destruction of Confidential Information shall be certified in writing to the Disclosing Party by an authorized officer of the Receiving Party supervising such destruction.

(c)Limitation.  Nothing in this Section 11.6 shall require the alteration, modification, deletion or destruction of archival tapes, scientific notebooks,or other electronic back-up media made in the ordinary course of business; providedthat the Receiving Party shall continue to be bound by its obligations of confidentiality and other obligations under this Article XI with respect to any Confidential Information contained in such archival tapes, scientific notebooks,or other electronic back-up media.

(d)Exceptions.  Notwithstanding the foregoing,

- 46 -

121186093.v1

(i)the Receiving Party’s legal counsel may retain one copy of the Disclosing Party’s (and its Affiliates’) Confidential Information solely for the purpose of determining the Receiving Party’s continuing obligations under this Article XI; and

(ii)the Receiving Party may retain the Disclosing Party’s (and its Affiliates’) Confidential Information and its own notes, reports and other documents

to the extent reasonably required (1) to exercise the rights and licenses of the Receiving Party expressly surviving expiration or termination of this Agreement; or (2) to perform the obligations of the Receiving Party expressly surviving expiration or termination of this Agreement.

Notwithstanding the return or destruction of the Disclosing Party’s (and its Affiliates’) Confidential Information, the Receiving Party shall continue to be bound by its obligations of confidentiality and other obligations under this Article XI.

Section 11.7Government Approvals.

(a)Efforts.  Each of HEC and Lannett will use its commercially reasonable good faith efforts to eliminate any concern on the part of any governmental authority regarding the legality of this Agreement including, if required by federal or state antitrust authorities, promptly taking all steps to secure government antitrust clearance, including cooperating in good faith with any government investigation including the prompt production of documents and information demanded by a second request for documents and of witnesses if requested.  Notwithstanding anything to the contrary in this Agreement, this Section 11.7 and the term “commercially reasonable good faith efforts” do not require that either Party (i) offer, negotiate, commit to or effect, by consent decree, hold separate order, trust or otherwise, the sale, divestiture, license or other disposition of any capital stock, assets, rights, products or businesses of HEC, Lannett or their respective Affiliates, (ii) agree to any restrictions on the businesses of HEC, Lannett or their respective Affiliates, or (iii) pay any amount or take any other action to prevent, effect the dissolution of, vacate, or lift any decree, order, judgment, injunction, temporary restraining order, or other order in any suit or proceeding that would otherwise have the effect of preventing or delaying the transactions contemplated by any proposed Agreement.

(b)HSR Filings.  Each of HEC and Lannett will, within ten (10) Business Days after the Effective Date (or such later time as may be agreed to in writing by the Parties) file with the U.S. Federal Trade Commission (“FTC”) and the Antitrust Division of the U.S. Department of Justice (“DOJ”) any HSR Filing required of it under the HSR Act in the reasonable opinion of either Party with respect to the transactions contemplated by this Agreement.  The Parties shall cooperate with one another to the extent necessary in the preparation of any such HSR Filing.  Each Party shall be responsible for its own costs, expenses, and filing fees associated with any HSR Filing; provided, however, the Parties shall equally share all fees (other than penalties that may be incurred as a result of actions or omissions on the part of a Party, which penalties shall be the sole financial responsibility of such Party), required to be paid to any governmental authority in connection with making any such HSR Filing.  In the event that the Parties make an HSR Filing under this Section 11.7(b), this Agreement shall terminate (i) at the election of either Party, immediately upon notice to the other Party, in the event that the FTC or DOJ obtains a preliminary injunction under the HSR Act against the Parties to enjoin the transactions contemplated by this

- 47 -

121186093.v1

Agreement, or (ii) at the election of either Party, immediately upon notice to the other Party, in the event that the HSR Clearance Date shall not have occurred on or prior to two hundred seventy (270) days after the effective date of the HSR Filing.  Notwithstanding anything to the contrary contained herein, except for the terms and conditions of this Section 11.7(b), none of the terms and conditions contained in this Agreement shall be effective until the “Implementation Date,” which is agreed and understood to mean the later of (A) the Effective Date, (B) if a determination is made pursuant to this Section 11.7(b) that a notification of this Agreement is not required to be made under the HSR Act, the date of such determination, or (C) if notification of this Agreement is required to be made under the HSR Act, the HSR Clearance Date.  As used herein: (x) “HSR Clearance Date” means the earliest date on which the Parties have actual knowledge that all applicable waiting periods under the HSR Act with respect to the transactions contemplated by this Agreement have expired or have been terminated; and (y) “HSR Filing” means a filing by HEC and Lannett with the FTC and the DOJ of a Notification and Report Form for Certain Mergers and Acquisitions (as that term is defined in the HSR Act) with respect to the matters set forth in this Agreement, together with all required documentary attachments thereto.

(c)Information Exchange.  Each of HEC and Lannett will, in connection with any HSR Filing, (i) reasonably cooperate with each other in connection with any communication, filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party; (ii) keep the other Party and/or its counsel informed of any communication received by such Party from, or given by such Party to, the FTC, the DOJ or any other U.S. or other governmental authority and of any communication received or given in connection with any proceeding by a private party, in each case regarding the transactions contemplated by this Agreement; (iii) consult with each other in advance of any meeting or conference with the FTC, the DOJ or any other governmental authority or, in connection with any proceeding by a private party, with any other Person, and to the extent permitted by the FTC, the DOJ or such other governmental authority or other Person, give the Parties and/or their counsel the opportunity to attend and participate in such meetings and conferences; and (iv) permit the other Party and/or its counsel to review in advance any submission, filing or communication (and documents submitted therewith) intended to be given by it to the FTC, the DOJ or any other governmental authority; provided, that materials may be redacted to remove references concerning the valuation of the Products.  HEC and Lannett, as each deems advisable and necessary, may reasonably designate any competitively sensitive material to be provided to the other under this Section 11.7(c) as “Antitrust Counsel Only Material.”  Such materials and the information contained therein shall be given only to the outside antitrust counsel of the recipient and will not be disclosed by such outside counsel to employees, officers or directors of the recipient unless express permission is obtained in advance from the source of the materials (HEC or Lannett, as the case may be) or its legal counsel.

(d)Assistance.  Subject to this Section 11.7(b), HEC and Lannett shall cooperate and use respectively all reasonable efforts to make all other registrations, filings and applications, to give all notices and to obtain as soon as practicable all governmental or other consents, transfers, approvals, orders, qualifications, authorizations, permits and waivers, if any, and to do all other thing necessary or desirable for the consummation of the transactions as contemplated hereby.

- 48 -

121186093.v1

(e)No Further Obligations.  If this Agreement is terminated pursuant to this Section 11.7(b), then, notwithstanding any provision in this Agreement to the contrary, neither Party shall have any further obligation to the other Party with respect to the subject matter of this Agreement; provided, that Lannett shall be permitted to assign this Agreement or any rights or obligations related thereto, if required to comply with any Antitrust Law.

Article XII
Representations and Warranties

Section 12.1Mutual Representations.  HEC and Lannett each represents, warrants and covenants to the other Party, as of the Effective Date, that:

(a)Authority.  Each Party is duly organized, validly existing and in good standing under the Laws of the jurisdiction of its formation and has full corporate power and authority to enter into this Agreement, and to carry out the provisions hereof or thereof, as applicable.

(b)Consents. All necessary consents, approvals and authorizations of all government authorities and other Persons required to be obtained by it as of the Effective Date in connection with the execution, delivery and performance of this Agreement, and the performance of its obligations hereunder have been obtained.

(c)No Conflict. Notwithstanding anything to the contrary in this Agreement, the execution and delivery of this Agreement, the performance of such Party’s obligations in the conduct of the Collaboration and the licenses and sublicenses to be granted pursuant to this Agreement (i) do not and will not conflict with or violate any requirement of applicable Laws existing as of the Effective Date and (ii) do not and will not conflict with, violate, breach or constitute a default under any agreement or any provision thereof, or any contract, oral or written, to which it is a party or by which it or any of its Affiliates is bound, existing as of the Effective Date.

(d)Enforceability. This Agreement has been duly executed and delivered on behalf of such Party and is a legal and valid obligation binding upon it and is enforceable in accordance with its terms.

(e)Employee Obligations. To its knowledge, none of its or its Affiliates’ employees who have been, are or will be involved in the Collaboration are, as a result of the nature of such Collaboration to be conducted by the Parties, in violation of any covenant in any contract with a Third Party relating to non-disclosure of proprietary information, noncompetition or non-solicitation.

Section 12.2Additional HEC Representations. HEC represents, warrants and covenants to Lannett, as of the Effective Date, as follows:

(a)HEC has all rights, authorizations and consents necessary to grant all rights and licenses it purports to grant to Lannett under this Agreement.

- 49 -

121186093.v1

(b)HEC has not used, and during the Term will not knowingly use, any Know-How in Developing the Product that is encumbered by any contractual right of or obligation to a Third Party that conflicts or interferes with any of the rights or licenses granted or to be granted to Lannett hereunder.

(c)HEC has not granted, and during the Term HEC will not grant, any right or license, to any Third Party relating to any of the intellectual property rights it Controls, that conflicts with or limits the scope of the rights or licenses granted or to be granted to Lannett hereunder.

(d)There are no claims, litigations, suits, actions, arbitrations, or legal, administrative or other proceedings or governmental investigations pending on the Product (excluding the Pen), or, to HEC’s knowledge, threatened against HEC, nor is HEC a party to any judgment or settlement, which would be reasonably expected to adversely affect or restrict the ability of HEC to consummate the transactions contemplated under this Agreement and to perform its obligations under this Agreement, or which would affect the HEC Intellectual Property, or HEC’s Control thereof, or any Product (excluding the Pen).

(e)To HEC’s knowledge, the practice of the HEC Intellectual Property as contemplated under this Agreement does not (i) infringe any claims of any Patents of any Third Party (without regard to actual or alleged infringement under 35 USC §271(e)(1) and comparable provisions under applicable Law outside the United States, including any safe harbor, research exemption, government or executive declaration of urgent public health need, or any similar right available in law or in equity which otherwise exempts actual or alleged infringing activity), or (ii) misappropriate any Know-How of any Third Party.

(f)None of (i) the HEC Patents owned by HEC or both Controlled by and Prosecuted by HEC and (ii) to HEC’s knowledge, the HEC Patents Controlled but not Prosecuted by HEC, are subject to any pending re-examination, opposition, interference or litigation proceedings or inter partes reviews, post grant reviews or covered business methods reviews.

(g)To the knowledge of HEC, the HEC Patents Controlled by HEC or any of its Affiliates pursuant to any Third Party Agreement were not and are not subject to any restrictions or limitations except as set forth in the Third Party Agreements.

(h)HEC has and, to HEC’s knowledge, the applicable licensor under each Third Party Agreement has, if applicable, complied with any and all obligations under the Bayh-Dole Act to perfect rights to the applicable Patents or Know-How licensed thereunder. Neither HEC nor any of its Affiliates has granted any liens or security interests on the HEC Intellectual Property and the HEC Intellectual Property is free and clear of any mortgage, pledge, claim, security interest, covenant, easement, encumbrance, lien or charge of any kind, except in each case with respect to licenses, covenants not to sue, immunities from suit, standstills, releases and options which would not, in the aggregate, fundamentally frustrate the purposes of the Collaboration.

(i)Schedule 12.2(i) contains a complete and accurate list of all Patents owned or licensed by HEC or its Affiliates as of the Effective Date that are included in the Patents

- 50 -

121186093.v1

licensed hereunder, indicating any co-owner(s), if applicable.  Except as set forth on Schedule 12.2(i), HEC and its Affiliates do not own and have not licensed any Patent that is necessary or, to HEC’s reasonable belief as of the Effective Date, reasonably useful to Develop or Commercialize any Products.

(j)Except as set forth on Schedule 12.2(j), Schedule 12.2(j) sets forth a complete and accurate list of all Third Party Agreements, true and correct copies of which have been provided to Lannett, and such agreements are in full force and effect and have not been modified or amended. Neither HEC nor, to the knowledge of HEC, any licensor under the Third Party Agreements is in default with respect to a material obligation under, and none of such parties has claimed or has grounds upon which to claim that the other party is in default with respect to a material obligation under, the Third Party Agreements.

(k)Except under the Third Party Agreements in effect as of the Effective Date, and except as set forth on Schedule 12.2(j), HEC and its Affiliates are not subject to any payment obligations to Third Parties as a result of the execution or performance of this Agreement.

Section 12.3Additional Lannett Representations. Lannett represents, warrants and covenants to HEC, as of the Effective Date, as follows:

(a)Lannett has all rights, authorizations and consents necessary to grant all rights and licenses it purports to grant to HEC under this Agreement.

Lannett has not used, and during the Term will not knowingly use, any Know-How in Developing the Pen that is encumbered by any contractual right of or obligation to a Third Party that conflicts or interferes with any of the rights or licenses granted or to be granted to HEC hereunder.

(c)There are no claims, litigations, suits, actions, disputes, arbitrations, or legal, administrative or other proceedings or governmental investigations pending on the Pen (excluding the administration of Insulin Aspart), or, to Lannett’s knowledge, threatened against Lannett, nor is Lannett a party to any judgment or settlement, which would be reasonably expected to adversely affect or restrict the ability of Lannett to consummate the transactions contemplated under this Agreement and to perform its obligations under this Agreement, or which would affect the Lannett Intellectual Property, or Lannett’s Control thereof, or any Pen Know-How, or Pen Patent.

(d)To Lannett’s knowledge, the practice of the Lannett Intellectual Property, Pen Patent and Pen Know-How  as contemplated under this Agreement does not (i) infringe any claims of any Patents of any Third Party (without regard to actual or alleged infringement under 35 USC §271(e)(1) and comparable provisions under applicable Law outside the United States, including any safe harbor, research exemption, government or executive declaration of urgent public health need, or any similar right available in law or in equity which otherwise exempts actual or alleged infringing activity), or (ii) misappropriate any Know-How of any Third Party.

(e)None of (i) the Lannett Patents owned by Lannett or both Controlled by and Prosecuted by Lannett and (ii) to Lannett’s knowledge, the Lannett Patents Controlled but not Prosecuted by Lannett, are subject to any pending re-examination, opposition, interference or

- 51 -

121186093.v1

litigation proceedings or inter partes reviews, post grant reviews or covered business methods reviews.

(f)To the knowledge of Lannett, the Lannett Patents Controlled by Lannett or any of its Affiliates pursuant to any Third Party Agreement were not and are not subject to any restrictions or limitations except as set forth in the Third Party Agreements.

(g)Lannett has and, to Lannett’s knowledge, the applicable licensor under each Third Party Agreement has, if applicable, complied with any and all obligations under the Bayh-Dole Act to perfect rights to the applicable Patents or Know-How licensed thereunder. Neither Lannett nor any of its Affiliates has granted any liens or security interests on the Lannett Intellectual Property and the Lannett Intellectual Property is free and clear of any mortgage, pledge, claim, security interest, covenant, easement, encumbrance, lien or charge of any kind, except in each case with respect to licenses, covenants not to sue, immunities from suit, standstills, releases and options which would not, in the aggregate, fundamentally frustrate the purposes of the Collaboration and except as disclosed in Lannett’s filings with the SEC on Forms 8-K, 10-Q and 10-K.

(h)Schedule 12.3(h) contains a complete and accurate list of all Patents owned or licensed by Lannett or its Affiliates as of the Effective Date that are included in the Patents licensed hereunder, indicating any co-owner(s), if applicable. Except as set forth on Schedule 12.2(i), Lannett and its Affiliates do not own and have not licensed any Patent that is necessary or, to Lannett’s reasonable belief as of the Effective Date, reasonably useful to Develop or Commercialize any Products.

(i)Except as set forth on Schedule 12.3(i), Schedule 12.3(i) sets forth a complete and accurate list of all Third Party Agreements, true and correct copies of which have been provided to HEC, and such agreements are in full force and effect and have not been modified or amended. Neither Lannett nor, to the knowledge of Lannett, any licensor under the Third Party Agreements is in default with respect to a material obligation under, and none of such parties has claimed or has grounds upon which to claim that the other party is in default with respect to a material obligation under, the Third Party Agreements.

Section 12.4Covenants.

(a)Mutual Covenants.  Each Party hereby covenants to the other Party that:

(i)all employees of such Party or its Affiliates, Licensee Partners or Third Party subcontractors working under this Agreement will be under appropriate confidentiality obligations at least as protective as those contained in this Agreement and, to the extent permitted under applicable Law, the obligation to assign all right, title and interest in and to their inventions and discoveries, whether or not patentable, to such Party like such Party is the sole owner thereof;

(ii)to its knowledge, such Party will not (A) employ or use, nor hire or use any contractor or consultant that employs or uses, any individual or entity, including a clinical investigator, institution or institutional review board, debarred or disqualified by the FDA (or subject to a similar sanction by any Regulatory Authority outside the US) or (B) employ any individual who, or entity that is, the subject of an FDA debarment investigation or proceeding (or

- 52 -

121186093.v1

similar proceeding by any Regulatory Authority outside the US), in each of subclauses (A) and (B) in the conduct of its activities under this Agreement;

(iii)neither such Party nor any of its Affiliates shall, during the Term, grant any right or license to any Third Party relating to any of the intellectual property rights it owns or Controls which would conflict with any of the rights or licenses granted to the other Party hereunder; and

(iv)such Party and its Affiliates shall perform their activities pursuant to this Agreement in compliance (and shall ensure compliance by any of its subcontractors) in all material respects with all applicable Laws, including GCP, GLP and GMP as applicable.

(b)Third Party Agreement Covenants.  Each Party hereby covenants to the other Party that such Party shall maintain the Third Party Agreements, and shall not amend or terminate such Third Party Agreements, and will not breach such Third Party Agreements, if such amendment, modification, termination or breach would adversely affect the other Party’s rights under this Agreement.  

Section 12.5HEC Covenants During the Term.  

(a)Except to the extent expressly permitted under Section 15.4, during the Term, neither HEC nor its Affiliates will, other than to an Affiliate of HEC who agrees in writing to be bound by the terms and conditions of this Agreement (a) assign, transfer, convey, encumber (including any liens or charges, but excluding any licenses, which are the subject of subsection (b), below) or dispose of, or enter into any agreement with any Third Party to assign, transfer, convey, encumber (including any liens or charges, but excluding any licenses, which are the subject of subsection (b), below) or dispose of, any assets specifically related to this Agreement, including with respect to any Product(s), or pre-clinical study or Clinical Trial results or other data specifically related to the Product, or any intellectual property specifically related to any of the foregoing (with respect to the Product, the “Product Assets”) owned or controlled by HEC at any time, except to the extent such assignment, transfer, conveyance, encumbrance or disposition would not fundamentally frustrate the purpose of this Agreement with respect to the Product, (b) license or grant to any Third Party, or agree to license or grant to any Third Party, any rights to any Product Assets owned or controlled by HEC at any time if such license or grant would fundamentally frustrate the purpose of this Agreement with respect to the Product, or (c) disclose any Confidential Information relating to the Product Assets owned or controlled by HEC at any time to any Third Party if such disclosure would fundamentally frustrate the purpose of this Agreement with respect to the Product.  HEC or its Affiliates shall have the right to assign, transfer, convey or dispose of any assets specifically related to the Product to any Affiliate of HEC to the extent permitted under Section 15.4.

Section 12.6Lannett Covenants During the Term.

(a)Except to the extent expressly permitted under Section 15.4, during the Term, neither Lannett nor its Affiliates will, other than to an Affiliate of Lannett who agrees in writing to be bound by the terms and conditions of this Agreement (a) assign, transfer, convey, encumber (including any liens or charges, but excluding any licenses, which are the subject of

- 53 -

121186093.v1

subsection (b), below) or dispose of, or enter into any agreement with any Third Party to assign, transfer, convey, encumber (including any liens or charges, but excluding any licenses, which are the subject of subsection (b), below) or dispose of the Product Assets owned or controlled by Lannett at any time, except to the extent such assignment, transfer, conveyance, encumbrance or disposition would not fundamentally frustrate the purpose of this Agreement with respect to the Product, (b) license or grant to any Third Party, or agree to license or grant to any Third Party, any rights to any Product Assets owned or controlled by Lannett at any time if such license or grant would fundamentally frustrate the purpose of this Agreement with respect to the Product, or (c) disclose any Confidential Information relating to the Product Assets owned or controlled by Lannett at any time to any Third Party if such disclosure would fundamentally frustrate the purpose of this Agreement with respect to the Product.  HEC or its Affiliates shall have the right to assign, transfer, convey or dispose of any assets specifically related to the Product to any Affiliate of Lannett to the extent permitted under Section 15.4.

Section 12.7Disclaimer.  Except as otherwise expressly set forth in this Agreement, NEITHER PARTY MAKES ANY REPRESENTATION OR EXTENDS ANY WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY THAT ANY PATENTS ARE VALID OR ENFORCEABLE, AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.  Without limiting the generality of the foregoing, each Party disclaims any warranties with regards to: (a) the success of any study or test commenced under this Agreement; (b) the safety or usefulness for any purpose of the technology or materials, including any Product; or (c) the validity, enforceability, or non-infringement of any intellectual property rights or technology it provides or licenses to the other Party under this Agreement.

Section 12.8Additional HEC Representations.  HEC represents and warrants to Lannett, as of the Effective Date, that HEC possesses sufficient rights to enable HEC to grant all rights and licenses it purports to grant to Lannett under this Agreement as of the Effective Date.

Section 12.9Additional Lannett Representations.  Lannett represents and warrants to HEC, as of the Effective Date, that Lannett possesses sufficient rights to enable Lannett to grant all rights and licenses it purports to grant to HEC under this Agreement as of the Effective Date.

Section 12.10Anti-Bribery and Anti-Corruption Compliance.  Each Party represents, warrants, and covenants to the other Party in connection with this Agreement that such Party and its Affiliates (a) have complied and shall comply with all applicable laws, rules, regulations and industry codes governing bribery, money laundering, and other corrupt practices and behavior (including, as applicable, the U.S. Foreign Corrupt Practices Act) and (b) shall not, directly or indirectly, offer, give, pay, promise to pay, or authorize the payment of any bribes, kickbacks, influence payments, or other unlawful or improper inducements to any Person in whatever form (including gifts, travel, entertainment, contributions, or anything else of value).

- 54 -

121186093.v1

Article XIII
Indemnification; Product Liabilities

Section 13.1Indemnification by HEC.HEC agrees, at HEC’s cost and expense, to defend, indemnify and hold harmless Lannett and its Affiliates and their respective directors, officers, employees and agents (the “Lannett Indemnified Parties”) from and against any Damages arising out of any claim, demand, action, suit or proceeding brought by a Third Party (collectively, a “Claim”) relating to:

(a)any breach by HEC of any of its representations, warranties or obligations under this Agreement;

(b)the gross negligence, or willful misconduct or violation of Law of HEC or its Affiliates, Licensee Partners or Third Party Contractors in connection with HEC’s performance of its obligations or exercise of its rights under this Agreement;

(c)[***];

(d)any Manufacture of the Products for the US by or on behalf of HEC or any of its Affiliates, including any Claims of Product Liability in the US or any personal injury, property damage or other damage in the US, in each case, resulting from any of the foregoing activities described in this Section 13.1;

(e)any(i) Development, Manufacture or Commercialization of Products (excluding the Pen) and (ii) assembly of the Pen, in each case of (i) and (ii),by or on behalf of HEC or any of its Affiliates in the US following the reversion thereof to HEC pursuant to Section 14.3, including any Claims of Product Liability in the US or any personal injury, property damage or other damage in the US, in each case, resulting from any of the foregoing activities described in this Section 13.1; or

(f)any misappropriation by HEC or any of its Affiliates of any Know-How owned or otherwise Controlled by a Third Party relating to the Manufacture of Insulin Aspart inthe Territory;

in each case, provided, however, that, such indemnity shall not apply to the extent (i) Lannett has an indemnification obligation pursuant to Section ‎13.2(a) or 13.2(b) for such Damages or (ii) such Damages are reflected in any applicable Operating Profits or Losses calculation.

Section 13.2Indemnification by Lannett.Lannett agrees, at Lannett’s cost and expense, to defend, indemnify and hold harmless HEC and its Affiliates and their respective directors, officers, employees and agents (the “HEC Indemnified Parties”) from and against any Damages arising out of any Claim relating to:

(a)any breach by Lannett of any of its representations, warranties or obligations under this Agreement;

- 55 -

121186093.v1

(b)the gross negligence, willful misconduct or violation of Law of Lannett or its Affiliates, Licensee Partners or Third Party Contractors in the US in connection with Lannett’s performance of its obligations or exercise of its rights under this Agreement;

(c)[***];

(d)any Development or Commercialization of Products in the US by or on behalf of Lannett or any of its Affiliates, including any Claims of Product Liability in the US or any personal injury, property damage or other damage in the US, in each case, resulting from any of the foregoing activities described in this Section 13.2; or

(e)any misappropriation by Lannett or any of its Affiliates of any Know-How owned or otherwise Controlled by a Third Party relating to the Development of the Pen in the Territory;

in each case, provided,however,that such indemnity shall not apply to the extent (i) HEC has an indemnification obligation pursuant to Section ‎13.1(a) or 13.1(b) for such Damages or (ii) such Damages are reflected in any applicable Operating Profits or Losses calculation.

Section 13.3Indemnification Procedures. In the event of any such Claim against any of the HEC Indemnified Parties or Lannett Indemnified Parties (each, an “Indemnified Party”), as applicable, by any Third Party, such Indemnified Party shall promptly, and in any event within ten (10) Business Days, notify the applicable indemnifying Party (the “Indemnitor”) in writing of the Claim.  The Indemnitor shall have the right, exercisable by notice to the Indemnified Party within ten (10) Business Days after receipt of notice from the Indemnified Party of the Claim, to assume direction and control of the defense, litigation, settlement, appeal or other disposition of the Claim (provided that such Claim is solely for monetary damages and the Indemnitor agrees to pay all Damages relating to such matter, as evidenced in a written confirmation delivered by the Indemnitor to the Indemnified Party) with counsel selected by the Indemnitor and reasonably acceptable to the Indemnified Party; providedthat the failure to provide timely notice of a Claim by a Third Party shall not limit an Indemnified Party’s right for indemnification hereunder except to the extent such failure results in actual prejudice to the Indemnitor.  The Indemnified Parties shall cooperate with the Indemnitor and may, at their option and expense, be separately represented in any such action or proceeding.  The Indemnitor shall not be liable for any litigation costs or expenses incurred by the Indemnified Parties without the Indemnitor’s prior written authorization for so long as the Indemnitor controls such litigation.  In addition, the Indemnitor shall not be responsible for the indemnification or defense of any Indemnified Party to the extent arising from any negligent or intentional acts by any Indemnified Party or the breach by such Indemnified Party of any representation, obligation or warranty under this Agreement, or any Claims compromised or settled without its prior written consent.  Each Party shall use reasonable efforts to mitigate Damages indemnified under this Article XIII.

Section 13.4Product Liability Costs.  Except with respect to such portion (if any) of Product Liabilities that are Claims entitled to indemnification under Section 13.1 or Section 13.2, with respect to the Development and Commercialization of the Product in the US, the Parties jointly shall be responsible for all Product Liabilities, and all Out-of-Pocket Costs incurred by the controlling Party under Section 13.5 in connection with any litigation or proceeding related to any

- 56 -

121186093.v1

applicable Third Party Products Liability Action and all Out-of-Pocket Costs incurred by the non-controlling Party under Section 13.5 at the request of the controlling Party under Section 13.5, and all such direct costs and expenses incurred relating to Products distributed shall be taken into account in determining the Profit & Loss Share as, and to the extent, provided in Exhibit D.

Section 13.5Conduct of Product Liability Claims.

(a)Each Party shall promptly notify the other in the event that any Third Party asserts or files any Claims for Product Liability or other action relating to alleged defects in any Product (whether design defects, manufacturing defects or defects in sales or marketing) (“Third Party Products Liability Action”) against such Party.  In the event of a Third Party Products Liability Action against such a single Party, the unnamed Party shall have the right, in the unnamed Party’s sole discretion, to join or otherwise participate in such legal action with legal counsel selected by the unnamed Party and reasonably acceptable to the named Party.  The Party named in such Third Party Products Liability Action shall have the right to control the defense of the action, but shall notify and keep the unnamed Party apprised in writing of such action and shall consider and take into account the unnamed Party’s reasonable interests and requests and suggestions regarding the defense of such action.  In the event of a Third Party Products Liability Action against both Parties, unless otherwise agreed by the Parties in writing, Lannett shall control the response to such Third Party Products Liability Action, unless the rights to Development and Commercialization have reverted to HEC pursuant to Section 14.3, in which case HEC shall control the response.

(b)The non-controlling Party of a Third Party Products Liability Action shall reasonably cooperate with the controlling Party in the preparation and formulation of a defense to such Third Party Products Liability Action, and in taking other steps reasonably necessary to respond to such Third Party Products Liability Action.  The controlling Party shall have the right to select its counsel for the defense to such Third Party Products Liability Action, which counsel must be reasonably acceptable to the non-controlling Party.  If required under applicable Law in order for the controlling Party to maintain a suit in response to such Third Party Products Liability Action, the non-controlling Party shall join as a party to the suit.  The non-controlling Party shall also have the right to participate and be represented in any such suit on a voluntary basis by its own counsel at its own expense.  The controlling Party shall not settle or compromise any Third Party Products Liability Action without the consent of the other Party, which consent shall not be unreasonably withheld.

Section 13.6Limitation of Liability.  EXCEPT WITH RESPECT TO A BREACH OF SECTION 8.6 OR ARTICLE XI, OR A PARTY’S LIABILITY PURSUANT TO SECTION 13.1 OR SECTION 13.2, NEITHER PARTY SHALL BE LIABLE FOR SPECIAL, CONSEQUENTIAL, EXEMPLARY, PUNITIVE, MULTIPLE OR OTHER INDIRECT OR REMOTE DAMAGES, OR FOR LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES ARISING IN ANY WAY OUT OF THIS AGREEMENT OR THE EXERCISE OF ITS RIGHTS HEREUNDER, WHETHER BASED UPON WARRANTY, CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSS.

- 57 -

121186093.v1

Section 13.7Insurance.  Beginning on the commencement of the first Clinical Trial of a Product and thereafter during the Term, each Party shall maintain commercial general liability insurance (including product liability insurance) from a recognized, creditworthy insurance company, with coverage limits of at least Five Million US Dollars ($5,000,000) per claim and Ten Million US Dollars ($10,000,000) annual aggregate.  Within ten (10) days following the date on which such commercial general liability insurance takes effect, each Party shall furnish to the other Party a certificate of insurance evidencing such coverage.  If such coverage is modified or cancelled, the insured Party shall notify the other Party and promptly provide such other Party with a new certificate of insurance evidencing that such insured Party’s coverage meets the requirements of this Section 13.7.

Article XIV
Term and Termination

Section 14.1Term; Expiration.

(a)Term.

(i)This Agreement shall become effective on the Effective Date and, unless earlier terminated or renewed pursuant to this Article XIV, shall remain in effect until the fifteenth (15^th) anniversary of the First Commercial Sale (the “Initial Term” and, together with any Renewal Period pursuant to Section 14.1(a)(ii), the “Term”).

(ii)Upon expiration of the Initial Term (unless earlier terminated pursuant to this Article XIV), this Agreement shall be automatically renewed every three (3) years (each such three (3) years, a “Renewal Period”), unless either Party notifies the other Party that it terminates this Agreement with at least twelve (12) months’ prior written notice (any such notice, a “Non-Renewal Notice”).

(b)Effects of Expiration.  After the expiration of the Term, the following terms shall apply:

(i)License after Expiration of Agreement.  Subject to 14.1.(b)(iii), after expiration of the Term (but not after early termination) pursuant to Section 14.1(a), HEC shall have an exclusive, fully-paid, royalty-free, irrevocable, non-terminable, right and license in the US, with the right to grant sublicenses through multiple tiers, under the Lannett Intellectual Property, Lannett Collaboration Intellectual Property and Lannett rights in the Joint IP to develop, manufacture, have manufactured, use, offer for sale, sell, import and otherwise commercialize such Product in the Field in the US; provided, however, that, following such expiration, notwithstanding anything to the contrary in this Agreement, (A) HEC shall be solely responsible for all payments owed to any Third Party licensors and (B) HEC shall be responsible for complying with the terms of any license agreements with such Third Party licensors, in each case ((A) and (B)) solely with respect to HEC’s exercise of such rights.

(ii)Trademark.  After expiration of the Term, Lannett shall promptly transfer and assign, free of charge, to HEC all of Lannett’s and its Affiliates’ rights, title and interests in and to the US Product Trademark(s) (but not any Lannett house marks or composite marks including a house mark) owned by Lannett and solely used for Products.

- 58 -

121186093.v1

(iii)Royalty Payments. If, prior to the expiration of the Initial Term, HEC delivered a Non-Renewal Notice, then HEC shall pay to Lannett a two percent (2%) royalty on Net Sales (and the definition of “Net Sales” will apply mutatis mutandis to Commercialization of the Product by HEC, its Affiliates, sublicensees, assignees, or successors) for so long as the Product is Commercialized by HEC, its Affiliates, sublicensees, assignees, or successors. Within thirty (30) days after the end of each Calendar Quarter, HEC shall provide Lannett with a report stating the sales in units and in value of such Product made by HEC, its Affiliates, Licensee Partners, assignees and successors, as applicable, in the US, together with the calculation of the royalties due to Lannett, including the method used to calculate the royalties and itemized deductions.  Payments of all amounts payable under this Section 14.1(b)(iii) shall be made by HEC to the bank account indicated by Lannett within forty-five (45) days from the end of each Calendar Quarter in which such payment accrues. The provisions of this Section 14.1(b)(iii) shall be subject to Section 9.3 and Section 9.4.

Section 14.2Termination.

(a)Termination for Material Breach.

(i)Termination by Either Party for Breach.  Subject to Section 14.2(a)(ii) (with respect to a Material Breach by either Party of its obligations to use Commercially Reasonable Efforts), this Agreement and the rights granted herein may be terminated by either Party for the material breach of this Agreement in a manner that fundamentally frustrates the transactions contemplated by this Agreement taken as a whole by the other Party to this Agreement, (each, a “Material Breach”), providedthat, the breaching Party has not cured such Material Breach within ninety (90) days after the date of written notice to the breaching Party of such breach (the “Cure Period”), which notice shall describe such breach in reasonable detail and shall state the non-breaching Party’s intention to terminate this Agreement pursuant to this Section 14.2(a)(i). Notwithstanding the preceding sentence, the Cure Period for any allegation made in good faith as to a Material Breach under this Agreement will run from the date that written notice was first provided to the breaching Party by the non-breaching Party. Any such termination of this Agreement under this Section 14.2(a)(i) shall become effective at the end of the Cure Period, unless the breaching Party has cured any such Material Breach prior to the expiration of such Cure Period, or, if such Material Breach is not susceptible to cure within the Cure Period, then, the non-breaching Party’s right of termination shall be suspended only if and for so long as the breaching Party has provided to the non-breaching Party a written plan that is reasonably calculated to effect a cure and such plan is acceptable to the non-breaching Party, and the breaching Party commits to and carries out such plan as provided to the non-breaching Party within two hundred twenty-five (225) days after the date that written notice was first provided to the breaching Party by the non-breaching Party. The Parties understand and agree that the totality of this Agreement and the totality of the circumstances with respect to this Agreement will be taken into account and assessed as a whole for purposes of determining whether a breach is a Material Breach under this Agreement.

(ii)Additional Procedures for Termination by either Party for Failure of the Other Party to Use Commercially Reasonable Efforts.  If either Party wishes to exercise its right to terminate this Agreement pursuant to Section 14.2(a)(i) for the other Party’s Material Breach of its obligations to use Commercially Reasonable Efforts, it shall provide to such other

- 59 -

121186093.v1

Party a written notice of its intent to exercise such right, which notice shall be labeled as a “notice of Material Breach for failure to use Commercially Reasonable Efforts,” and shall state the reasons and justification for such termination and recommending steps which such Party believes the other Party should take to cure such alleged breach.  For any such notice of breach by a Party, the Cure Period shall, subject to Section 14.2(a)(iii), be one hundred and eighty (180) days, and shall become effective in accordance with Section 14.2(a)(i).

(iii)Disagreement as to Material Breach.  If the Parties reasonably and in good faith disagree as to whether there has been a Material Breach, then, subject to Section 15.1: (A) the Party that disputes that there has been a Material Breach may contest the allegation by referring such matter, within thirty (30) days following such notice of alleged Material Breach for resolution to the Executive Officers, who shall meet promptly to discuss the matter, and determine, within ten (10) Business Days following referral of such matter, whether or not a Material Breach has occurred pursuant to this Section 14.2(a); (B)the relevant Cure Period with respect thereto will be tolled from the date the breaching Party notifies the non-breaching Party of such dispute and through the resolution of such dispute in accordance with the applicable provisions of this Agreement (provided, that if such dispute relates to payment, the Cure Period will only be tolled with respect to payment of disputed amounts, and not with respect to undisputed amounts), (C) it is understood and agreed that during the pendency of such dispute, all of the terms and conditions of this Agreement shall remain in effect and the Parties shall continue to perform all of their respective obligations hereunder and (D) if it is finally and conclusively determined in accordance with Section 15.2 that the breaching Party committed such Material Breach, then the breaching Party shall have the right to cure such Material Breach after such determination within the Cure Period (provided, that if such dispute relates to a failure to use Commercially Reasonable Efforts, such post-determination Cure Period shall be strictly limited to thirty (30) days and any cure within such thirty (30) day period must fully cure such breach prior to the end of such thirty (30) day period).

(iv)If the Executive Officers are unable to resolve a dispute within such ten (10) Business Day period after it is referred to them, the matter will be resolved as provided in Section 15.2.

(b)Termination for Insolvency.  To the extent permitted by Law, this Agreement may be terminated by either Party upon the filing or institution of bankruptcy, reorganization, liquidation or receivership proceedings with respect to, or upon an assignment of a substantial portion of the assets for the benefit of creditors by, the other Party; provided, however, that, in the event of any involuntary bankruptcy or receivership proceeding such right to terminate shall only become effective if the non-terminating Party consents to the involuntary bankruptcy or receivership or such proceeding is not dismissed within ninety (90) days after the filing thereof.

Section 14.3Effects of Termination for Breach or Insolvency. Subject to Section 14.3(k), upon termination of this Agreement by either Party under Section 14.2(a) or Section 14.2(b), the following shall apply:

(a)(i) solely upon termination of this Agreement by Lannett under Section 14.2(a), all licenses granted by Lannett to HEC under Section 8.1(b) with respect to the

- 60 -

121186093.v1

Product(s) in the US shall convert to non-exclusive licenses solely in the ROW and otherwise remain in effect (and, for clarity, HEC shall have no rights to Develop or Commercialize Product(s) in the US) or (ii) solely upon termination of this Agreement by HEC pursuant to Section 14.2(a), all licenses granted by Lannett to HEC under Section 8.1(b) with respect to the Product(s) shall convert to exclusive licenses and otherwise remain in effect;

(b)each Party shall be released from its Development, Manufacture and Commercialization obligations, as applicable;

(c)within thirty (30) days after such termination, each Party shall provide the other with a report of Net Sales, COGS and Allowable Expenses and other amounts incurred by such Party that are subject to the Parties’ cost-sharing obligations through the effective date of termination for the purpose of calculating a final reconciliation of shared costs and payments in accordance with Section 9.1 and Section 9.2, as applicable. Each Party shall submit any supporting information reasonably requested by the other Party related to such Net Sales, COGS and Allowable Expenses and such other amounts included in such Party’s reconciliation report within ten (10) days after the other Party’s receipt of such request.  The Parties shall conduct a final reconciliation of such costs and payments within thirty (30) days after receipt of all such supporting information, and an invoice shall be issued to the Party (if any) that owes the other Party a payment to accomplish the cost sharing or payment envisioned under this Agreement pursuant to Section 9.1 and Section 9.2, as applicable.  The paying Party shall pay all amounts payable under any such invoice within thirty (30) days after its receipt of such invoice; provided, however, that, HEC shall remain responsible for its applicable share of all COGS and Allowable Expenses committed prior to the effective date of termination and not cancelable by Lannett, which Lannett shall reasonably seek to minimize, with respect to the Products to the extent such COGS and Allowable Expenses (A) are within an approved Development Budget under an approved Development Plan in place prior to termination or (B) are solely incurred by Lannett during the period ending ninety (90) days after the effective date of termination of this Agreement;

(d)Lannett shall promptly transfer and assign to HEC all of Lannett’s and its Affiliates’ rights, title and interests in and to the US Product Trademark(s) (but not any Lannett house marks or composite marks including a house mark) owned by Lannett and solely used for Products;

(e)Lannett shall as soon as reasonably practicable transfer and assign to HEC all Regulatory Approvals and Regulatory Documentation with respect to the Products and a copy of all of the data comprising the Global Safety Database; providedthat Lannett may retain such data and a single copy of such Regulatory Approvals and Regulatory Documentation for its records. Notwithstanding the foregoing, if such Regulatory Approvals or Regulatory Documentation are necessary or useful for the Development, Manufacture or Commercialization of any product other than the Products, in place of transferring or assigning the foregoing, Lannett shall instead grant HEC a Right of Reference or Use with respect to such approvals or documentation with respect to the Products;

(f)notwithstanding anything to the contrary in Section 8.6, HEC shall have the sole right to pursue the Development, Manufacture and Commercialization of the Products in the US;

- 61 -

121186093.v1

(g)each Party shall return any Confidential Information of the other Party pursuant to Article XI;

(h)the provisions of Article X (other than Section 10.1) shall terminate, and Lannett shall, if applicable, provide reasonable assistance to HEC and cooperation in connection with the transition of Prosecution and enforcement responsibilities to HEC with respect to HEC Collaboration Patents, Lannett Collaboration Patents, and Joint Patents then being Prosecuted or enforced by HEC, including execution of such documents as may be necessary to effect such transition;

(i)if any Clinical Trials are then being conducted at the time of such termination with respect to any Product, the Parties hereby agree (i) to reasonably cooperate in the completion of any such Clinical Trials, and (ii) notwithstanding anything to the contrary contained herein, to grant to HEC following such termination (A) free of charge, copies of and rights of reference to and use of all Product Data that is Controlled by Lannett and generated pursuant to such Clinical Trials that are relevant to or necessary to address issues relating to: (1) the safety of such Product inthe Territory, including data that is related to adverse effects experienced with such Product or (2) all activities relating to CMC regarding such Product and in each of (1) and (2), that are required to be reported or made available to Regulatory Authorities inthe Territory, when and as such data become available, and (B) copies of and rights of reference to and use of all Product Data (other than the Product Data referred to in subclause (A) above) that is Controlled by Lannett and generated pursuant to such Clinical Trials that are relevant to or necessary to address the Development and Commercialization of such Product promptly following the generation of such Product Data if, but only if, as to such Product Data described in this subclause (B), HEC following such termination promptly pays for the Development costs incurred  by Lannett when conducting the activities according to the Development Plan which generated such Product Data following any such termination of this Agreement with respect to such Clinical Trials;

(j)Survival.  Upon any termination or expiration of this Agreement, unless otherwise specified in this Agreement and except for any rights or obligations that have accrued prior to the effective date of termination or expiration, all rights and obligations of each Party under this Agreement shall terminate in whole or with respect to the Products, as the case may be; provided, however, that, Section 8.7, Section 8.8, Section 9.3, Section 9.4, Section 9.5, Section 10.1, Section 11.5, Section 11.6, Section 12.6, Section 13.1, Section 13.2, Section 13.3, Section 13.4, Section 13.5, Section 13.6, Section 14.3 and Sections 15.2-15.19, as well as any other provision which by its terms or by the context thereof is intended to survive, shall survive any such termination or expiration of this Agreement.

(k)Equitable Relief.  Termination of this Agreement shall be in addition to, and shall not prejudice, the Parties’ remedies at law or in equity, including the Parties’ ability to receive legal damages or equitable relief with respect to any breach of this Agreement, regardless of whether or not such breach was the reason for the termination.

(l)Accrued Liabilities.  Except as otherwise specifically provided herein, termination of this Agreement shall not relieve the Parties of any liability or obligation which accrued hereunder prior to the effective date of such termination, nor preclude either Party from

- 62 -

121186093.v1

pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement nor prejudice either Party’s right to obtain performance of any obligation.  In addition, termination of this Agreement shall not terminate provisions which provide by their respective terms for obligations or undertakings following the expiration of the term of this Agreement.

Article XV
Miscellaneous

Section 15.1Dispute Resolution.  The Parties agree that any disputes arising with respect to the interpretation, enforcement, termination or invalidity of this Agreement (each, a “Dispute”) shall first be presented to the Parties’ respective Executive Officers for resolution.  If the Parties are unable to resolve a given dispute pursuant to this Section 15.1 after in-person discussions between the Executive Officers within ten (10) Business Days after referring such dispute to the Executive Officers, either Party may, at its sole discretion, seek resolution of such matter in accordance with Section 15.2.

Section 15.2Submission to Arbitration for Resolution.  Subject to Section 15.1, any Disputes shall be submitted to binding arbitration under the Rules of Arbitration (the “Rules”) of the International Chamber of Commerce (“ICC”). The arbitration shall be conducted by a tribunal of arbitrators experienced in the business of pharmaceuticals. The tribunal shall be compromised of three (3) arbitrators, one of whom shall be nominated by each Party and a third of whom, who shall serve as the presiding arbitrator, shall be nominated by mutual agreement of the two party-nominated arbitrators.  If the two party-nominated arbitrators do not nominate the third arbitrator within thirty (30) days of the second arbitrator’s appointment, then the third arbitrator shall be appointed by the International Court of Arbitration of the ICC. If the issues in dispute involve scientific, technical or commercial matters, the arbitrators chosen hereunder shall engage experts that have educational training or industry experience sufficient to demonstrate a reasonable level of relevant scientific, medical and industry knowledge, as necessary to resolve the dispute. Within thirty (30) days after initiation of arbitration, the Parties shall select the arbitrators.  The arbitration proceeding shall be conducted in the English language.  That is, neither Party shall be requested to provide any documents or other evidence beyond the documents and other evidence that each Party chooses to submit in support of its case. The place of arbitration shall be Singapore.  The award of such arbitration shall be conclusive and binding on the Parties, and judgment upon the award may be entered in any court having jurisdiction thereover. All costs of the arbitration shall be borne in accordance with the Rules and, if different, according to the award rendered, but each Party shall be responsible for its own legal and other costs.

Section 15.3Governing Law.  This Agreement and all questions regarding its validity or interpretation, or the performance or breach of this Agreement, shall be governed by and construed and enforced in accordance with the laws of Hong Kong, without reference to conflicts of laws principles.

Section 15.4Assignment and Right of First Refusal of HEC. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either Party (whether by operation of law or otherwise) without the prior written consent of the other Party not to be unreasonably withheld. Notwithstanding the foregoing, either Party may, without the other Party’s

- 63 -

121186093.v1

written consent, assign this Agreement and its rights and obligations hereunder in whole or in part to an Affiliate of such Party.  In the event Lannett intends to assign this Agreement in whole or in part to a Third Party, HEC shall have the right of first refusal to exclusively negotiate with Lannett for a period of sixty (60) days for repurchasing the rights, interests and obligations under this Agreement at a price agreed to by both Parties (the “Right of First Refusal of HEC”); provided that, if the Parties cannot reach an agreement within such sixty (60) day period, then Lannett shall be entitled to assign this Agreement in whole or part to a Third Party in its sole discretion without restriction. In the event HEC does not exercise the Right of First Refusal or HEC exercises the Right of First Refusal but the Parties cannot reach a repurchasing intention within the aforementioned sixty (60) day period, Lannett shall keep HEC informed of the final result of the negotiation between Lannett and the Third Party to the extent of the details of the terms and provisions that will impair the license rights, benefits and interests of HEC to the Product in the U.S.

Section 15.5All Other Assignments Null and Void.  The terms of this Agreement will be binding upon and will inure to the benefit of the successors, heirs, administrators and permitted assigns of the Parties.  Any purported assignment in violation of Section 15.4 will be null and void ab initio.

Section 15.6Change of Control.  Notwithstanding anything to the contrary in this Agreement, with respect to any intellectual property rights controlled by the acquiring party or its Affiliates (if other than one of the Parties to this Agreement or any Affiliate of a Party immediately before such Change of Control) involved in any Change of Control of either Party, such intellectual property rights shall not be included in the technology and intellectual property rights licensed to the other Party hereunder to the extent held by such acquirer or its Affiliates (other than the relevant Party to this Agreement or any Affiliate of a Party immediately before such Change of Control) prior to such transaction, or to the extent such technology is developed outside the scope of activities conducted with respect to the Collaboration or Products.  The HEC Intellectual Property and the Lannett Intellectual Property shall exclude any intellectual property owned or controlled by a permitted assignee or successor and not developed in connection with the Collaboration or Products, Developed, Manufactured or Commercialized pursuant to this Agreement.  

Section 15.7Force Majeure.  If the performance of any part of this Agreement by a Party is prevented, restricted, interfered with or delayed by an occurrence beyond the control of such Party (and which did not occur as a result of such Party’s financial condition, negligence or fault), including fire, earthquake, flood, embargo, power shortage or failure, acts of war or terrorism, insurrection, riot, lockout or other labor disturbance, governmental acts or orders or restrictions, pandemic，acts of God (for the purposes of this Agreement, a “force majeure event”), such Party shall, upon giving written notice to the other Party, be excused from such performance to the extent of such prevention, restriction, interference or delay; providedthat the affected Party shall use its Commercially Reasonable Efforts to avoid or remove such causes of non-performance and shall continue performance with the utmost dispatch whenever such causes are removed.

Section 15.8Notices.  Unless otherwise agreed by the Parties or specified in this Agreement, all notices required or permitted to be given under this Agreement shall be in writing and shall be sufficient if:  (a) personally delivered; (b) sent by registered or certified mail (return receipt requested and postage prepaid); (c) sent by express courier service providing evidence of

- 64 -

121186093.v1

receipt and postage prepaid where applicable; or (d) sent by facsimile transmission (receipt verified and a copy promptly sent by another permissible method of providing notice described in clauses (a), (b) or (c) above), to the address for a Party set forth below, or such other address for a Party as may be specified in writing by like notice:

To Lannett Lannett Company, Inc. 9000 State Road Philadelphia, PA 19136 Attention: Legal Department Telephone: (215) 333-9000 Facsimile: (215) 464-1861	To HEC HEC Pharm US Inc. 2 Enfield Circle, West Windsor , NJ, 08550Telephone: 408-580-6016 Facsimile: N.A.
	With a copy to: Hill Wallack LLP 21 Roszel Rd, Princeton, NJ 08540 Attention: Quinn ZhaoTelephone: (609) 924-0808 Facsimile: N.A.

Any such notices shall be effective upon receipt by the Party to whom it is addressed. Any notice given in connection with this Agreement shall be in English. Unless otherwise agreed upon by all of the Parties, any other document provided pursuant to this Agreement shall be: (i) in English; or (ii) translated in to English and accompanied by a certified English translation at HEC’s sole cost, in which case the English translation prevails unless the document is a statutory or other official document.

Section 15.9Waiver.  Except as otherwise expressly provided in this Agreement, any term of this Agreement may be waived only by a written instrument executed by a duly authorized representative of the Party waiving compliance.  The delay or failure of either Party at any time to require performance of any provision of this Agreement shall in no manner affect such Party’s rights at a later time to thereafter enforce such provision.  No waiver by either Party of any condition or term in any one or more instances shall be construed as a further or continuing waiver of such condition or term or of another condition or term.

Section 15.10Severability. If any provision of this Agreement should be invalid, illegal or unenforceable in any jurisdiction, the Parties shall negotiate in good faith a valid, legal and enforceable substitute provision that most nearly reflects the original intent of the Parties and all other provisions of this Agreement shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the Parties hereto as nearly as may be possible. If the Parties cannot agree upon a substitute provision, the invalid, illegal or unenforceable provision of this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid, illegal or unenforceable provision is of such essential importance to

- 65 -

121186093.v1

this Agreement that it is to be reasonably assumed that the Parties would not have entered into this Agreement without the invalid, illegal or unenforceable provision.

Section 15.11Entire Agreement.  This Agreement (including the Exhibits and Schedules attached hereto), constitutes the entire agreement between the Parties relating to its subject matter, and supersedes all prior and contemporaneous agreements, representations or understandings, either written or oral, between the Parties with respect to such subject matter. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. This Agreement is written and executed in the English language. Any translation into any other language shall not be an official version of this Agreement and in the event of any conflict in interpretation between the English version and such translation, the English version shall prevail.

Section 15.12Modification.  No modification, amendment or addition to this Agreement, or any provision hereof, shall be effective unless reduced to writing and signed by a duly authorized representative of each Party.  No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by a duly authorized representative of each Party.

Section 15.13Independent Contractors; No Intended Third Party Beneficiaries.  This Agreement is not intended nor shall be deemed or construed to create any relationship of employer and employee, agent and principal, partnership, or joint venture between the Parties.  Each Party is an independent contractor.  Neither Party shall assume, either directly or indirectly, any liability of or for the other Party.  Neither Party shall have any express or implied right or authority to assume or create any obligations on behalf of, or in the name of, the other Party, nor to bind the other Party to any contract, agreement or undertaking with any Third Party.  There are no express or implied third party beneficiaries hereunder, (a) except for the indemnitees identified in Section 13.1 and Section 13.2 and except for any licensor under any Third Party Agreement, to the extent described in Exhibit C.  Notwithstanding the provisions of this Section 15.13, the provisions of Section 15.17 shall control for US federal income tax purposes, as applicable.

Section 15.14Interpretation; Construction.  The captions to the several Articles and Sections of this Agreement are included only for convenience of reference and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement.  In this Agreement, unless the context requires otherwise, (a) the words “including,” “include,” “includes,” “such as” and “e.g.” shall be deemed to be followed by the phrase “without limitation” or like expression, whether or not followed by the same; (b) references to the singular shall include the plural and vice versa; (c) references to masculine, feminine and neuter pronouns and expressions shall be interchangeable; (d) the words “herein” or “hereunder” relate to this Agreement; (e) the word “or” is used in the inclusive sense that is typically associated with the phrase “and/or”; (f) the word “will” shall be construed to have the same meaning and effect as the word “shall”; and (g) all references to “dollars” or “$” herein shall mean US Dollars and (h) a capitalized term not defined herein but reflecting a different part of speech from that of a capitalized term which is defined herein shall be interpreted in a correlative manner.  Each Party represents that it has been represented by legal counsel in connection with this Agreement and acknowledges that it has participated in the drafting hereof.  In interpreting and applying the terms

- 66 -

121186093.v1

and provisions of this Agreement, the Parties agree that no presumption will apply against the Party which drafted such terms and provisions.

Section 15.15Performance by Affiliates. A Party may perform any obligation this Agreement imposes on such Party through any of such Party’s Affiliates. To the extent that this Agreement imposes obligations on Affiliates of a Party, such Party agrees to cause its Affiliates to perform such obligations.

Section 15.16Counterparts.  This Agreement may be executed in four (4) counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Any such counterpart, to the extent delivered by means of a fax machine or by .pdf, .tif, .gif, .jpeg or similar attachment to electronic mail (any such delivery, an “Electronic Delivery”) shall be treated in all manner and respects as an original executed counterpart and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.  No Party hereto shall raise the use of Electronic Delivery to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of Electronic Delivery as a claim or defense with respect to the formation of a contract, and each Party forever waives any such claim or defense, except to the extent that such claim or defense relates to lack of authenticity.

Section 15.17Certain US Federal Income Tax Treatment.  Pursuant to Section 15.13, this Agreement is not intended nor shall be deemed or construed to create any relationship of employer and employee, agent and principal, legal partnership, or joint venture between the Parties; provided, however, that the Parties hereby acknowledge and agree that this Agreement shall be treated as a partnership with respect to the US for US federal and state income tax purposes only pursuant to Section 7701(a)(2) of the Code and the Treasury Regulations thereunder, and each of Lannett and HEC shall be treated as partners in such partnership for all taxable periods during which this Agreement is effective.  Lannett and HEC agree that each will take no position inconsistent with partnership tax treatment for US federal and state income tax purposes for such time.  Exhibit E of this Agreement sets forth the Parties’ intentions regarding allocations and other tax matters related to the tax partnership.  Exhibit E shall be interpreted in a manner consistent with this Section 15.17.  For the avoidance of doubt, the tax partnership referred to in this Section 15.17 shall be treated as separate from any other partnership entered into by, or deemed to exist between, the Parties.

Section 15.18Equitable Relief.  Notwithstanding anything to the contrary herein, the Parties shall be entitled to seek equitable relief, including injunction and specific performance, as a remedy for any breach of this Agreement.  Such remedies shall not be deemed to be the exclusive remedies for a breach of this Agreement but shall be in addition to all other remedies available at law or equity.  

Section 15.19Further Assurances.  Each Party shall execute, acknowledge and deliver such further instruments, and do all such other acts, as may be necessary or appropriate in order to carry out the expressly stated purposes and the clear intent of this Agreement.  

[Remainder of page intentionally left blank]

- 67 -

121186093.v1

IN WITNESS WHEREOF, the Parties have executed this Collaboration and License Agreement as of the Effective Date.

LANNETT COMPANY, INC.

By:​ ​/s/ Tim Crew​ ​Name:​ ​Tim Crew​ ​Title:​ ​CEO​ ​

SUNSHINE LAKE PHARMA CO., LTD

By:​ ​/s/ Wenjia Li​ ​Name:​ ​Wenjia Li​ ​Title:​ ​Vice President​ ​

[Signature Page to Collaboration and License Agreement]

121186093.v1

Exhibit F

PEN DEVELOPMENT PLAN

[***]

121186093.v1

Exhibit H

New Facility No. 1 Timeline

[***]

121186093.v1

Exhibit I

New Facility No. 2 Timeline

[***]

121186093.v1

Schedule 3.2(a)

Development Plan

[***]

121186093.v1

EX-10.89

EXECUTION VERSION

CERTAIN INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.
[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

Exhibit 10.89

SUPPLY AGREEMENT

THIS SUPPLY AGREEMENT (this “Agreement”) is made this 5^th day of February 2021 (the “Effective Date”), by and among Sunshine Lake Pharma Co., Ltd., a corporation organized and existing under the laws of the People’s Republic of China, (“Seller”), and Lannett Company, Inc., a Delaware corporation (“Lannett”).

WHEREAS, Lannett and Seller have entered into that certain Collaboration and License Agreement, dated as of the Effective Date (the “Collaboration Agreement”), for Lannett to develop and commercialize Product in the US;

WHEREAS, Seller has developed and manufactured the insulin aspart identified on Exhibit A hereto (the “Drug Substance”) and shall manufacture the finished product containing the Drug Substance assembled with an injection drug delivery device identified on Exhibit A hereto (such finished product, the “Product”) at Seller’s new manufacturing facility to be constructed in Yidu, China in accordance with the terms of the Collaboration Agreement (the “New Facility”); and

WHEREAS, Lannett desires to purchase Product from Seller; and

WHEREAS, Seller is willing to supply such Product for Lannett’s use, distribution and sale in the U.S. on the terms and conditions set forth in this Agreement.

NOW THEREFORE, in consideration of the promises and the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree and covenant as follows:

1.Manufacture and Sale.

1.1.Supply. During the term of this Agreement and subject to the terms and conditions set forth herein, Lannett or its Affiliates shall purchase Product from Seller, and Seller shall directly or through one or more of its Affiliates or (sub)licensees manufacture and supply Product to Lannett (or a third party designated by Lannett) in such quantities as from time to time shall be ordered by Lannett. “Affiliate” means any entity, directly or indirectly, controlling, controlled by, or under common control with an entity or person. For purposes of this definition, "controlling" (including its cognates, “controlled by” and “under common control”) shall mean: (i) ownership of more than fifty percent (50%) of the equity capital or other ownership interest in or of an entity; (ii) the power to control or otherwise direct the affairs of an entity; (iii) in the case of non-stock organizations, the power to control the distribution of profits of an entity; or (iv) such other relationship as, in fact, results in actual control over the management, business, and affairs of

121181118.v1

an entity.In addition, if requested by Lannett, Seller shall use commercially reasonable efforts to supply up to one hundred twenty-five percent (125%) of Lannett’s requirement forecast of Product for the applicable period. During the term of this Agreement, Seller shall ensure that it has the capacity to meet all of Lannett’s requirements for Product in a timely manner, including in accordance with Section 4.3 of the Collaboration Agreement. In addition, Seller shall maintain at all times a three (3) month supply of all raw material, Drug Substance and packaging component inventory based on the most recent forecast.

1.2.Product Specifications. The specifications of the Product are set forth in Exhibit B to this Agreement (the “Product Specifications”), as such Exhibit may be amended from time to time by mutual agreement of the parties in a writing signed and dated by each of the parties which makes specific reference to Exhibit B of this Agreement. Product Specifications include Lannett’s required labelling and packaging including all United States Food and Drug Administration (the “FDA”) requirements including labelling, packaging and serialization.

1.3.Costs. Seller shall be responsible for all costs and expenses related to providing data, analytical samples and documentation, and related technical information that the FDA and/or Lannett may require with regard to the Drug Substance and Product including packaging and serialization to develop the Product and to prepare any submission to the FDA and/or any other applicable regulatory authority. Seller shall also be responsible for any and all development costs and expenses associated with this Agreement, all of which will be included in the development plan set forth in the Collaboration Agreement.

1.4.Supply Chain Committee. In order to better monitor and safeguard the supply of the Product hereunder, within thirty (30) days after the Effective Date, the parties shall agree on the composition, schedule and logistics of a supply chain committee (“Supply Chain Committee”), which shall (i) be compromised of one (1) representative from each party, (ii) meet at least two (2) times per calendar year, and (iii) coordinate efforts and resolve supply issues. Each party shall bear its own costs associated with holding and attending such meetings.

2.Price, Orders and Terms of Payment.

2.1Pricing. Subject to Section 2.9, the pricing for the Product shall be as set forth on Exhibit C hereto, as may be amended from time to time by mutual agreement of the parties in writing (the “Price”). Price is determined by Seller’s Costs of Goods Sold.

Any increase to the Price during any calendar year cannot be greater than the percentage increase in the Chinese equivalent of the Consumer Price Index for all Urban Consumers for Medical Care Commodities for the twelve (12) month period ending three (3) months prior to the commencement of such calendar year, unless the Seller can provide relevant documentation or evidences to justify an increase greater than the percentage increase in the Chinese equivalent of the Consumer Price Index for all Urban Consumers for Medical Care Commodities thirty (30) days prior to such increase of the Price. A reasonable quantity of the Product shall be made available to Lannett for marketing samples for the Product and shall be deductible by Lannett, with advance notice to Seller, from any amounts due to Seller under future Purchase Orders. All sums shall be expressed in and payable in U.S. Dollars.

-2-

121181118.v1

2.2.Purchase Orders. Lannett will order Product by sending purchase orders for quantities of the Product (each, a “Purchase Order”) to Seller in accordance with the Shipping Instructions set forth on Exhibit D, which Purchase Order shall also specify the delivery date (such date, the “Delivery Date”). Lannett shall have the right to place orders for Product up through the last day of the term of this Agreement. Seller shall fill all orders even though Product may be shipped and paid for after this Agreement has expired or terminated.

2.3.Lead Time. Lannett will provide Seller with a minimum lead-time of twelve (12) weeks on all Purchase Orders. Within three (3) business days after its receipt of a Purchase Order from Lannett submitted for all amounts up to the Binding Forecast amount for the applicable calendar month, Seller shall notify Lannett of its acceptance of such Purchase Order. If notification is not received within three (3) business days after receipt of a Purchase Order, the Purchase Order will be deemed to be accepted. Both parties shall make reasonable efforts to adjust order requirements to reflect market conditions.

2.4.Modification of Orders. Purchase Orders may be modified by written notice to Seller up to four (4) weeks prior to the Delivery Date required in such Purchase Order.

2.5.Forecasting. On monthly basis, Lannett shall submit a twelve (12) month rolling forecast, broken down on a monthly basis, covering Lannett’s anticipated requirements of Product. The first three (3) months of each rolling forecast shall be a binding forecast (the “Binding Forecast”), and the last nine (9) months will be for information purposes only and non-binding, subject to Lannett’s ability to (i) increase the quantity of the Product specified therein up to twenty-five percent (25%) of the Binding Forecast, and (ii) decrease the quantity of the Product specified therein up to twenty-five percent (25%) of the Binding Forecast, in the case of either (i) or (ii), as specified in the subsequent monthly forecast. If Lannett fails to provide an updated forecast for the next succeeding quarter as set forth above, the forecast that was last provided by Lannett shall be considered to be Lannett’s forecast for such next succeeding quarter.

2.6.Packaging and Delivery of Product. Seller shall package the Product in a manner that will protect the Product against damage or deterioration under normal conditions and shall advise Lannett as to any special conditions which may be required during transit and storage thereof. The Product shall be packaged in cases and full cases on pallets. Any partial cases of the Products must have its own unique Serialized Shipping Container Code, 18-digit (“SSCC18”). Electronic Product Code Information Service (“EPCIS”) data associated with each LOT must be sent to Lannett either prior to shipment or no later than Products shipment from Seller to Lannett.

2.7.Electronic Data Interchange. Lannett prefers to utilize Electronic Data Interchange (“EDI”) transactions for Product order placement and tracking.  Lannett expects Seller to transmit at a minimum, an EDI856 ASN (Advance Ship Notification) upon shipment of Product from Seller’s facility.  Additional EDI transactions may be established upon mutual agreement by the parties.

2.8.Serialization. All Product delivered by Seller to Lannett shall meet serialization requirements, as outlined in the Drug Supply Chain Security Act (Title II of the Drug Quality

-3-

121181118.v1

and Security Act) signed into law on November 27, 2013 and provide data to support Product traceability as deemed necessary by Lannett. Requirements include, but are not limited to, the addition of unique Product identifiers Global Trade Item Number (“GTIN”), Serial Number (“SN”), Lot of batch number (“LOT”), expiration date (“EXP”) imprinted on each sellable unit, the same unique Product identifiers mentioned above and Quantity (“QTY”) are required on each homogeneous caseand Serialized Shipping Container Code, 18-digit (“SSCC18”) on each pallet intended to be introduced in the US market. Serial numbers must be aggregated from unit to case and case to pallet. Reporting of serial number and aggregation data is required to coincide with finished goods shipment and must conform to data exchange format and connectivity specifications supported by TraceLink.

2.9.Delivery Terms.  Seller agrees to deliver the Product on the Delivery Date DDP(Incoterms 2010) to such U.S. location as may be designated by Lannett from time to time. In the event less than one hundred percent (100%) of the Product is delivered pursuant to this Agreement more than ten (10) days after the Delivery Date (a “Late Delivery”) and there are at least two (2) Late Deliveries during any one (1) calendar quarter, the parties, through the Supply Chain Committee, shall in good faith discuss potential improvements to avoid such delays as well as appropriate compensation for Lannett.

2.10.Payment Terms.  Subject to Section 2.9, each delivery of Product pursuant to a Purchase Order shall be accompanied by an invoice based upon the Price and quantity of Product requested in the applicable Purchase Order. Lannett shall pay each invoice within ninety (90) calendar days of the applicable Delivery Date. Payments shall be made to Seller by check or wire transfer to the bank account designated by Seller. If within such ninety (90) day period, Lannett disputes all or any portion of an invoice, it shall be required to pay only the amount not in dispute, and in such event Lannett shall notify Seller of the amount and nature of the dispute. Any invoiced amounts not disputed within such ninety (90) day period shall be deemed to be accepted by Lannett. The parties will use good faith efforts to resolve any dispute regarding payments owed by Lannett as soon as reasonably practicable, but in any event within thirty (30) days of Lannett’s notice to Seller of such dispute. The dispute payment shall be made to Seller in the amount both parties finally agree within fifteen (15) calendar days after the dispute resolved. Seller shall keep complete, fair and true books of accounts and records for the purpose of determining the amounts payable by Lannett pursuant to this Section 2.10. Such books and records shall be kept for such period of time required by law, but no less than three (3) years following the end of the calendar year to which they pertain.

2.11.Minimum Number of Batches. Seller shall use commercially reasonable efforts to minimize the number of different batches shipped to fulfill a Purchase Order.

2.12.Failure to Supply and Purchase.  Seller shall notify Lannett immediately of any anticipated failure to meet Lannett’s forecasted supply of Product, for any reason whatsoever (“Failure to Supply”). In the event that Seller fails to supply Product in accordance with the Binding Forecast, Seller shall be liable, upon reasonable proof by Lannett (redacted to preserve confidentiality), for any and all costs, fees, penalties, charges or amounts, if any, otherwise incurred by Lannett resulting directly or indirectly from such Failure to Supply. Lannett may, in its sole discretion, invoice Seller for the amount of such Failure to Supply or offset such amount

-4-

121181118.v1

against the amounts otherwise payable to Seller pursuant to this Agreement. Lannett shall notify Seller immediately of any anticipated failure to purchase according to Lannett’s Binding Forecast, for any reason whatsoever (“Failure to Purchase”). In the event that Lannett fails to purchase Product in an amount less than the Binding Forecast, Lannett shall be liable, upon reasonable proof by Seller (redacted to preserve confidentiality), for any and all costs, fees, penalties, charges or amounts, if any, otherwise incurred by Seller resulting directly or indirectly from such Failure to Purchase.

2.13.Safety Stock. Each party shall maintain safety stock for the Product in such party’s location in the minimum amount of three (3) months of supply measured, as of any date, based on Lannett’s most recently submitted Binding Forecasts calculated on an annualized basis.

2.14.Scope of Agreement. The terms and conditions of this Agreement shall apply to all Purchase Orders issued hereunder. In no event shall any terms or conditions included on any Purchase Order, invoice or acknowledgement thereof or any other document, whether paper, electronic or otherwise, relating thereto, apply to the relationship between the parties under this Agreement, unless such terms are expressly agreed to by the parties in writing. If there is a conflict between the terms of any Purchase Order or other document and this Agreement, the terms of this Agreement shall control, unless such Purchase Order or other document, as applicable, has been signed by both parties, in which event such Purchase Order or other document, as applicable, shall control, but solely to the extent of the conflict. The parties further agree that no course of dealing between the parties shall in any way modify, change or supersede the terms and conditions of this Agreement or the Collaboration Agreement.

3.Manufacture and Delivery of Product.

3.1.Manufacture. The Product shall be manufactured by Seller at the New Facility in accordance with all relevant current Good Manufacturing Practices (as defined in Exhibit B, “cGMPs”) and all applicable laws, rules and regulations promulgated by the FDA, as amended and revised from time to time. Seller shall not make any changes to the Product Specifications or any proposed material changes in the methods, processes or procedures in manufacturing Product, without the regulatory approval by the FDA. If Seller wants to make any material changes, Seller will propose changes to Lannett with a written notice letter and the relevant documentation in English version, of which the costs and expenses for the translation shall be incurred by both parties calculated in the Profit & Loss Share. Proposed changes to be submitted to FDA shall be approved by Lannett in writing prior to their implementation by Seller within thirty (30) days after Lannett’s receipt of the Seller’s written notice letter and relevant documentation, which approval shall not be unreasonably withheld or delayed; otherwise, Seller will regard it as an approval by Lannett without written notice.

3.2.Certificate of Analysis. Seller shall provide certificates of analysis and certificates of compliance to Lannett for each batch of Product delivered under this Agreement confirming that the Drug Substance and Product has been manufactured, packaged and tested, in each case in accordance with the Product Specifications and applicable laws. Seller shall test raw materials and Product, and further, will use no raw materials in the manufacture of the Product which are not in accordance with Product Specifications. Seller shall comply with

-5-

121181118.v1

applicable law for biopharmaceutical products (including the electronic records and electronic signatures requirements of USC 21 CFR Part 11).

3.3.Cooperation. During the term of this Agreement, Seller shall assist Lannett in its preparation of any documents or other materials which may be required by the FDA and/or any other regulatory authority to validate, sell and/or distribute the Product to be supplied by Seller under this Agreement.

3.4.Required Changes. In the event Lannett is required to change the Product Specifications pursuant to applicable laws or in response to the order or request of the FDA or another applicable regulatory authority, no prior consent of Seller shall be necessary to effect the changes of packaging materials and appearance of the Product. Seller shall be informed by Lannett within five (5) business days after the receipt of the request from the FDA or another applicable regulatory authority. In the event Lannett wishes to change Product Specifications absent a legal requirement to make such change, Lannett shall deliver to Seller written notice of any required changes to the Product Specifications, and Seller shall use its commercially reasonable efforts to make such changes to the Product Specifications. Seller shall cooperate with Lannett in good faith to implement all changes to the Product Specifications as soon as practicable after notice thereof. If any change to Product Specifications requested by Lannett materially affects Seller’s costs of producing the Product, then Seller shall promptly so inform Lannett in writing and the parties shall negotiate, in good faith, an adjustment to the Price paid by Lannett for Product under this Agreement. If the parties cannot mutually agree on an adjustment to the Price, then either Seller or Lannett may terminate this Agreement on not less than ninety (90) days prior written notice, without any further obligation to the other party; provided, however, that Lannett shall remain liable for all sums owed to Seller for orders of Product that were placed prior to the date of termination.

3.5.Inspection of Product. Within sixty (60) calendar days of the arrival of each lot of Product at the U.S. location designated by Lannett, Lannett shall inspect and test each lot of Product at its own cost and expense. If, upon inspecting and testing the Product, Lannett determines that a Product lot does not materially conform to the Product Specifications or to any of the warranties contained in Section 4.1 (any quantity of such Product, the “Non-Conforming Product”), then Lannett shall, within such sixty (60) day period, in the case of any defects readily observable based on visual inspection of the packaged Product or the accompanying certificates, give Seller written notice of such Non-Conforming Product (setting forth the details of such non-conformity).

3.6.Latent Defects. The parties acknowledge that it is possible for Product to have manufacturing defects that are not discoverable through industry standard physical inspection and which render the Product not usable in the ordinary course of Lannett’s business or not fit for its intended purpose (hereinafter referred to as “Latent Defects”). Latent Defects may include, by way of illustration and not definition or limitation, loss of potency/stability, discoloration, contamination with foreign matter or substances or other manufacturing defects. Seller shall remain solely responsible for all such Latent Defects that are directly attributable to the manufacture of Product. If any party discovers or becomes aware of a Latent Defect in any Product manufactured by Seller and shipped to or for the benefit of Lannett, it shall promptly

-6-

121181118.v1

notify the other party. Nonetheless, Lannett agrees that Seller shall not be liable for any loss or damages resulting from the inappropriately stored or transported the Product by Lannett in a storage condition other than what is provided by the Specification after the Product is delivered to Lannett.

3.7.Disputes. Seller shall respond in writing to a rejection notice for Non-Conforming Product or Product with a Latent Defect from Lannett within ten (10) days from the date of receipt of such rejection notice in accordance with Sections 3.5 and 3.6 above. If Seller fails to respond within such time period, Seller shall be deemed to have accepted such rejection and to agree with the basis therefor. If Seller does not agree with Lannett’s determination that such Product fails to conform to the Product Specifications or the warranties provided by Seller in Section 4.1, then Seller and Lannett shall use reasonable efforts to resolve such disagreement as promptly as possible. Without limiting the foregoing, if such disagreement cannot be resolved within fourteen (14) days following Seller’s notice that it disagrees with Lannett’s determination, disputes between the parties as to whether all or any part of a shipment rejected by Lannett materially conforms to the Product Specifications shall be resolved by a mutually acceptable independent third party testing laboratory approved by the FDA and the determination of such laboratory as to whether such Product was non-confirming shall be final and binding on the parties. Seller shall pay all the fees of the independent third party laboratory, unless the third party testing laboratory determines that the delivered Product materially conforms to the Product Specifications, in which case Lannett shall pay all the fees of such third party laboratory.

3.8.Refunds; Replacement of Product.Product accepted by Seller as not meeting the applicable requirements from the FDA or another applicable regulatory authority and/or the Product Specifications agreed by both Parties previously, or which is determined by the independent third party laboratory not to meet such requirements and/or the Product Specifications, shall be returned by Lannett to Seller, or disposed of, as directed by Seller and at Seller’s sole cost and expense (including, but not limited to, the cost of labor and supplies to manufacture the replacement quantity, and all shipping costs and expenses to deliver such replacement quantity). At Lannett’s election, Seller shall either (a) if approved by Lannett in writing, replace all such rejected Product as promptly as practicable, but in any event, within sixty (60) days after its receipt of Lannett’s notice of such rejection or the resolution of any dispute relating to such notice or (b) promptly refund to Lannett any amount paid by Lannett for such rejected Product or, if such Product has not been paid for, cancel any outstanding invoice (or portion thereof) relating to such Product. Without limiting any other provision in this Agreement, Lannett may withhold payment for such shipment or the portion thereof that has been rejected by Lannett pursuant to Section 3.5 and 3.6 pending the resolution of any dispute relating thereto, and in the event that the rejected Product is determined to be non-conforming pursuant to Section 3.7, then Lannett shall have no obligation to make any payment for such shipment of Product. If Lannett does not elect to have any rejected Product replaced by Seller, the quantity of Product that Lannett is obligated to purchase hereunder for the period in which such rejected Product was delivered shall be reduced by the quantity of Product so rejected.

3.9.FDA Delays. To the extent that the FDA and/or any other applicable regulatory authority acts inordinately slowly in approving any Product, clearing paperwork or otherwise

-7-

121181118.v1

releasing Product to Lannett, Lannett and Seller shall confer and cooperate with each other on the effect that such delay may have on any obligations arising under this Agreement.

3.10.Gap Analysis for New Facility. For each regulatory approval required by the FDA to develop and commercialize the Product, the Seller agrees to provide a “gap analysis”, performed by a third party approved by Lannett. The analysis will compare the New Facility design and standards, quality system requirements, operating, environmental and procedural requirements to the standards of the FDA, and will contain proposed modifications to the facility and manufacturing processes (the “Modification Plan”). Each Modification Plan, if requested by Lannett, will be constructed and performed by the Seller and reported to the Supply Chain Committee. The Supply Chain Committee will review each Modification Plan progress, its deliverables and timelines. The Supply Chain Committee will communicate progress of each Modification Plan to the Seller and Lannett over the lifetime of each Modification Plan.

3.11.Right of Audit. Lannett and its representativesshall have the right to audit Seller for compliance with applicable regulatory requirements, including, but not limited to, cGMPs, at reasonable intervals and upon reasonable notice. Such audits shall be scheduled at mutually agreeable times.

3.12.Inspection of Facilities by Lannett. Lannett shall have the right to inspect, at all reasonable times, during normal business hours, upon fifteen (15) days’ advance notice or on less notice if reasonably required in order to timely respond to or comply with inquiries from or requirements imposed by any applicable regulatory authority, the operations and facilities wherein any Product is manufactured, packaged, tested, labeled and/or stored for shipping. All Product manufactured by Seller shall be subject to approval by Lannett’s quality assurance group or such other technical representatives as Lannett may select, with respect to whether or not each batch of Product meets the Product Specifications and complies with all warranties contained in this Agreement. Seller covenants and agrees that the New Facility shall be in compliance with all applicable laws and cGMPs and that such New Facility shall be available for FDA inspection if and when the FDA so requests.

3.13.Regulatory Inspection.

(a)Regulatory Actions. Seller shall permit the FDA and other regulatory authorities, as applicable, to conduct such inspections of the New Facility, and/or any other facility at which any of the manufacturing or processing activities relating to the Drug Substance or Product are performed, as such regulatory authorities may request, including pre-approval inspections, and shall cooperate with such regulatory authorities with respect to such inspections and any related matters, in each case in relation to the manufacture and supply of Drug Substance and Product. Seller shall (a) give Lannett prior written notice, as far in advance as practicable, of any such inspections related to the Product or that could reasonably be expected to have implications for Seller’s obligations under this Agreement; (b) permit a representative of Lannett to be present at any such inspection contemplated by clause (a); (c) provide Lannett with a copy of any report(s), notices, findings or other documentation received from the FDA or other regulatory authority within five(5) business days following such inspection, which may be redacted to remove information that is unrelated to the Product and that relates to matters that

-8-

121181118.v1

could not reasonably be expected to affect Seller’s performance of this Agreement; and (d) otherwise keep Lannett informed about the results and conclusions of each such regulatory inspection, including any actions taken by Seller to remedy any conditions cited in such inspections related to the Drug Substance or Product.

(b)Regulatory Responsibilities. Seller will, at its own cost and expense, continue to own and maintain the applicable regulatory approvals necessary to market the Product in the US. Seller shall be responsible for all regulatory and safety reporting requirements associated with ownership of the regulatory approvals, including, without limitation, Periodic Adverse Drug Experience Reports and Annual Reports mandated by the applicable laws in the US. Additionally, Seller shall be responsible for complying with applicable laws to appropriately categorize and report changes to the FDA, including without limitation, amendments, supplements, and Annual Reports. All communications by Seller with the FDA relating to the Product as marketed in the US shall be promptly provided in writing to Lannett, and Seller shall promptly provide Lannett copies of all documents sent to or received from the FDA regarding the Product.

(c)Labeling. Seller shall be responsible for the creation, content, and printing of the labeling for the Product. Seller shall send Lannett all labeling materials for the Product (e.g., package insert, instruction for use, container label, carton label, medication guide, patient labeling, etc.) in final format for Lannett’s review and final written approval. Seller is responsible for ensuring the most current labeling content is consistent with the BLA approval and all requested FDA updates and used on Product supplied to Lannett. Seller is responsible for notifying Lannett within three (3) business days of any FDA communication requesting changes to labeling materials and changes required by 21CFR601.12. Seller will provide Lannett with a copy of all FDA communications related to labeling. All changes to labeling materials for the Product require Lannett’s review and final written approval. Labeling materials that have not been subject to Lannett’s review and written approval are prohibited to be used on Product supplied to Lannett. Seller is responsible for submitting the content of labeling in Structured Product Labeling (“SPL”) format to the FDA for Lannett’s NDC numbers within fourteen (14) days of BLA approval to ensure proper drug listing. Seller is also responsible for submitting updated SPL files within fourteen (14) days when labeling changes are made and approved and as required by applicable laws.

(d)Monitoring Adverse Events. Seller shall be responsible for all safety reporting requirements associated with ownership of the BLA approval mandated by the laws in the US. The Parties shall enter into a separate Safety Data Exchange Agreement (“SDEA”). The SDEA shall be executed as early as possible but no later than the date of first commercial marketing of the Products covered by the present Agreement. To the extent there are any inconsistencies or conflicts between this Agreement and the SDEA, the terms and conditions of this Agreement shall control unless specifically otherwise agreed to in writing by the Parties. Notwithstanding the foregoing, in matters regarding safety reporting, the terms of the SDEA shall supersede those in this Agreement. Seller, as the owner of the BLA for the Product, shall be solely responsible for FDA reporting in relation to the Product.

-9-

121181118.v1

(e)Cooperation. Without limiting the foregoing, each of Seller and Lannett shall provide to each other in a timely manner with all information which the other Party reasonably requests regarding the Product in order to enable the other Party to comply with all laws applicable to the Product in the US. Each of Seller and Lannett shall provide to the other or, if applicable, directly to the FDA, any assistance and all documents reasonably necessary to enable the other to carry out its obligations under this Section 3.13. In general, requests for cooperation should be responded to by the other Party within three (3) Business Days and both should make responsible efforts to ensure that cooperation is maintained to ensure completion of the given project.

(f)Recalls, Etc. Any recalls, withdrawals, field alerts or similar actions involving the Product shall, as between the Parties, be controlled solely by Lannett; provided, however, that if Seller reasonably believes any such action may be necessary by virtue of any Product provided under this Agreement, Seller shall immediately notify Lannett in writing. Seller shall provide assistance to Lannett (and/or its designee), as reasonably requested by Lannett, in conducting such action, including providing all pertinent records that may assist Lannett in effecting such recall or other action. In the case of a recall, withdrawal, field alert or similar action involving the Product which is subject to indemnification by Seller under Section 6, Seller will reimburse the Lannett for any out-of-pocket cost reasonably expended by Lannett to effect the recall and the replacement of the Product without charge; provided, however, that in no event Seller will reimburse the out-of-pocket cost for the recalls resulting from the inappropriately stored or transported Product by Lannett in the storage condition other than what is provided by the Specification after the Product is delivered to Lannett. The losses caused by the recalls shall be incurred solely by the party that is responsible for the recalls and the losses shall be calculated according to the commercialization price of per unit multiplies the recall quantity of the Product.

3.14.Representative in New Facility. With respect to the New Facility, Lannett will have the option to have one (1) representative of Lannett or its Affiliates on site until the expiration or termination of the Collaboration Agreement. Lannett’s representative will, strictly for the purpose of ensuring compliance with cGMPs: (i) have full access to the validation master plan for the New Facility and the manufacturing operations and laboratories (including facilities, equipment, documentation, and personnel) utilized for the manufacture of Drug Substance when Drug Substance is being produced, tested, or released, (ii) have the option to participate in batch record reviews, deviation investigations, customer complaints, quality incidents, and other such activities related to the release of Drug Substance, (iii) will have the ability to convene periodic meetings with representatives of HEC with respect to manufacture of Drug Substance, (iv) participate in routine and for-cause quality audits, (v) review validation data for systems and processes relevant to Drug Substance, (vi) ensure appropriate quality metrics are tracked and trended to identify adverse quality trends in both Drug Substance and systems, (vii) participate in scheduled periodic cGMP audits, (viii) participate with the site supply chain team to review manufacturing schedules and provide input, and (ix) participate in joint capacity review meetings to be conducted at least annually based on HEC’s forecasts. The costs or expenses incurred by Lannett from the outside representative of Lannett or its Affiliates that involved in the activities listed in the clause (i) through (ix) above, if applicable, shall be borne solely by Lannett and, for

-10-

121181118.v1

clarify, not part of Lannett’s Financial Responsibility, the Share Development Costs, or Profit & Loss Share.

4.Warranties.

4.1.Seller’s Warranties. Seller represents and warrants to Lannett that:

(a)It has full right and power to enter into this Agreement and perform its obligations hereunder in accordance with its terms;

(b)The Product and all components and ingredients thereof shall be manufactured and delivered in strict compliance with: (i) the Product Specifications; (ii) the terms of this Agreement; (iii) the methods processes and procedures, including the site manufacture, together with all applicable regulatory requirements relating to the manufacture of the Product; (iv) all applicable United States state and federal laws, rules and regulations, including, but not limited to, the provisions of the United States Federal Food, Drug and Cosmetic Act (the “FFDCA”), and Public Health Service Act and The Patient Production and Affordable Care Act as amended from time to time (collectively, the “Acts”), and cGMPs; and (v) all quality control procedures and associated test methods for the manufacturing process as developed by Seller in conformance with the Quality Agreement (defined below) attached hereto and incorporated by reference herein as Exhibit E and acceptance specifications and test methods for the Product as jointly approved by Seller and Lannett;

(c)The Product does not include any components or ingredients that would cause the Product to degrade over time;

(d)Seller shall not deviate from manufacturing Product in accordance with Section 4.1(b) without the prior written consent of a duly authorized representative of Lannett;

(e)Good and valid title to the Product will pass to Lannett upon delivery by Seller to Lannett at the shipping address set forth in the applicable Purchase Order, free and clear of all third party liens, security interests, claims and/or encumbrances of any kind or nature;

(f)All manufacturing, packaging and testing procedures utilized under this Agreement have been or shall be validated under the Acts.

(g)Prior to Lannett issuing its first Purchase Order to Seller pursuant to this Agreement (and in any event, within ninety (90) days after the Effective Date), the Parties shall enter into an agreement specifying the Parties’ respective responsibilities for storage, release, quality control and quality assurance with respect to the Product (the “Quality Agreement”). The Quality Agreement is not intended and shall not be construed to limit any of the rights and obligations of the parties set forth in this Agreement. Subject to the foregoing, to the extent possible, the Quality Agreement will be interpreted with the terms set forth in this Agreement. If there is any conflict or inconsistency between the terms of the Quality Agreement and the terms set forth in this Agreement, however, the terms set forth in this Agreement shall control;

-11-

121181118.v1

(h)The Product has a shelf life of three (3) years. All Product supplied by Seller under this Agreement shall have eighty percent (80%) of its maximum shelf life remaining at the time of delivery of such Product to Lannett (or its designee);

(i)Seller has obtained and, at all times during the term of this Agreement, shall maintain, all registrations, permits, licenses and approvals required by regulatory authorities and other governmental authorities in order for Seller to manufacture and supply Product to Lannett, and otherwise to perform its obligations, under this Agreement and in accordance with applicable laws; and

(j)Neither Seller, nor any of its Affiliates, nor any of their respective employees have been “debarred” or suspended by the FDA, or subject to a similar sanction from any regulatory authority in any jurisdiction outside the United States, nor have debarment proceedings against Seller, any of its Affiliates, or any of their respective employees been commenced. Seller shall not, in the performance of its obligations, under this Agreement use the services of any person so “debarred” or suspended.

4.2.Lannett’s Warranties. Lannett represents and warrants to Seller that:

(a)It has the full right and power to enter into this Agreement and perform its obligations hereunder in accordance with its terms; and

(b)All processing, packaging and testing procedures utilized under this Agreement have been or shall be validated under the Acts.

4.3.Mutual Warranties. Each party represents and warrants to the other party that it holds all necessary and required permits and authorizations, including, but not limited to, those required by the Acts, and shall undertake throughout the term of this Agreement to maintain the same in full force and effect. Each party further covenants that it shall use commercially reasonable efforts to obtain all such other permits and authorizations as may be reasonably required from time to time in either case to operate their respective facilities and/or businesses in order to manufacture, provide, distribute and/or sell Product hereunder.

4.4.No Adulteration. For the purposes of Section 303(c) of the FFDCA: (a) Seller guarantees to Lannett that all Product shipped by or on behalf of Seller hereunder will not, on the date of shipment, be adulterated or misbranded (i) within the meaning of the FFDCA, or (ii) within the meaning of any applicable state law in which the definitions of “adulteration” and/or “misbranding” are substantially the same as those contained in the FFDCA, the provisions of which are in effect at the time of such shipment, and will not be an article which may not, under the provisions of Section 404 or 505 of the FFDCA, be introduced into interstate commerce; and (b) Lannett guarantees to Seller that all Product shipped by or on behalf of Lannett hereunder will not, on the date of shipment, be adulterated or misbranded (i) within the meaning of the FFDCA, or (ii) within the meaning of any applicable state law in which the definitions of “adulteration” and/or “misbranding” are substantially the same as those contained in the FFDCA, the provisions of which are in effect at the time of such shipment, and will not be an article

-12-

121181118.v1

which may not, under the provisions of Section 404 or 505 of the FFDCA, be introduced into interstate commerce.

5.Confidentiality.

5.1.Confidentiality. Each party agrees to retain in confidence all proprietary and confidential information of the others disclosed to it pursuant to this Agreement, whether such disclosure occurred before or after the date hereof. Disclosed information shall not be deemed confidential hereunder if: (a) it is now or later becomes publicly known, other than through the fault of the receiving party; (b) it is known to the receiving party prior to the time of disclosure; (c) it is rightfully obtained by the receiving party from a third party without restriction and without breach of this Agreement or any similar agreement; (d) it is independently developed by the receiving party without access to the disclosing party’s information; and/or (e) it is required to be disclosed by order of a court of competent jurisdiction, administrative agency or governmental body, or by subpoena, summons or other legal process, or by law, rule or regulation; provided that, prior to such disclosure, the disclosing party is given reasonable advance notice of such order and an opportunity to object to such disclosure and the receiving party cooperates with the disclosing party to take whatever action it may deem appropriate to protect the confidentiality of the information and furnishes only that portion of the disclosing party’s confidential information that the receiving party is legally required to furnish. The confidentiality of disclosed proprietary and confidential information and the obligation of confidentiality hereunder shall survive any expiration or termination of this Agreement and shall expire five (5) years following termination or expiration of this Agreement. The parties specifically agree that all terms of this Agreement, all sales and Product requirements and costs and all Purchase Orders shall be deemed to be confidential; provided, however, that this sentence shall not apply to any person or entity that desires to acquire or merge with or into either party, so long as such person or entity enters into a confidentiality agreement or non-disclosure agreement on terms no less stringent than those set forth herein. Lannett agrees that all information observed or obtained by Lannett during Lannett’s inspection of Seller’s facility pursuant to Section 3.12 of this Agreement is confidential information no matter whether the information is in writing or not in writing.

5.2.Public Announcements. During the term of this Agreement, neither party hereto shall issue or release, directly or indirectly, any press release, marketing material or other communication to or for the media or the public that pertains to this Agreement, the Product or the transactions contemplated hereby (collectively, a “Press Release”) unless the content of such Press Release has been approved by the other party hereto, such approval not to be unreasonably withheld or delayed; provided, however, that nothing contained in this Agreement shall prevent or preclude any party from making such disclosures as may be required by applicable law, including, but not limited to, any disclosures required by applicable securities laws.

6.Indemnification.

6.1.Lannett shall indemnify, defend and hold Seller and its officers, directors, affiliates, agents and employees harmless from and against any and all third party claims, demands, costs, expenses, losses, liabilities and/or damages (including, but not limited to,

-13-

121181118.v1

reasonable attorneys’ fees and court costs) of every kind and nature caused by or resulting from Lannett’s or its officers, directors, affiliates, agents and employee’s negligence relating to, or breach of, this Agreement; provided, however, that in no event shall this Section 6.1 apply to any claim covered by Sections 6.2 or 6.3 below and Lannett shall not have any liability or indemnification obligation hereunder to the extent any such allegation is caused by the negligence, gross negligence or willful misconduct of Seller or its officers, directors, agents and/or employees.

6.2.Seller shall indemnify, defend and hold Lannett and its officers, directors, affiliates, agents and employees harmless from and against any and all claims, demands, costs, expenses, losses, liabilities and/or damages (including, but not limited to, third party claims, reasonable attorneys’ fees and court costs) of every kind and nature caused by or resulting from Seller or its officers, directors, affiliates, agents and employee’s negligence relating to, or breach of, this Agreement, misrepresentation, breach of warranty and any claim for personal or bodily injury (including death) arising from Seller’s failure to manufacture the Product in accordance with the Product Specifications and applicable laws; provided, however, that in no event shall this Section 6.2 apply to any claim covered by Sections 6.1 above and Seller shall not have any liability or indemnification obligation hereunder to the extent any such allegation is caused by the negligence, gross negligence or willful misconduct of Lannett or its officers, directors, agents and/or employees.

6.3.Seller shall also indemnify, defend and hold Lannett and its officers, directors, affiliates, agents and employees harmless from and against any and all claims, demands, costs, expenses, losses, liabilities, and/or damages (including, but not limited to, third party claims, reasonable attorneys’ fees and court costs) of every kind and nature incident to or resulting directly or indirectly from any allegation that Product, or the manufacture and/or processing thereof, infringes upon or violates any patent, copyright, trade secret or other intellectual property right of any third party; provided, however, that in no event shall this Section 6.3 apply to any and all claims, demands, costs, expenses, losses, liabilities, and/or damages of every kind and nature incident to or resulting directly or indirectly from any allegation that the injection drug delivery device, or the assembly and/or use thereof, infringes upon or violates any patent, copyright, trade secret, trademark or other intellectual property right of any third party and Seller shall not have any liability or indemnification obligation hereunder.

6.4.Each party will promptly notify the other of any actual or threatened judicial or other proceedings which could involve either or both parties. Each party reserves the right to defend itself in any such proceedings; provided, however, that, if indemnity is sought, then the party from whom indemnity is sought shall have the right to control the defense of the claim (provided that such claim is solely for monetary damages and the indemnifying party agrees to pay all damages relating to such matter, as evidenced in a written confirmation delivered by the indemnifying party to the indemnified party), and the indemnified party may participate with counsel of its choice at its own expense. The parties shall cooperate with each other to the extent reasonably necessary in the defense of all actual or potential liability claims and in any other litigation relating to the Product supplied pursuant to this Agreement. Each party will supply information to the other relevant to any product liability claims and litigation affecting the Product and/or the Product, as the case may be.

-14-

121181118.v1

7.Insurance. Unless the parties otherwise agree in writing, the following terms shall apply:

7.1.Beginning on the commencement of the first Clinical Trial of a Product and thereafter during the term of this Agreement and for a period one (1) year after any expiration or termination of this Agreement, each of Lannett and Seller shall maintain in full force and effect a comprehensive general liability insurance policy, including coverage for products liability, contractual liability, bodily injury (including death) and property damage, with minimum limits of at least Five Million U.S. Dollars ($5,000,000) per claim and Ten Million U.S. Dollars ($10,000,000) annual aggregate.

7.2.On or before the date on which Lannett begins to sell the Product in the United States, each party shall deliver to the other party a Certificate of Insurance with a broad form vendors endorsement naming such other party as an additional insured to verify the coverage required by this Agreement, which endorsement provides a thirty (30) day written notice of cancellation, termination or non-renewal to each of Lannett and Seller. Each party shall maintain such endorsement in effect for so long as Lannett ships, stores and/or delivers any Product under this Agreement and for a period of one (1) year thereafter. Each party agrees to promptly renew all insurance policies in a timely manner and so notify the other party with certificates evidencing same. Each party further agrees to notify the other party at least thirty (30) days in advance of any proposed cancellation, termination or non-renewal of any such policies.

8.Term and Termination.

8.1.Termination. Unless terminated in accordance with the provisions of Section 8.2 below, the term of this Agreement shall commence on the Effective Date and shall terminate upon the expiration or termination of the Collaboration Agreement.

8.2.Continuing Obligations; Survival. In no event shall any termination or expiration of this Agreement excuse either party from any breach or violation of this Agreement and full legal and equitable remedies shall remain available therefor, nor shall it excuse either party from making any payment due under this Agreement with respect to any period prior to the date of expiration or termination. Notwithstanding any provision of this Agreement to the contrary, Sections 3.5, 3.6, 3.8, 3.9, 4, 5, 6, 7, 8.2, 9, 11, and 12 hereof shall survive any termination or expiration of this Agreement.

9.Agreement to Consummate; Further Assurances. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use commercially reasonable efforts to do all things necessary, proper or advisable under this Agreement, applicable laws and regulations to consummate and make effective the transactions contemplated hereby. If, at any time after the date hereof, any further action is necessary, proper or advisable to carry out the purposes of this Agreement, then, as soon as is reasonably practicable, each party to this Agreement shall take, or cause its proper officers to take, such action.

10.Annual Facility and Regulatory Fees. Any facility fees and regulatory expenses required to certify and maintain FDA approval of the manufacturing facilities for the Product (collectively, the “Facility Fees”), are the sole responsibility of the Seller. Seller acknowledges

-15-

121181118.v1

that it is a violation of U.S. federal law to ship Product in interstate commerce or to import Product into the United States if manufactured in a facility that has not met its obligations to self-identity or to pay fees when they are due.  Seller will indemnify and hold harmless Lannett for any and all costs, fees, fines or penalties paid by Lannett associated with Seller’s failure to self-identify or to pay Facility Fees when due during the term. 

11.Force Majeure. Any delay in the performance of any of the duties or obligations of either party hereto (except for the payment of money) caused by an event outside the affected party’s reasonable control shall not be considered a breach of this Agreement and the time required for performance shall be extended for a period equal to the period of such delay. Such events shall include, but will not be limited to, acts of God, acts of a public enemy, acts of terrorism, insurrections, riots, injunctions, embargoes, fires, explosions, floods, or any other unforeseeable causes beyond the reasonable control and without the fault or negligence of the party so affected. The party so affected shall give prompt written notice to the other party of such event, and shall take whatever reasonable steps are appropriate in that party’s reasonable discretion to relieve the effect of such event as rapidly as possible.

12.General Provisions.

12.1.Assignment. Neither this Agreement nor any interest herein may be assigned, in whole or in part, by either party without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except that either party may assign its rights and obligations under this Agreement: (a) to an affiliate, division or subsidiary of such party; and/or (b) to any third party that acquires all or substantially all of the stock or assets of such party, whether by asset sale, stock sale, merger or otherwise, and, in any such event such assignee shall assume the assignor’s obligations hereunder. However, notwithstanding any such assignment, the assignor shall remain liable under this Agreement (in addition to the assignee) unless such liability is specifically waived in writing by the other party hereto. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns.

12.2.Notice. Any notice or other communication required or permitted to be made or given by either party pursuant to this Agreement shall be in writing in English and will be deemed to have been duly given: (i) five (5) business days after the date of mailing if sent by registered or certified U.S. mail, postage prepaid, with return receipt requested; or (ii) upon receipt, if sent by email or by facsimile (with confirmation of transmission); or (iii) when delivered, if delivered personally or sent by national overnight delivery service. All notices will be sent to the other party at its address as set forth below or at such other address as such party will have specified in a notice given in accordance with this Section:

If to Seller, then to: HEC Pharm US Inc. 2 Enfield Circle, West Windsor, NJ, 08550 Attn: Kevin Kong Email: kongweiheng@yahoo.com__

-16-

121181118.v1

with a copy, sent as provided herein, to:	Hill Wallack LLP 21 Roszel Rd, Princeton, NJ 08540 Attention: Quinn Zhao Telephone: (609) 924-0808
If to Lannett, then to:	Lannett Company, Inc. 9000 State Road Philadelphia, PA 19136 USA Attn: Legal Department Facsimile: (215) 464-1861 Email: samuel.israel@lannett.com

12.3.Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges all prior discussions and negotiations between them, and neither party shall be bound by any conditions, definitions, warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or as duly set forth on or subsequent to the date hereof in writing and signed by a proper and duly authorized officer or representative of the parties to be bound thereby.

12.4.Amendment and Modification. This Agreement may be amended, modified and supplemented only by written agreement duly executed and delivered by each of the parties hereto.

12.5.Waiver. The failure of any party to exercise any right or to demand the performance by the other party of duties required hereunder shall not constitute a waiver of any rights or obligations of the parties under this Agreement. A waiver by any party of a breach of any of the terms of this Agreement by any other party shall not be deemed a waiver of any subsequent breach of the terms of this Agreement.

12.6.Dispute Resolution. The parties agree that any disputes arising with respect to the interpretation, enforcement, termination or invalidity of this Agreement (each, a “Dispute”) shall first be presented to the parties’ respective Executive Officers (as defined in the Collaboration Agreement) for resolution. If the parties are unable to resolve a given dispute pursuant to this Section 12.6 after in-person discussions between the Executive Officers within ten (10) business days after referring such dispute to the Executive Officers, either party may, at its sole discretion, seek resolution of such matter in accordance with Section 12.7.

12.7.Submission to Arbitration for Resolution. Subject to Section 12.6, any Disputes shall be submitted to binding arbitration under the Rules of Arbitration (the “Rules”) of the International Chamber of Commerce (“ICC”). The arbitration shall be conducted by a tribunal of arbitrators experienced in the business of pharmaceuticals. The tribunal shall be compromised of three (3) arbitrators, one of whom shall be nominated by each Party and a third of whom, who shall serve as the presiding arbitrator, shall be nominated by mutual agreement of the two party-nominated arbitrators. If the two party-nominated arbitrators do not nominate the third arbitrator

-17-

121181118.v1

within thirty (30) days of the second arbitrator’s appointment, then the third arbitrator shall be appointed by the International Court of Arbitration of the ICC. If the issues in dispute involve scientific, technical or commercial matters, the arbitrators chosen hereunder shall engage experts that have educational training or industry experience sufficient to demonstrate a reasonable level of relevant scientific, medical and industry knowledge, as necessary to resolve the dispute. Within thirty (30) days after initiation of arbitration, the Parties shall select the arbitrators. The arbitration proceeding shall be conducted in the English language. That is, neither Party shall be requested to provide any documents or other evidence beyond the documents and other evidence that each Party chooses to submit in support of its case. The place of arbitration shall be Singapore. The award of such arbitration shall be conclusive and binding on the Parties, and judgment upon the award may be entered in any court having jurisdiction thereover. All costs of the arbitration shall be borne in accordance with the Rules and, if different, according to the award rendered, but each Party shall be responsible for its own legal and other costs.

12.8.Governing Law. This Agreement is to be governed by and construed in accordance with the laws of Hong Kong, notwithstanding any conflict of law principles to the contrary. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. The parties waive any and all rights to have any dispute, claim or controversy arising out of or relating to this Agreement tried before a jury.

12.9.Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had not been contained herein.

12.10.Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event of any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. As used in this Agreement, the singular shall include the plural and vice versa, and the terms “include” and “including” shall be deemed to be immediately followed by the phrase “but not limited to.” The terms “herein” and “hereunder” and similar terms shall be interpreted to refer to this entire Agreement, including any schedules attached hereto.

12.11.Relationship of the Parties. Neither party shall hold itself out to third parties as possessing any power or authority to enter into any contract or commitment on behalf of any other party. This Agreement is not intended to, and shall not, create any agency, partnership or joint venture relationship between or among the parties. Each party is an independent contractor with respect to the others. No party is granted any right or authority to assume or create any obligation or responsibility, express or implied, on behalf of, or in the name of any other party hereto, or to bind any other party hereto in any manner or with respect to anything, whatsoever.

-18-

121181118.v1

12.12.Captions. The captions and headings in this Agreement are inserted for convenience and reference only and in no way define or limit the scope or content of this Agreement and shall not affect the interpretation of its provisions.

12.13.Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. The delivery of a facsimile signature or e-mail signature shall have the same force and effect as the delivery of an original signature.

12.14.Subcontractors. Any work that is to be done by any party under this Agreement may be subcontracted to a third party upon prior written consent of the other party and in accordance with the approved Biologics License Application, cGMPs and any applicable FDA guidelines which relate to the work to be performed under the direction and supervision of such party, as the case may be; provided, however, that, as between the parties hereto, the subcontracting party shall be and remain responsible for all acts and omissions of any such subcontractor.

12.15.Schedules and Exhibits. All Schedules and Exhibits referenced in this Agreement, if any, are hereby incorporated by reference into, and made a part of, this Agreement.

12.16.Currency. All sums set forth in this Agreement and any appendices, exhibits or schedules hereto are, and are intended to be, expressed in United States dollars.

-19-

121181118.v1

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

SELLER: SUNSHINE LAKE PHARMA CO., LTD By: /s/ Wejia Li​ ​ Name: Wenjia Li​ ​ Its: Vice President​ ​ Date: February 06, 2021​ ​ LANNETT: LANNETT COMPANY, INC. By: /s/ Tim Crew​ ​ Name: Tim Crew ​ ​ Its: CEO ​ ​ Date: February 08, 2021​ ​

121181118.v1

LIST OF EXHIBITS

Exhibit A+Product

Exhibit B+Product Specifications

Exhibit C*Pricing

Exhibit D+Shipping Instructions

Exhibit E+Quality Agreement

_________________________________________

* This Exhibit have been redacted to preserve confidentiality. The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request.

+ This Exhibit has been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to provide further information regarding such omitted materials to the Commission upon request.

121181118.v1

EXHIBIT C

Pricing

[***]

Page 22 of 22

121181118.v1

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy Crew, certify that:

1. I have reviewed this report on Form 10-Q of the Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in shareholders’ equity and cash flows of the Company as of and for the periods presented in this report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting;

5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: May 6, 2021

/s/ Timothy Crew

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John Kozlowski, certify that:

1. I have reviewed this report on Form 10-Q of the Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in shareholders’ equity and cash flows of the Company as of and for the periods presented in this report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting;

5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: May 6, 2021

/s/ John Kozlowski

Vice President of Finance, Chief Financial Officer and Principal Accounting Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lannett Company, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy Crew, the Chief Executive Officer of the Company, and I, John Kozlowski, the Vice President of Finance, Chief Financial Officer and Principal Accounting Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.       The Report complies with the requirements of Section13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 6, 2021	/s/ Timothy Crew
	Timothy Crew,
	Chief Executive Officer
Dated: May 6, 2021	/s/ John Kozlowski
	John Kozlowski,
	Vice President of Finance, Chief Financial Officer and Principal Accounting Officer

XML

Document and Entity Information - shares	9 Months Ended
	Mar. 31, 2021	Apr. 30, 2021
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Mar. 31, 2021
Entity File Number	001-31298
Entity Registrant Name	LANNETT CO INC
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	23-0787699
Entity Address, Address Line One	9000 State Road
Entity Address, City or Town	Philadelphia
Entity Address, State or Province	PA
Entity Address, Postal Zip Code	19136
City Area Code	215
Local Phone Number	333-9000
Title of 12(b) Security	Common Stock
Trading Symbol	LCI
Security Exchange Name	NYSE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		41,446,013
Entity Central Index Key	0000057725
Current Fiscal Year End Date	--06-30
Document Fiscal Year Focus	2021
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Mar. 31, 2021	Jun. 30, 2020
Current assets:
Cash and cash equivalents	$ 81,290	$ 144,329
Accounts receivable, net	114,691	125,688
Inventories	113,074	142,867
Income taxes receivable	40,043	14,419
Assets held for sale	2,678	2,678
Other current assets	18,135	13,227
Total current assets	369,911	443,208
Property, plant and equipment, net	168,844	179,518
Intangible assets, net	160,138	374,735
Operating lease right-of-use assets	10,762	9,343
Deferred tax assets	138,019	117,890
Other assets	14,696	11,861
TOTAL ASSETS	862,370	1,136,555
Current liabilities:
Accounts payable	32,605	32,535
Accrued expenses	4,025	14,962
Accrued payroll and payroll-related expenses	9,758	16,304
Rebates payable	31,848	38,175
Royalties payable	14,541	20,863
Restructuring liability	42	27
Current operating lease liabilities	2,040	1,097
Short-term borrowings and current portion of long-term debt		88,189
Other current liabilities	2,270	2,713
Total current liabilities	97,129	214,865
Long-term debt, net	610,698	592,940
Long-term operating lease liabilities	11,306	9,844
Other liabilities	19,187	16,010
TOTAL LIABILITIES	738,320	833,659
Commitments and contingencies (Notes 11 and 12)
STOCKHOLDERS' EQUITY
Common stock ($0.001 par value, 100,000,000 shares authorized; 40,872,485 and 39,963,127 shares issued; 39,539,798 and 38,798,787 shares outstanding at March 31, 2021 and June 30, 2020, respectively)	41	40
Additional paid-in capital	328,911	321,164
Accumulated deficit	(186,880)	(1,291)
Accumulated other comprehensive loss	(603)	(627)
Treasury stock (1,332,687 and 1,164,340 shares at March 31, 2021 and June 30, 2020, respectively)	(17,419)	(16,390)
Total stockholders' equity	124,050	302,896
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 862,370	$ 1,136,555

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Mar. 31, 2021	Jun. 30, 2020
CONSOLIDATED BALANCE SHEETS
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, authorized shares	100,000,000	100,000,000
Common stock, issued shares	40,872,485	39,963,127
Common stock, outstanding shares	39,539,798	38,798,787
Treasury stock, shares	1,332,687	1,164,340

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales	$ 112,370	$ 144,372	$ 372,769	$ 407,824
Cost of sales	82,063	94,380	298,738	258,699
Amortization of intangibles	3,851	8,316	21,097	23,497
Gross profit	26,456	41,676	52,934	125,628
Operating expenses:
Research and development expenses	5,973	7,441	18,156	23,287
Selling, general and administrative expenses	17,636	22,147	46,502	60,876
Restructuring expenses		191	4,043	1,771
Asset impairment charges		13,989	198,000	15,607
Total operating expenses	23,609	43,768	266,701	101,541
Operating income (loss)	2,847	(2,092)	(213,767)	24,087
Other income (loss):
Loss on extinguishment of debt				(2,145)
Investment income	80	393	168	1,552
Interest expense	(12,631)	(16,177)	(40,613)	(52,163)
Other	18	(380)	23	(181)
Total other loss	(12,533)	(16,164)	(40,422)	(52,937)
Loss before income tax	(9,686)	(18,256)	(254,189)	(28,850)
Income tax benefit	(2,544)	(1,664)	(68,600)	(5,185)
Net loss	$ (7,142)	$ (16,592)	$ (185,589)	$ (23,665)
Loss per common share:
Basic (in dollars per share)	$ (0.18)	$ (0.43)	$ (4.72)	$ (0.61)
Diluted (in dollars per share)	$ (0.18)	$ (0.43)	$ (4.72)	$ (0.61)
Weighted average common shares outstanding:
Basic (in shares)	39,511,296	38,707,049	39,340,670	38,539,850
Diluted (in shares)	39,511,296	38,707,049	39,340,670	38,539,850

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net loss	$ (7,142)	$ (16,592)	$ (185,589)	$ (23,665)
Other comprehensive income (loss):
Foreign currency translation gain (loss)	(8)	(63)	24	(26)
Total other comprehensive income (loss)	(8)	(63)	24	(26)
Comprehensive loss	$ (7,150)	$ (16,655)	$ (185,565)	$ (23,691)

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) shares in Thousands, $ in Thousands	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)	Treasury Stock	Total
Balance, beginning at Jun. 30, 2019	$ 39	$ 317,023	$ 32,075	$ (615)	$ (14,481)	$ 334,041
Balance, beginning (in shares) at Jun. 30, 2019	38,970
Increase (Decrease) in Shareholders' Equity
Shares issued in connection with share-based compensation plans	$ 1	777				778
Shares issued in connection with share-based compensation plans (in shares)	929
Share-based compensation		8,336				8,336
Purchase of treasury stock					(1,854)	(1,854)
Other comprehensive income (Loss)				(26)		(26)
Purchase of capped call		(7,072)				(7,072)
Net loss			(23,665)			(23,665)
Balance, ending at Mar. 31, 2020	$ 40	319,064	8,410	(641)	(16,335)	310,538
Balance, ending (in shares) at Mar. 31, 2020	39,899
Balance, beginning at Dec. 31, 2019	$ 40	317,012	25,002	(578)	(16,304)	325,172
Balance, beginning (in shares) at Dec. 31, 2019	39,852
Increase (Decrease) in Shareholders' Equity
Shares issued in connection with share-based compensation plans		182				182
Shares issued in connection with share-based compensation plans (in shares)	47
Share-based compensation		1,870				1,870
Purchase of treasury stock					(31)	(31)
Other comprehensive income (Loss)				(63)		(63)
Net loss			(16,592)			(16,592)
Balance, ending at Mar. 31, 2020	$ 40	319,064	8,410	(641)	(16,335)	310,538
Balance, ending (in shares) at Mar. 31, 2020	39,899
Balance, beginning at Jun. 30, 2020	$ 40	321,164	(1,291)	(627)	(16,390)	302,896
Balance, beginning (in shares) at Jun. 30, 2020	39,963
Increase (Decrease) in Shareholders' Equity
Shares issued in connection with share-based compensation plans	$ 1	551				552
Shares issued in connection with share-based compensation plans (in shares)	909
Share-based compensation		7,196				7,196
Purchase of treasury stock					(1,029)	(1,029)
Other comprehensive income (Loss)				24		24
Net loss			(185,589)			(185,589)
Balance, ending at Mar. 31, 2021	$ 41	328,911	(186,880)	(603)	(17,419)	124,050
Balance, ending (in shares) at Mar. 31, 2021	40,872
Balance, beginning at Dec. 31, 2020	$ 41	326,939	(179,738)	(595)	(17,389)	129,258
Balance, beginning (in shares) at Dec. 31, 2020	40,832
Increase (Decrease) in Shareholders' Equity
Shares issued in connection with share-based compensation plans		109				109
Shares issued in connection with share-based compensation plans (in shares)	40
Share-based compensation		1,863				1,863
Purchase of treasury stock					(30)	(30)
Other comprehensive income (Loss)				(8)		(8)
Net loss			(7,142)			(7,142)
Balance, ending at Mar. 31, 2021	$ 41	$ 328,911	$ (186,880)	$ (603)	$ (17,419)	$ 124,050
Balance, ending (in shares) at Mar. 31, 2021	40,872

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
OPERATING ACTIVITIES:
Net loss	$ (185,589)	$ (23,665)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	38,345	41,386
Deferred income tax benefit	(20,129)	(2,488)
Share-based compensation	7,196	8,336
Asset impairment charges	198,000	15,607
Gain on sale/disposal of assets	(26)	(821)
Loss on extinguishment of debt		2,145
Amortization of debt discount and other debt issuance costs	9,073	11,001
Provision for inventory write-downs	23,613	8,486
Other noncash expenses	853	1,387
Changes in assets and liabilities which provided (used) cash:
Accounts receivable, net	10,997	(15,604)
Inventories	6,180	(470)
Income taxes receivable/payable	(25,420)	(10,472)
Other assets	(1,423)	3,006
Rebates payable	(6,327)	(2,871)
Royalties payable	(6,322)	5,147
Restructuring liability	15	(2,254)
Operating lease liability	52	(1,005)
Accounts payable	70	20,341
Accrued expenses	(10,937)	1,366
Accrued payroll and payroll-related expenses	(6,546)	(6,803)
Other liabilities	2,530	(1,374)
Net cash provided by operating activities	34,205	50,381
INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(6,599)	(13,105)
Proceeds from sale of property, plant and equipment	51	7,332
Advance to VIE		(250)
Purchases of intangible assets	(4,500)	(27,750)
Net cash used in investing activities	(11,048)	(33,773)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		86,250
Purchase of capped call		(7,072)
Repayments of long-term debt	(78,353)	(129,989)
Proceeds from issuance of stock	552	778
Payment of debt issuance costs	(2,390)	(3,489)
Purchase of treasury stock	(1,029)	(1,854)
Net cash used in financing activities	(81,220)	(55,376)
Effect on cash and cash equivalents of changes in foreign exchange rates	24	(26)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(58,039)	(38,794)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	144,329	140,249
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	86,290	101,455
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	30,670	39,554
Income taxes paid (refunded)	(23,052)	7,775
Accrued purchases of property, plant and equipment	$ 803	$ 2,023

XML

Interim Financial Information

9 Months Ended

Mar. 31, 2021

Interim Financial Information

Interim Financial Information

Note 1. Interim Financial Information

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for the presentation of interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited financial statements do not include all the information and footnotes necessary for a comprehensive presentation of the financial position, results of operations and cash flows for the periods presented. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for the three and nine months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021. These unaudited financial statements should be read in combination with the other Notes in this section; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 2; and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The Consolidated Balance Sheet as of June 30, 2020 was derived from audited financial statements.

XML

The Business and Nature of Operations

9 Months Ended

Mar. 31, 2021

The Business and Nature of Operations

The Business and Nature of Operations

Note 2. The Business and Nature of Operations

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company” or “Lannett”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, nasal and oral solution finished dosage forms of drugs that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the Company.

The Company operates pharmaceutical manufacturing plants in Carmel, New York and Seymour, Indiana. The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations.

COVID-19 Update

In December 2019, the COVID-19 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated COVID-19 a global pandemic. Governments on the national, state and local level in the United States, and around the world, implemented lockdown and shelter-in-place orders, requiring many non-essential businesses to shut down operations. The Company’s business, however, is deemed “essential” and it has continued to operate, manufacture, and distribute its medicines to customers.

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

While COVID-19 has thus far not had a material impact on the Company’s operations, subsequent to an initial stocking up of supplies at the start of the pandemic, the total volume of drug prescriptions being written in the country has decreased causing less demand for our products. We cannot reasonably predict the ultimate impact of COVID-19 on our future results of operations and cash flows due to the continued uncertainty around the duration and severity of the pandemic.

XML

Summary of Significant Accounting Policies

9 Months Ended

Mar. 31, 2021

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP.

Principles of consolidation

The Consolidated Financial Statements include the accounts of Lannett Company, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, returns and other adjustments including a provision for the Company’s liability under the Medicare Part D program. Additionally, significant estimates and assumptions are required when determining the value of inventories and long-lived assets, including intangible assets, income taxes, contingencies and share-based compensation.

Because of the inherent subjectivity and complexity involved in these estimates and assumptions, actual results could differ from those estimates.

Foreign currency translation

The Consolidated Financial Statements are presented in U.S. dollars, the reporting currency of the Company. The financial statements of the Company’s foreign subsidiary are maintained in local currency and translated into U.S. dollars at the end of each reporting period. Assets and liabilities are translated at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. The adjustments resulting from the use of differing exchange rates are recorded as part of stockholders’ equity in accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in foreign currencies are recognized in the Consolidated Statements of Operations under other income (loss). Amounts recorded due to foreign currency fluctuations are immaterial to the Consolidated Financial Statements.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with original maturities less than or equal to three months at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value, and consist of bank deposits and money market funds. The Company maintains its cash deposits and cash equivalents at well-known, stable financial institutions. Such amounts frequently exceed insured limits. In connection with the Amendment No. 4 to the Term Loan B Facility, which is discussed in further detail in Note 10 “Long-Term Debt,” the Company is required to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent. At March 31, 2021, the Company classified this balance as restricted cash, which is included in other assets.

Presented in the table below is a reconciliation of the cash, cash equivalents and restricted cash amounts presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended March 31, 2021 and 2020.

	March 31, 2021		March 31, 2020
Cash and cash equivalents	$	81,290	$	101,455
Restricted cash, included in other assets		5,000		—
Cash, cash equivalents and restricted cash as presented on the Consolidated Statements of Cash Flows	$	86,290	$	101,455

Allowance for doubtful accounts

On July 1, 2020, the Company adopted guidance issued by the FASB in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the Company to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are determined to be uncollectible.

Inventories

Inventories are stated at the lower of cost or net realizable value by the first-in, first-out method. Inventories are regularly reviewed and write-downs for excess and obsolete inventory are recorded based primarily on current inventory levels, expiration date and estimated sales forecasts.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the assets’ estimated useful lives. Repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

Intangible Assets

Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives which commences upon shipment of the product, generally for periods ranging from 5 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred.

Valuation of Long-Lived Assets, including Intangible Assets

The Company’s long-lived assets primarily consist of property, plant and equipment and definite and indefinite-lived intangible assets. Property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances (“triggering events”) indicate that the carrying amount of the asset may not be recoverable. If a triggering event is determined to have occurred, the asset’s carrying value is compared to the future undiscounted cash flows expected to be generated by the asset. If the carrying value exceeds the undiscounted cash flows of the asset, then impairment exists. Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of each fiscal year or more frequently if triggering events indicate that the asset might be impaired.

An impairment loss is measured as the excess of the asset’s carrying value over its fair value, which in most cases is calculated using a discounted cash flow model. Discounted cash flow models are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

In-Process Research and Development

Amounts allocated to in-process research and development in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets subject to impairment testing in accordance with the Company’s impairment testing policy for indefinite-lived intangible assets. As products in development are approved for sale, amounts will be allocated to product rights and will be amortized over their estimated useful lives. Definite-lived intangible assets are amortized over the expected lives of the related assets. The judgments made in determining the estimated fair value of in-process research and development, as well as asset lives, can materially impact our results of operations. The Company’s fair value assessments are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

Segment Information

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

	Three Months Ended				Nine Months Ended
(In thousands)	March 31,				March 31,
Medical Indication	2021		2020		2021		2020
Analgesic	$	3,836	$	2,811	$	10,528	$	6,806
Anti-Psychosis		11,678		27,858		38,023		78,588
Cardiovascular		16,573		21,746		52,623		67,325
Central Nervous System		24,509		18,566		71,648		57,154
Endocrinology		6,822		—		19,551		—
Gastrointestinal		16,817		20,745		52,492		56,020
Infectious Disease		10,610		21,749		55,586		51,722
Migraine		5,169		12,886		20,942		32,907
Respiratory/Allergy/Cough/Cold		2,548		2,966		6,241		8,747
Urinary		1,566		1,149		4,385		2,817
Other		8,617		8,051		24,661		27,847
Contract manufacturing revenue		3,625		5,845		16,089		17,891
Total net sales	$	112,370	$	144,372	$	372,769	$	407,824

Customer, Supplier and Product Concentration

The following table presents the percentage of total net sales, for the three and nine months ended March 31, 2021 and 2020, for certain of the Company’s products, defined as products containing the same active ingredient or combination of ingredients, which accounted for at least 10% of net sales in any of those periods:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Product 1	8	%	11	%	13	%	10	%
Product 2	8	%	17	%	8	%	18	%

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

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Customer A	29	%	29	%	27	%	25	%
Customer B	20	%	21	%	21	%	24	%
Customer C	13	%	12	%	12	%	11	%

Revenue Recognition

The Company complies with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when (or as) we satisfy our performance obligations by transferring a promised good or service to a customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. The revenue standard impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time.” However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position.

When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments. These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual. Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.

Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity. While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions. Each major category is discussed in detail below:

Chargebacks

The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health, AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their Food and Drug Administration (“FDA”) approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug application ("ANDA’). Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

Returns

Consistent with industry practice, the Company has a product returns policy that allows customers to return product within a specified time period prior to and subsequent to the product’s expiration date in exchange for a credit to be applied to future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices, credit terms and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve for returns increases as net sales increase.

Other Adjustments

Other adjustments consist primarily of “price adjustments”, also known as “shelf-stock adjustments” and “price protections,” which are both credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available. Other adjustments also include prompt payment discounts and “failure-to-supply” adjustments. If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.

Leases

On July 1, 2019, the Company adopted ASC Topic 842, Leases, which superseded ASC Topic 840, Leases. Under ASC 842, when the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. Once a lease has been identified, the Company must determine the lease term, the present value of lease payments and the classification of the lease as either operating or financing.

The lease term is determined to be the non-cancelable period including any lessee renewal options which are considered to be reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The present value of lease payments includes fixed and certain variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. To calculate the present value of lease payments, we use our incremental borrowing rate based on the information available at commencement date, as the rate implicit in the lease is generally not readily available.

In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors.

Upon the commencement of the lease, the Company will record a lease liability and right-of-use (“ROU”) asset based on the present value of the future minimum lease payments over the lease term at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.

For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term unless an impairment has been recorded with respect to a leased asset. For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.

Cost of Sales, including Amortization of Intangibles

Cost of sales includes all costs related to bringing products to their final selling destination, which includes direct and indirect costs, such as direct material, labor and overhead expenses. Additionally, cost of sales includes product royalties, depreciation, amortization and costs to renew or extend recognized intangible assets, freight charges and other shipping and handling expenses.

Research and Development

Research and development costs are expensed as incurred, including all production costs until a drug candidate is approved by the FDA. Research and development expenses include costs associated with internal projects as well as costs associated with third-party research and development contracts.

Contingencies

Loss contingencies, including litigation-related contingencies, are included in the Consolidated Statements of Operations when the Company concludes that a loss is both probable and reasonably estimable. Legal fees for litigation-related matters are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative expenses line item.

Restructuring Costs

The Company records charges associated with approved restructuring plans to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges based on estimated employee terminations, site closure and consolidation plans. The Company accrues severance and other employee separation costs under these actions when it is probable that a liability exists and the amount is reasonably estimable.

Share-based Compensation

Share-based compensation costs are recognized over the vesting period, using a straight-line method, based on the fair value of the instrument on the date of grant less an estimate for expected forfeitures. The Company uses the Black-Scholes valuation model to determine the fair value of stock options, the stock price on the grant date to value restricted stock and the Monte-Carlo simulation model to determine the fair value of performance-based shares. The Black-Scholes valuation and Monte-Carlo simulation models include various assumptions, including the expected volatility, the expected life of the award, dividend yield and the risk-free interest rate as well as performance assumptions of peer companies. These assumptions involve inherent uncertainties based on market conditions which are generally outside the Company’s control. Changes in these assumptions could have a material impact on share-based compensation costs recognized in the Consolidated Financial Statements.

Self-Insurance

The Company self-insures for certain employee medical and prescription benefits. The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure. The liability for self-insured risks is primarily calculated using independent third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported. Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The liability for self-insured risks under this plan was not material to the consolidated financial position of the Company as of March 31, 2021 and June 30, 2020.

Income Taxes

The Company uses the liability method to account for income taxes as prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. The Company evaluates the need for a valuation allowance each reporting period weighing all positive and negative evidence. The factors used to assess the likelihood of realization include, but are not limited to, the Company’s forecast of future taxable income, historical results of operations, statutory expirations and available tax planning strategies and actions that could be implemented to realize the net deferred tax assets. Under ASC 740, Income Taxes, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company continues to closely monitor the need for a valuation against its deferred tax assets in light of recent pre-tax losses while also giving consideration to our forecasted taxable income, which is inherently uncertain and subject to change based on market conditions. Further near-term losses along with significant changes to our forecasted income could affect the ultimate realization of our deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative accounting standards also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, former President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law, which provides a stimulus to the U.S. economy in the form of various individual and business assistance programs as well as temporary changes to existing tax law. Among the changes to the provision in business tax laws include a five-year net operating loss carryback for the Fiscal 2019 - 2021 tax years, a deferral of the employer’s portion of certain payroll tax, and an increase in the interest expense deductibility limitation for the Fiscal 2020 and 2021 tax years. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. As a result of the CARES Act, the Company carried back its Fiscal 2020 taxable loss into the Fiscal 2015 tax year.

Earnings (Loss) Per Common Share

A dual presentation of basic and diluted earnings (loss) per common share is required on the face of the Company's Consolidated Statements of Operations as well as a reconciliation of the computation of basic earnings (loss) per common share to diluted earnings (loss) per common share. Basic earnings (loss) per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Beginning in the first quarter of Fiscal 2020, the Company's diluted earnings (loss) per common share is computed using the "if-converted" method by dividing the adjusted "if-converted" net income by the adjusted weighted average number of shares of common stock outstanding during the period. The adjusted "if-converted" net income is adjusted for interest expense and amortization of debt issuance costs, both net of tax, associated with the Company’s 4.50% Convertible Senior Notes due 2026. The weighted average number of diluted shares is adjusted for the potential dilutive effect of the exercise of stock options, treats unvested restricted stock and performance-based shares as if it were vested, and assumes the conversion of the 4.50% Convertible Senior Notes. Anti-dilutive securities are excluded from the calculation. Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss), but excluded from income (loss) for all amounts are recorded directly as an adjustment to stockholders’ equity.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the impairment model used to measure credit losses for most financial assets. We are required to recognize an allowance that reflects the Company’s current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The Company adopted this guidance in the first quarter of Fiscal 2021. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity, with changes to modify and simplify the application of U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted. The ASU requires adoption using either the retrospective basis or the modified retrospective basis. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements.

XML

Restructuring Charges

9 Months Ended

Mar. 31, 2021

Restructuring Charges

Restructuring Charges

Note 4. Restructuring Charges

2020 Restructuring Plan

On July 10, 2020, the Board of Directors authorized a restructuring and cost savings plan (the “2020 Restructuring Plan”) to enhance manufacturing efficiencies, streamline operations and reduce the Company’s cost structure. The 2020 Restructuring Plan was implemented, in part, as a result of previously anticipated near-term competition and pricing pressure with respect to certain key products. The 2020 Restructuring Plan includes lowering operating costs and reducing the workforce by approximately 80 positions. The 2020 Restructuring Plan was initiated on July 13, 2020 and completed as of December 31, 2020.

The Company incurred $4.0 million in severance-related costs in the first nine months of Fiscal 2021 in connection with the 2020 Restructuring Plan. The Company expects the 2020 Restructuring Plan to result in annual cost savings in excess of $15.0 million.

A reconciliation of the changes in restructuring liabilities associated with the 2020 Restructuring Plan from June 30, 2020 through March 31, 2021 is set forth in the following table:

	Employee
(In thousands)	Separation Costs
Balance at June 30, 2020	$	—
Restructuring charges		4,043
Payments		(4,001)
Balance at March 31, 2021	$	42

XML

Accounts Receivable, net

9 Months Ended

Mar. 31, 2021

Accounts Receivable, net

Accounts Receivable, net

Note 5. Accounts Receivable, net

Accounts receivable, net consisted of the following components at March 31, 2021 and June 30, 2020:

	March 31,		June 30,
(In thousands)	2021		2020
Gross accounts receivable	$	258,652	$	271,557
Less: Chargebacks reserve		(74,729)		(61,877)
Less: Rebates reserve		(16,446)		(24,536)
Less: Returns reserve		(38,708)		(40,796)
Less: Other deductions		(13,449)		(17,557)
Less: Allowance for doubtful accounts		(629)		(1,103)
Accounts receivable, net	$	114,691	$	125,688

For the three months ended March 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $135.4 million, $27.1 million, $3.9 million and $18.6 million, respectively. For the three months ended March 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $201.0 million, $63.8 million, $6.4 million and $35.7 million, respectively.

For the nine months ended March 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $515.2 million, $104.8 million, $14.5 million and $55.2 million, respectively. For the nine months ended March 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $608.6 million, $180.6 million, $16.6 million and $77.2 million, respectively.

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

Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2020	$	61,877	$	62,711	$	40,796	$	17,557	$	182,941
Current period provision		515,196		104,795		14,545		55,213		689,749
Credits issued during the period		(502,344)		(119,212)		(16,633)		(59,321)		(697,510)
Balance at March 31, 2021	$	74,729	$	48,294	$	38,708	$	13,449	$	175,180

Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2019	$	89,567	$	78,274	$	55,554	$	18,128	$	241,523
Current period provision		608,570		180,574		16,600		77,167		882,911
Credits issued during the period		(637,664)		(181,465)		(24,466)		(52,508)		(896,103)
Balance at March 31, 2020	$	60,473	$	77,383	$	47,688	$	42,787	$	228,331

For the three months ending March 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 46.1% and 45.1%, the provision for rebates was 9.2% and 14.3%, the provision for returns was 1.3% and 1.4% and the provision for other adjustments was 6.3% and 8.0%, respectively.

For the nine months ending March 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 49.2% and 47.8%, the provision for rebates was 10.0% and 14.2%, the provision for returns was 1.4% and 1.3% and the provision for other adjustments was 5.3% and 6.1%, respectively.

The increase in the chargebacks reserve was primarily due to timing of sales and product mix partially offset by lower sales. The rebates reserve decreased primarily due to lower sales of Fluphenazine in Fiscal 2021, which had higher than average government-related rebates. Historically, we have not recorded any material amounts in the current period related to reversals or additions of prior period reserves.

XML

Inventories

9 Months Ended

Mar. 31, 2021

Inventories

Inventories

Note 6. Inventories

Inventories at March 31, 2021 and June 30, 2020 consisted of the following:

	March 31,		June 30,
(In thousands)	2021		2020
Raw Materials	$	47,307	$	59,703
Work-in-process		16,143		12,235
Finished Goods		49,624		70,929
Total	$	113,074	$	142,867

During the three months ended March 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $0.4 million and $2.4 million, respectively. During the nine months ended March 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $23.6 million and $8.5 million, respectively. The increase in write-downs for excess and obsolete inventory was primarily related to the discontinuation of certain product lines during the second quarter of Fiscal 2021, which is discussed further in Note 9 “Intangible Assets.”

XML

Property, Plant and Equipment, net

9 Months Ended

Mar. 31, 2021

Property, Plant and Equipment, net

Property, Plant and Equipment, net

Note 7. Property, Plant and Equipment, net

Property, plant and equipment, net at March 31, 2021 and June 30, 2020 consisted of the following:

		March 31,		June 30,
(In thousands)	Useful Lives	2021		2020
Land	—	$	1,783	$	1,783
Building and improvements	10 - 39 years		103,361		100,285
Machinery and equipment	5 - 10 years		168,858		164,704
Furniture and fixtures	5 - 7 years		3,402		3,116
Less accumulated depreciation			(119,953)		(102,983)
			157,451		166,905
Construction in progress			11,393		12,613
Property, plant and equipment, net		$	168,844	$	179,518

Depreciation expense for the three months ended March 31, 2021 and 2020 was $5.8 million and $6.2 million, respectively. Depreciation expense for the nine months ended March 31, 2021 and 2020 was $17.2 million and $17.9 million, respectively.

Property, plant and equipment, net included amounts held in foreign countries in the amount of $0.5 million at March 31, 2021 and June 30, 2020.

XML

Fair Value Measurements

9 Months Ended

Mar. 31, 2021

Fair Value Measurements

Fair Value Measurements

Note 8. Fair Value Measurements

The Company’s financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt obligations. The Company’s cash and cash equivalents include bank deposits and money market funds. The carrying value of certain financial instruments, primarily cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair values based upon the short-term nature of their maturity dates.

The Company follows the authoritative guidance of ASC Topic 820 “Fair Value Measurements and Disclosures.” Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s financial assets and liabilities measured at fair value are entirely within Level 1 of the hierarchy as defined below:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 — Directly or indirectly observable inputs, other than quoted prices, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are material to the fair value of the asset or liability. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation are examples of Level 3 assets and liabilities.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial Instruments Disclosed, But Not Reported, at Fair Value

We estimate the fair value of our debt utilizing market quotations for debt that have quoted prices in active markets. Since our debt does not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). The estimated fair value of our term loan debt was approximately $518 million and $608 million as of March 31, 2021 and June 30, 2020, respectively. The estimated fair value of our 4.50% Convertible Senior Notes was approximately $53 million and $58 million as of March 31, 2021 and June 30, 2020, respectively. The fair value as of March 31, 2021 was lower than the carrying value primarily due to the Company’s stock price at March 31, 2021 as compared to the $15.29 conversion price.

Non-recurring Fair Value Measurements

The Company has certain assets that are measured at fair value on a non-recurring basis and are adjusted to fair value only when the carrying values are greater than the fair values. These assets are subject to fair value adjustments when there is evidence of impairment. The Company’s estimation of the fair value of intangible assets for impairment represents a Level 3 fair value measurement, due to the use of internal and external projections and unobservable measurement inputs. Based on an impairment analysis performed during the second quarter of Fiscal 2021, the Company adjusted the KUPI product rights assets and the KUPI in-process research and development asset to fair value, $84.0 million and $4.0 million respectively, as of December 31, 2020. Refer to Note 9 “Intangible Assets” for further information.

XML

Intangible Assets

9 Months Ended

Mar. 31, 2021

Intangible Assets

Intangible Assets

Note 9. Intangible Assets

Intangible assets, net as of March 31, 2021 and June 30, 2020 consisted of the following:

	Weighted	Gross Carrying Amount				Accumulated Amortization				Intangible Assets, Net
	Avg. Life	March 31,		June 30,		March 31,		June 30,		March 31,		June 30,
(In thousands)	(Yrs.)	2021		2020		2021		2020		2021		2020
Definite-lived:
KUPI product rights	15		83,955		416,154		(2,099)		(125,327)		81,856		290,827
KUPI trade name	2		2,920		2,920		(2,920)		(2,920)		—		—
KUPI other intangible assets	15		19,000		19,000		(6,778)		(5,828)		12,222		13,172
Silarx product rights	15		20,000		20,000		(4,556)		(3,556)		15,444		16,444
Other product rights	10		55,218		50,718		(8,602)		(5,426)		46,616		45,292
Total definite-lived		$	181,093	$	508,792	$	(24,955)	$	(143,057)	$	156,138	$	365,735
Indefinite-lived:
KUPI in-process research and development	—	$	4,000	$	9,000	$	—	$	—	$	4,000	$	9,000
Total indefinite-lived			4,000		9,000		—		—		4,000		9,000
Total intangible assets, net		$	185,093	$	517,792	$	(24,955)	$	(143,057)	$	160,138	$	374,735

For the three months ended March 31, 2021 and 2020, the Company recorded amortization expense of $3.9 million and $8.3 million, respectively. For the nine months ended March 31, 2021 and 2020, the Company recorded amortization expense of $21.1 million and $23.5 million, respectively.

In December 2020, the Company reviewed its product portfolio and decided to discontinue 23 lower gross margin product lines, including product lines that were acquired through various past business and product acquisitions. As a result of the discontinuance and the reduction in net sales and gross margin of certain other product lines, the Company determined that such decision represents a “triggering event” and, therefore, commenced an analysis to determine the potential for impairment of certain long-lived assets, primarily its intangible assets. Based on that analysis, the Company recorded an impairment charge of $193.0 million related to the KUPI product rights intangible assets during the second quarter of Fiscal 2021. The impairment charge is primarily a result of the decline in net sales and gross margin of certain product lines acquired in connection with the KUPI acquisition, including those product lines being discontinued.

In the second quarter of Fiscal 2021, the Company also recorded a $5.0 million impairment charge to its KUPI in-process research and development intangible asset due to delays in the expected launch of a product within the portfolio, which resulted in reduced projected cash flows.

In November 2020, the Company entered into Amendment No. 2 to License and Supply Agreement (the “2020 Amendment”) with Recro Gainesville LLC (“Recro”), which amended the Company’s agreement with Recro to exclusively distribute Verelan PM ®, Verelan SR ®, and Verapamil PM. In accordance with the Company’s policy to expense costs to renew or extend the term of a recognized intangible asset as incurred, the Company recorded $5.0 million in consideration to renew the Company’s distribution agreement during the second quarter of Fiscal Year 2021, which is included within cost of sales on the Consolidated Statements of Operations.

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

(In thousands)	Amortization
Fiscal Year Ending June 30,	Expense
2021	$	3,857
2022		17,026
2023		16,726
2024		16,426
2025		16,026
Thereafter		86,077
	$	156,138

XML

Long-Term Debt

9 Months Ended

Mar. 31, 2021

Long-Term Debt

Long-Term Debt

Note 10. Long-Term Debt

Long-term debt, net consisted of the following:

	March 31,		June 30,
(In thousands)	2021		2020
Term Loan A	$	—	$	48,844
Unamortized discount and other debt issuance costs		—		(433)
Term Loan A, net		—		48,411
Term Loan B due 2022; 6.38% as of March 31, 2021		543,348		572,857
Unamortized discount and other debt issuance costs		(16,162)		(23,278)
Term Loan B, net		527,186		549,579
4.50% Convertible Senior Notes due 2026		86,250		86,250
Unamortized discount and other debt issuance costs		(2,738)		(3,111)
4.50% Convertible Senior Notes, net		83,512		83,139
$125 million Revolving Credit Facility		—		—
$30 million ABL Credit Facility		—		—
Total debt, net		610,698		681,129
Less short-term borrowings and current portion of long-term debt		—		(88,189)
Total long-term debt, net	$	610,698	$	592,940

The weighted average interest rate for the three months ended March 31, 2021 and 2020 was 7.9% and 8.6%, respectively. The weighted average interest rate for the nine months ended March 31, 2021 and 2020 was 7.9% and 9.0%, respectively. The Company paid off the outstanding balance of the Term Loan A of $42.0 million on November 25, 2020 with cash on hand. The Company’s undrawn $125 million Revolving Credit Facility also expired on November 25, 2020.

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

	Amounts Payable
(In thousands)	to Institutions
2022 (a)	$	39,345
2023		504,003
2024		—
2025		—
2026		—
Thereafter		86,250
Total	$	629,598

(a) The Company completed multiple transactions to refinance the existing Term Loan B Facility due 2022 on April 22, 2021. In accordance with ASC 470 Debt, the principal payments due for the twelve-month period ending March 31, 2022 are classified as non-current on the Consolidated Balance Sheet as of March 31, 2021.

On December 7, 2020, the Company entered into a credit and guaranty agreement, which provides for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $30 million, subject to borrowing base availability, and includes letter of credit and swing line sub-facilities. Borrowing availability under the ABL Credit Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of eligible accounts receivable less certain reserves and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. Loans outstanding under the ABL Credit Agreement bear interest at a floating rate measured by reference to an adjusted London Inter-Bank Offered Rate (“LIBOR”), subject to a floor of 0.75%, plus an applicable margin of 2.50% per annum. Unused commitments under the ABL Credit Facility are subject to a per annum fee of 0.50%. The obligations under the ABL Credit Agreement are guaranteed by the Company and all of the Company’s existing and future subsidiaries, subject to certain exceptions (collectively, the “Guarantors”), and such obligations and the obligations of the Guarantors are secured by:

● a perfected security interest in all present and after-acquired accounts receivable, payment intangibles, inventory, deposit accounts, securities accounts, and any cash, cash equivalents or other assets in such accounts and other related assets owned by each Guarantor and the proceeds of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral (as defined below), and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the ABL Priority Collateral securing the Company’s existing Term Loan B Facility; and

● a perfected security interest in substantially all present and after-acquired tangible and intangible assets of each Guarantor other than the ABL Priority Collateral (the “Cash Flow Priority Collateral”), which security interest is junior to the security interest in the Cash Flow Priority Collateral securing the Term Loan B Facility.

The ABL Credit Agreement contains customary representations and warranties and customary affirmative covenants and negative covenants. The negative covenants include restrictions on, among other things: the incurrence of additional indebtedness; the incurrence of additional liens; dividends or other distributions on equity; the purchase, redemption or retirement of capital stock; the payment or redemption of certain indebtedness; the nature of the business activity of the Company and its subsidiaries; loans, guarantees and other investments; entering into other agreements that create restrictions on the ability to pay dividends or make other distributions on equity or create or incur certain liens; asset sales; consolidations or mergers; amendment of certain material documents; changes in fiscal year; and affiliate transactions. The negative covenants are subject to customary exceptions and also permit dividends and other distributions on equity, consolidations, mergers and asset sales, certain acquisitions and other investments, and payments or redemptions of certain indebtedness, in each case upon satisfaction of the “payment conditions”. The payment conditions are deemed satisfied upon Excess Availability (as defined in the ABL Credit Agreement) on the date of the designated action and Excess Availability for the prior 30-day period exceeding agreed-upon thresholds, the absence of the occurrence and continuance of any event of default and, in certain cases, pro forma compliance with a fixed charge coverage ratio of no less than 1.10 to 1.00.

The ABL Credit Agreement includes a minimum fixed charge coverage ratio of no less than 1.10 to 1.00, which is tested only when Excess Availability is less than 15.0% of the lesser of (A) the borrowing base and (B) the then effective commitments under the ABL Credit Facility for three consecutive business days, and continuing until the first day immediately succeeding the last day of 30 consecutive days on which Excess Availability is in excess of such threshold.

The ABL Credit Agreement provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the ABL Credit Facility to be due and payable immediately and the commitments under the ABL Credit Facility to be terminated.

The Company also entered into Amendment No. 4 to the Credit and Guaranty Agreement, which amends the Term Loan B Facility to permit the incurrence of the ABL Credit Facility and requires the Company to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent, and a minimum cash balance of $15 million as of the last day of each month. At March 31, 2021, the Company classified the $5 million required deposit account balance as restricted cash, which is included in other assets caption in the Consolidated Balance Sheet. The amendment also replaced Morgan Stanley Senior Funding, Inc. with Alter Domus (US) LLC as administrative agent and collateral agent under the Term Loan B Facility.

The outstanding Term Loan B Facility and ABL Credit Facility amounts above are guaranteed by all of Lannett’s significant wholly-owned domestic subsidiaries and are collateralized by substantially all present and future assets of the Company.

On April 22, 2021, the Company entered into multiple transactions to refinance the existing Term Loan B Facility due 2022. The Company also amended the existing ABL Credit Facility to, among other things, increase the aggregate amount and extend the maturity of the revolving credit. Refer to Note 20 “Subsequent Events” for further discussion of the details of the transactions.

XML

Legal, Regulatory Matters and Contingencies

9 Months Ended

Mar. 31, 2021

Legal, Regulatory Matters and Contingencies

Legal, Regulatory Matters and Contingencies

Note 11. Legal, Regulatory Matters and Contingencies

State Attorneys General Inquiry into the Generic Pharmaceutical Industry

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

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

Federal Investigation into the Generic Pharmaceutical Industry

In November and December 2014, the Company and certain affiliated individuals and customers were served with grand jury subpoenas relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The subpoenas requested corporate documents of the Company relating to corporate, financial and employee information, communications or correspondence with competitors regarding the sale of generic prescription medications and the marketing, sale, or pricing of certain products, generally for the period of 2005 through the dates of the subpoenas.

The Company received a Civil Investigative Demand (“CID”) from the Department of Justice on May 14, 2018. The CID requested information from 2009-present regarding allegations that the generic pharmaceutical industry engaged in market allocation, price fixing, payment of illegal remuneration and submission of false claims. The Company has responded to the CID.

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

Government Pricing

During the quarter ended December 31, 2016, the Company completed a contract compliance review, for the period January 1, 2012 through June 30, 2016, for one of KUPI’s government-entity customers. As a result of the review, the Company identified certain commercial customer prices and other terms that were not properly disclosed to the government-entity resulting in potential overcharges. For the period January 1, 2012 through November 24, 2015 (“the pre-acquisition period”), the Company is fully indemnified per the Stock Purchase Agreement.

On May 22, 2019, the Department of Veterans Affairs issued a Contracting Officer’s Final Decision and Demand for Payment, assessing the sum of $9.4 million for overpayments by the Veteran’s Administration for the period of January 1, 2012 through June 30, 2016. In August 2019, the Company remitted payment to the VA and received reimbursement from UCB for the indemnified portion of the payment in the amount of $8.1 million. The VA requested additional information for the period of July 1, 2016 through March 2018. The Company is in the process of responding to the information request.

State Attorneys General and Private Plaintiffs Antitrust and Consumer Protection Litigation

In December 2016, the Connecticut Attorney General and various other State Attorneys General filed a civil complaint alleging that six pharmaceutical companies engaged in anti-competitive behavior. The Company was not named in the action and does not compete on the products that formed the basis of the complaint. The complaint was later transferred for pretrial purposes to the United States District Court for the Eastern District of Pennsylvania as part of a multidistrict litigation captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation (the “MDL”). On October 31, 2017, the State Attorneys General filed a motion for leave to amend their complaint to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs. The District Court granted that motion on June 5, 2018. The State Attorneys General filed their amended complaint on June 18, 2018. The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, but does not involve the pricing for digoxin. The State Attorneys General also allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. On August 15, 2019, the Court denied the defendants' joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it.

On May 10, 2019, the State Attorneys General filed a new lawsuit naming the Company and one of its employees as defendants, along with 33 other companies and individuals. The complaint again alleges an overarching conspiracy and contains claims for price-fixing and market allocation under the Sherman Act and related state laws. The complaint focuses on the conduct of another generic pharmaceutical company, and the relationships that company had with other generic companies and their employees. The specific allegations in this complaint against Lannett relate to the Company’s sales of baclofen and levothyroxine. The complaint also names another current employee as a defendant, but the allegations pertain to conduct that occurred prior to their employment by Lannett. In June 2020, the State Attorneys General filed a third overarching conspiracy complaint involving scores of different drugs, including alleged price-fixing by the Company for acetazolamide. Both complaints have been added to the MDL.

In 2016 and 2017, the Company and certain competitors were named as defendants in a number of lawsuits alleging that the Company and certain generic pharmaceutical manufacturers have conspired to fix prices of generic digoxin, levothyroxine, ursodiol and baclofen. These cases are part of a larger group of more than 100 lawsuits generally alleging that over 30 generic pharmaceutical manufacturers and distributors conspired to fix prices for multiple different generic drugs in violation of the federal Sherman Act, various state antitrust laws, and various state consumer protection statutes. The United States also has been granted leave to intervene in the cases. On April 6, 2017, these cases were added to the MDL. The various plaintiffs are grouped into three categories - Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers - and filed Consolidated Amended Complaints (“CACs”) against the Company and the other defendants in August 2017.

The CACs naming the Company as a defendant involve generic digoxin, levothyroxine, ursodiol and baclofen. Pursuant to a court-ordered schedule grouping the 18 different drug cases into three separate tranches, the Company and other generic pharmaceutical manufacturer defendants in October 2017 filed joint and individual motions to dismiss the CACs involving the six drugs in the first tranche, including digoxin. In October 2018, the Court (with one exception) denied defendants’ motions to dismiss plaintiffs’ Sherman Act claims with respect to the drugs in the first tranche. In March 2019, the Company and other defendants filed answers to the Sherman Act claims. In addition, in February 2019, the Court dismissed certain of the plaintiffs’ state law claims, but denied the remainder of defendants’ motions to dismiss and set a deadline of April 1, 2019 for certain plaintiffs to amend their existing complaints. Those plaintiffs amended their complaints, but further motions to dismiss the state-law claims remain pending.

Following the lead of the state Attorneys General, the Direct Court Purchaser Plaintiffs, End Payer Plaintiffs and Indirect Reseller Plaintiffs filed their own complaints in June 2018 alleging an overarching conspiracy relating to 14 generic drugs in the End Payer complaint and 15 generic drugs in the Indirect Reseller complaint. Although the complaints allege an overarching conspiracy with respect to all of the drugs identified, the specific allegations related to drugs the Company manufactures involve acetazolamide and doxycycline monohydrate.

The Company and the other defendants filed motions to dismiss the overarching conspiracy claims. In August 2019, the Court denied the defendants' joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it. In addition, between December 2019 and February 2020, the End Payer Plaintiffs, Indirect Reseller Purchasers, and Direct Purchaser Plaintiffs filed separate complaints alleging overarching, industry-wide price-fixing conspiracies modeled on the second one filed by the state Attorneys General. The new complaint involves 135 new drugs in addition to those named in previous complaints. As to the Company, the new drugs involved are pilocarpine HCL, triamterene HCTZ capsules, amantadine HCL, and oxycodone HCL. None of the defendants, including the Company, has responded yet to these new complaints.

Between January 2018 and December 2020, a number of opt-out parties have filed individual complaints or otherwise commenced actions against the Company and dozens of other companies and individuals alleging an overarching conspiracy and individual conspiracies to fix the prices and allocate markets on scores of different drug products, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen. The opt-out parties include various retailers, insurers and county governments, which have filed federal suits in Pennsylvania, New York, California, Minnesota and Texas. All of those complaints have been added to the MDL but none of the defendants, including the Company, has responded to any of the complaints. Other groups of insurers have commenced actions in Pennsylvania state court against the Company and other drug companies by filing writs of summons, which are not complaints but can serve to toll the running of statutes of limitations. Those state-court cases have not been added to the MDL, although the parties have agreed to stay those cases pending further developments in the MDL.

In June 2020, the Company and a number of other generic pharmaceutical manufacturers were named as defendants in a Statement of Claim, along with a number of other generic pharmaceutical manufacturers, in a proposed class proceeding in federal court in Toronto, Ontario, Canada. The case alleges a violation of Canada’s Competition Act. The allegations are similar to those in the MDL alleging an overarching, industry-wide conspiracy to allocate markets and fix the price of generic drugs. That alleged conspiracy reached Canada because these same manufacturers also allegedly sell the majority of generic drugs in Canada. The Statement of Claim alleges that the conspiracy extends to the entire generic pharmaceutical market. The specific drugs identified with respect to the Company are: acetazolamide, baclofen, digoxin, doxycycline monohydrate, levothyroxine, and ursodiol. The Company has not yet responded to the Statement of Claim.

On July 13, 2020, the District Court overseeing the MDL selected as “bellwether” cases the second overarching conspiracy case filed by the state Attorneys General in May 2019 as well as individual-conspiracy cases filed by the Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers involving the drugs clobetasol, clomipramine and pravastatin. The Company is a defendant only in the overarching conspiracy case. On February 9, 2021, the District Court vacated the order selecting the bellwether cases. The District Court has re-designated the clobetasol and clomipramine cases as individual-conspiracy bellwethers, but has not yet designated a new overarching conspiracy bellwether case. To date, none of the bellwether cases have been scheduled for trial.

The Company believes that it acted in compliance with all applicable laws and regulations. Accordingly, the Company disputes the allegations set forth in these class actions and plans to vigorously defend itself against these claims.

Shareholder Litigation

In November 2016, a putative class action lawsuit was filed against the Company and two of its former officers in the federal district court for the Eastern District of Pennsylvania, alleging that the Company and two of its former officers damaged the purported class by making false and misleading statements regarding the Company’s drug pricing methodologies and internal controls. In December 2017, counsel for the putative class filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint in February 2018. In July 2018, the court granted the Company’s motion to dismiss the second amended complaint. In September 2018, counsel for the putative class filed a third amended complaint alleging that the Company and two of its former officers made false and misleading statements regarding the impact of competition on prices and sales of certain of the Company’s products and regarding the potential effects on the Company of regulatory investigations and antitrust litigation. The Company filed a motion to dismiss the third amended complaint in November 2018. In May 2019, the court denied the Company’s motion to dismiss the third amended complaint. In July 2019, the Company filed an answer to the third amended complaint. On October 1, 2020, the plaintiff filed a motion for class certification. In March 2021, the Company filed a brief in opposition to the motion to certify the putative class. The Company believes it acted in compliance with all applicable laws and plans to vigorously defend itself from these claims. The Company cannot reasonably predict the outcome of the suit at this time.

In May 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers and certain of the current and former members of the Company’s Board of Directors in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, that certain of the defendants caused the Company to issue false and misleading proxy statements in violation of Section 14(a) of the Securities Exchange Act of 1934, that the defendants were unjustly enriched at the expense of the Company, and that the defendants wasted corporate assets belonging to the Company. On December 4, 2019 the Court entered a stipulation consolidating the suit with a separate shareholder derivative suit filed in July 2019, as described below. On December 6, 2019, the Company filed a motion to dismiss the consolidated cases. On January 14, 2020, the parties reached an agreement in principle to resolve the consolidated cases, subject to the execution of a mutually acceptable settlement document and Court approval.

In July 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers and directors in the federal court for the Eastern District of Pennsylvania. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company and that certain of the defendants caused the Company to violate Sections 10(b), 14(a), and 29(b) of the Securities Exchange Act of 1934. In October 2019, this suit was transferred to the federal court for the District of Delaware and was pending before the same judge presiding over the shareholder derivative suit that was filed in May 2019. On December 4, 2019, the Court entered a stipulation consolidating the suit with a separate shareholder derivative suit filed in May 2019, as described above. On December 6, 2019, the Company filed a motion to dismiss the consolidated cases. On January 14, 2020, the parties reached an agreement in principle to resolve the consolidated cases, subject to the execution of a mutually agreeable settlement document and Court approval.

The settlement of the two consolidated cases, which was preliminarily approved by the Court on August 7, 2020, requires the Company to implement certain new corporate policies and pay the plaintiffs’ counsel in the consolidated cases, collectively, the sum of $600,000 in exchange for a release of all liability with respect to both of the consolidated cases. A settlement hearing was held on October 7, 2020. At the settlement hearing, the Magistrate Judge issued an oral Report and Recommendation approving the settlement and denying the objecting parties’ motion to intervene. The time period to object to the Report and Recommendation has expired. On October 22, 2020, the Court adopted the Report and Recommendation, granted the motion for final approval of the settlement, denied the objecting parties’ motion to intervene, and issued a final judgement dismissing the consolidated cases with prejudice. The Company considers these matters closed.

In September 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers, directors, and employees in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, alleges waste of corporate assets and gross mismanagement, and alleges that certain of the defendants caused the Company to violate Section 14(a) of the Securities and Exchange Act of 1934. On November 22, 2019, the Company filed a motion to dismiss the complaint. On January 16, 2020, the Court entered the parties’ stipulation to stay the case pending the resolution of the defendants’ motion to dismiss the two earlier filed consolidated shareholder derivative cases referenced above. On February 18, 2020, the Court entered the parties’ stipulation to withdraw the Company’s motion to dismiss without prejudice to the Company’s ability to refile a renewed motion to dismiss after the stay is lifted. On March 11, 2020, following notice that Plaintiffs no longer consented to the stay, the Court lifted the stay. On April 6, 2020, certain of the defendants, including the Company, filed a renewed motion to dismiss or, in the alternative, to stay the account. On April 29, 2020, the Court entered the parties’ stipulation to stay the action, pending a decision from the Court regarding the settlement in the consolidated derivative actions discussed above. In light of the Final Order and Judgment entered in the two earlier filed consolidated shareholder derivative cases referenced above, the parties filed a stipulation and proposed order dismissing this action, with prejudice. On October 29, 2020, the District Court Judge entered an Order approving the parties’ Stipulation of Dismissal, with prejudice. The Company considers this matter closed.

In February 2020, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers, directors, and employees in the Court of Chancery of the State of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, and were unjustly enriched. On March 16, 2020, the Company filed a motion to dismiss the complaint, and a motion to stay the proceedings. On March 27, 2020, the Company filed its opening brief in support of its motion to stay the proceedings. On April 6, 2020, the parties entered into a stipulation and proposed order to stay the action. The Court granted the stipulation and proposed order that same day. In light of the Final Order and Judgment entered in the two earlier filed consolidated shareholder derivative cases referenced above, the parties agreed to dismiss this action, with prejudice. The Court granted Stipulation of Dismissal with Prejudice on November 4, 2020. The Company considers this matter closed.

Genus Life Sciences

In December 2018, Genus Lifesciences, Inc. (“Genus”) sued the Company, Cody Labs, and others in California federal court, alleging violations of the Lanham Act, Sherman Act, and California false advertising law. Genus received FDA approval for a cocaine hydrochloride product in December 2018, and its claims are premised in part on allegations that the Company falsely advertises its unapproved cocaine hydrochloride solution product. The Company denies that it is falsely advertising its cocaine hydrochloride solution product and continues to market its unapproved product relying on the Guidance for FDA Staff and Industry, Marketed Unapproved Drugs — Compliance Policy Guide, pending approval of its Section 505(b)(2) application. In January 2019, the Company filed a motion to dismiss the complaint. On May 3, 2019, the Court issued a written decision granting in part and denying in part the motion to dismiss. On June 6, 2019, Genus filed an Amended Complaint. On June 27, 2019, the Company filed a motion to dismiss the amended complaint. By Order dated September 3, 2019, the Court granted in part and denied in part the Company's motion to dismiss. On November 20, 2019, Genus filed a second amended complaint. On December 17, 2019, the Company filed an answer to the second amended complaint. The Company believes it acted in compliance with all applicable laws and regulations and plans to vigorously defend itself from these claims. Discovery is ongoing and the Company cannot reasonably predict the outcome of this suit at this time.

Sandoz, Inc.

On July 20, 2020, Sandoz, Inc. (“Sandoz”) filed a complaint in federal court in Philadelphia, alleging claims for tortious interference with contract, unfair competition and conversion of confidential information, arising out of Cediprof, Inc.’s (“Cediprof”) termination of Sandoz’s contract to distribute levothyroxine tablets in the United States and certain territories. Along with the complaint, Sandoz filed a motion for a temporary restraining order and preliminary injunction, seeking to enjoin the Company from commencing the distribution of levothyroxine tablets on August 3, 2020. On the same day, Sandoz filed a separate complaint and application for a temporary restraining order and preliminary injunction against Cediprof in federal court in New York, seeking to prevent Cediprof from selling its levothyroxine tablets in the United States and certain of its territories to anyone other than Sandoz. On July 27, 2020, the New York court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling Sandoz had failed to establish irreparable harm. Sandoz subsequently dismissed the complaint and is proceeding against Cediprof in an Arbitration in New York, where the Company has agreed to indemnify Cediprof. On July 28, 2020, the Philadelphia court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling that Sandoz had failed to establish irreparable harm and failed to establish that it is likely to succeed on the merits of its claim against Lannett. On October 5, 2020, the Company filed a motion to dismiss the complaint. On December 28, 2020, the Court granted in part and denied in part the motion, dismissing certain of the claims. The Company has filed a motion to stay the case pending the Arbitration of the Sandoz/Cediprof dispute. On January 11, 2021, the Company filed an answer and counterclaim to the complaint. The Company denies that it tortiously interfered with Sandoz’s contract or that it converted any of Sandoz’s alleged confidential information. Discovery is ongoing and the Company cannot reasonably predict the outcome of this suit at this time.

Other Litigation Matters

The Company is also subject to various legal proceedings arising out of the normal course of its business including, but not limited to, product liability, intellectual property, patent infringement claims and antitrust matters. It is not possible to predict the outcome of these various proceedings. An adverse determination in any of these proceedings or in any of the proceedings described above in the future could have a significant impact on the financial position, results of operations and cash flows of the Company.

XML

Commitments

9 Months Ended

Mar. 31, 2021

Commitments

Commitments

Note 12. Commitments

Leases

At March 31, 2021 and June 30, 2020, the Company had a ROU lease asset of $10.8 million and $9.3 million, respectively, and a ROU liability of $13.3 million and $10.9 million, respectively. The current balance of the ROU liability at March 31, 2021 and June 30, 2020 was $2.0 million and $1.1 million, respectively.

In February 2021, the Company extended our existing lease for the warehouse in Seymour, Indiana. The lease term is now set to expire in March 2031. Accordingly, the Company recorded a ROU lease asset and liability totaling $2.3 million, respectively, in the third quarter of Fiscal 2021.

Components of lease cost are as follows:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Operating lease cost	$	463	$	642	$	1,342	$	1,713
Variable lease cost		37		32		119		93
Short-term lease cost (a)		111		194		337		473
Total	$	611	$	868	$	1,798	$	2,279

(a) Not recorded on the Consolidated Balance Sheet.

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

	Nine Months Ended
	March 31,
(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,405	$	1,439
Non-cash activity:
ROU assets obtained in exchange for new operating lease liabilities	$	2,275	$	4,317

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

	Nine Months Ended
	March 31,
	2021		2020
Weighted-average remaining lease term	10	years	9	years
Weighted-average discount rate	8.5	%	7.9	%

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

(In thousands)	Amounts Due
2021	$	527
2022		2,045
2023		2,064
2024		2,083
2025		2,103
Thereafter		10,637
Total lease payments		19,459
Less: Imputed interest		6,113
Present value of lease liabilities	$	13,346

Other Commitments

During Fiscal 2017, the Company signed an agreement with a company operating in the pharmaceutical business, under which the Company agreed to provide up to $15.0 million in revolving loans, which expires in seven years and bears interest at 2.0%, for the purpose of expansion and other business needs. In Fiscal 2019, the Company sold 50% of the outstanding loan to a third party for $5.6 million, in addition to assigning 50% of all rights, title and interest in the loan and loan documents. As of March 31, 2021, $6.6 million was outstanding under the revolving loan and is included in other assets. Based on the guidance set forth in ASC 810-10 Consolidation, the Company has concluded that it has a variable interest in the entity. However, the Company is not the primary beneficiary to the entity and as such, is not required to consolidate the entity’s results of operations.

In Fiscal 2020, the Company executed a License and Collaboration Agreement with North South Brother Pharmacy Investment Co., Ltd. and HEC Group PTY, Ltd. (collectively, “HEC”) to develop an insulin glargine product that would be biosimilar to Lantus Solostar. Under the terms of the deal, among other things, the Company shall fund up to the initial $32 million of the development costs and split 50/50 any development costs in excess thereof. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of HEC for the following five years. To date, the COVID-19 pandemic has not had a material impact on the development of the insulin glargine product. The longer that countries around the world remain on lockdown, the more likely it becomes that the timing of the product development and approval will be delayed. 

On February 8, 2021, the Company executed a License and Collaboration Agreement and a Supply Agreement with Sunshine Lake Pharma Co., Ltd. an HEC Group company (“Sunshine”) with respect to the development of a biosimilar insulin aspart product. Under the terms of the deal, among other things, the Company shall fund up to the initial $32 million of the development costs, provided that if total development and other costs paid by Lannett are less than $32 million then the difference will be paid to Sunshine over the first year of commercialization. The parties shall negotiate the sharing of any development costs in excess of $32 million. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of Sunshine for the following five years.

XML

Accumulated Other Comprehensive Loss

9 Months Ended

Mar. 31, 2021

Accumulated Other Comprehensive Loss.

Accumulated Other Comprehensive Loss

Note 13. Accumulated Other Comprehensive Loss

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

	March 31,
(In thousands)	2021		2020
Foreign Currency Translation
Beginning Balance, June 30	$	(627)	$	(615)
Net income (loss) on foreign currency translation (net of tax of $0 and $0)		24		(26)
Other comprehensive income (loss), net of tax		24		(26)
Total Accumulated Other Comprehensive Loss	$	(603)	$	(641)

XML

Loss Per Common Share

9 Months Ended

Mar. 31, 2021

Loss Per Common Share

Loss Per Common Share

Note 14. Loss Per Common Share

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

	Three Months Ended
	March 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(7,142)	$	(16,592)
Interest expense applicable to the Convertible Notes, net of tax		—		—
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax		—		—
Adjusted “if-converted” net loss	$	(7,142)	$	(16,592)
Denominator:
Basic weighted average common shares outstanding		39,511,296		38,707,049
Effect of potentially dilutive options and restricted stock awards		—		—
Effect of conversion of the Convertible Notes		—		—
Diluted weighted average common shares outstanding		39,511,296		38,707,049
Loss per common share:
Basic	$	(0.18)	$	(0.43)
Diluted	$	(0.18)	$	(0.43)

	Nine Months Ended
	March 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(185,589)	$	(23,665)
Interest expense applicable to the Convertible Notes, net of tax		—		—
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax		—		—
Adjusted “if-converted” net loss	$	(185,589)	$	(23,665)
Denominator:
Basic weighted average common shares outstanding		39,340,670		38,539,850
Effect of potentially dilutive options and restricted stock awards		—		—
Effect of conversion of the Convertible Notes		—		—
Diluted weighted average common shares outstanding		39,340,670		38,539,850
Loss per common share:
Basic	$	(4.72)	$	(0.61)
Diluted	$	(4.72)	$	(0.61)

The number of anti-dilutive shares that have been excluded in the computation of diluted loss and earnings per share for the three months ended March 31, 2021 and 2020 were 8.1 million and 7.8 million, respectively. The number of anti-dilutive shares that have been excluded in the computation of diluted loss and earnings per share for the nine months ended March 31, 2021 and 2020 were 8.1 million and 6.0 million, respectively. The effect of potentially dilutive shares was excluded from the calculation of diluted loss per share in the three and nine months ended March 31, 2021 and 2020 because the effect of including such securities would be anti-dilutive.

XML

Share-based Compensation

9 Months Ended

Mar. 31, 2021

Share-based Compensation

Share-based Compensation

Note 15. Share-based Compensation

At March 31, 2021, the Company had two share-based employee compensation plans (the 2014 Long-Term Incentive Plan “LTIP” and the 2021 “LTIP”). The 2021 LTIP, which authorized 3.0 million new shares of common stock for future issuances, was approved by the stockholders of the Company January 2021. Together these plans authorized an aggregate total of 8.0 million shares to be issued. As of March 31, 2021, the plans have a total of 3.0 million shares available for future issuances. No awards have been granted from the 2021 LTIP as of March 31, 2021.

Historically, the Company has issued share-based compensation awards with a vesting period ranging up to 3 years and a maximum contractual term of 10 years. The Company issues new shares of stock when stock options are exercised. As of March 31, 2021, there was $11.2 million of total unrecognized compensation cost related to non-vested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 2.2 years.

Stock Options

The Company measures share-based compensation cost for options using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used to estimate fair values of the stock options granted, the estimated annual forfeiture rates used to recognize the associated compensation expense and the weighted average fair value of the options granted during the nine months ended March 31, 2021 and 2020:

	Nine Months Ended
	March 31, 2021			March 31, 2020
Risk-free interest rate		0.2	%		1.9	%
Expected volatility		82.5	%		73.7	%
Expected dividend yield		—	%		—	%
Forfeiture rate		—	%		—	%
Expected term		5.0	years		5.1	years
Weighted average fair value	$	3.86		$	4.04

Expected volatility is based on the historical volatility of the price of our common shares during the historical period equal to the expected term of the option. The Company uses historical information to estimate the expected term, which represents the period of time that options granted are expected to be outstanding. The risk-free rate for the period equal to the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period. This assumption is based on our actual forfeiture rate on historical awards. Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. Additionally, the expected dividend yield is equal to zero, as the Company has not historically issued and has no immediate plans to issue a dividend.

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

						Weighted
		Weighted-				Average
		Average		Aggregate		Remaining
		Exercise		Intrinsic		Contractual
(In thousands, except for weighted average price and life data)	Awards	Price		Value		Life (yrs.)
Outstanding at June 30, 2020	991	$	12.11	$	678	5.6
Granted	309	$	5.95
Exercised	(37)	$	4.12	$	61
Forfeited, expired or repurchased	(217)	$	17.17
Outstanding at March 31, 2021	1,046	$	9.51	$	62	7.4
Vested and expected to vest at March 31, 2021	1,045	$	9.51	$	62	7.4
Exercisable at March 31, 2021	383	$	14.82	$	62	5.1

Restricted Stock

The Company measures restricted stock compensation costs based on the stock price at the grant date less an estimate for expected forfeitures. The annual forfeiture rate used to calculate compensation expense was 6.5% for the nine months ended March 31, 2021 and 2020.

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

		Weighted
		Average Grant -		Aggregate
(In thousands, except for weighted average price data)	Awards	date Fair Value		Intrinsic Value
Non-vested at June 30, 2020	1,344	$	8.70
Granted	894		5.74
Vested	(792)		8.49	$	4,613
Forfeited	(75)		9.57
Non-vested at March 31, 2021	1,371	$	6.85

Performance-Based Shares

In September 2017, the Company began granting performance-based awards to certain key executives. The stock-settled awards will cliff vest based on relative Total Shareholder Return (“TSR”) over a three-year period. The Company measures share-based compensation cost for TSR awards using a Monte-Carlo simulation model.

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

		Weighted
		Average Grant -
(In thousands, except for weighted average price and life data)	Awards	date Fair Value
Non-vested at June 30, 2020	204	$	12.99
Granted	339	$	9.22
Performance adjustment (1)	(12)	$	25.58
Non-vested at March 31, 2021	531	$	10.29

(1) Represents the adjustment based on the performance of the September 2017 awards, which was below the Threshold goal level at the end of the three-year performance period.

Employee Stock Purchase Plan

In February 2003, the Company’s stockholders approved an Employee Stock Purchase Plan (“ESPP”). Employees eligible to participate in the ESPP may purchase shares of the Company’s stock at 85% of the lower of the fair market value of the common stock on the first day of the calendar quarter, or the last day of the calendar quarter. Under the ESPP, employees can authorize the Company to withhold up to 10% of their compensation during any quarterly offering period, subject to certain limitations. The ESPP was implemented on April 1, 2003 and is qualified under Section 423 of the Internal Revenue Code. The Board of Directors authorized an aggregate total of 1.1 million shares of the Company’s common stock for issuance under the ESPP. During the nine months ended March 31, 2021 and 2020, 81 thousand shares and 83 thousand shares were issued under the ESPP, respectively. As of March 31, 2021, 991 thousand total cumulative shares have been issued under the ESPP.

The following table presents the allocation of share-based compensation costs recognized in the Consolidated Statements of Operations by financial statement line item:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Selling, general and administrative expenses	$	1,411	$	1,124	$	5,632	$	5,965
Research and development expenses		132		180		419		618
Cost of sales		320		566		1,145		1,753
Total	$	1,863	$	1,870	$	7,196	$	8,336
Tax benefit at statutory rate	$	419	$	421	$	1,619	$	1,876

XML

Employee Benefit Plan

9 Months Ended

Mar. 31, 2021

Employee Benefit Plan

Employee Benefit Plan

Note 16. Employee Benefit Plan

The Company has a 401k defined contribution plan (the “Plan”) covering substantially all employees. Pursuant to the Plan provisions, the Company was required to make matching contributions equal to 50% of each employee’s contribution, not to exceed 4% of the employee’s compensation for the Plan year. Beginning January 1, 2021, the Company reduced the matching contribution to 50% of each employee’s contribution, not to exceed 2% of the employee’s compensation for the Plan year. Contributions to the Plan were $0.3 million and $0.6 million during the three months ended March 31, 2021 and 2020, respectively. Contributions to the Plan were $1.3 million and $1.7 million during the nine months ended March 31, 2021 and 2020, respectively.

In Fiscal 2020, the Company implemented a non-qualified deferred compensation plan for certain senior-level management and executives. The non-qualified deferred compensation plan allows certain eligible employees to defer additional pre-tax earnings for retirement, beyond the IRS limits in place under the Plan. Contributions to the non-qualified deferred compensation plan during the three and nine months ended March 31, 2021 were not material.

XML

Income Taxes

9 Months Ended

Mar. 31, 2021

Income Taxes

Income Taxes

Note 17. Income Taxes

The Company uses the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which are expected to be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

The federal, state and local income tax benefit for the three months ended March 31, 2021 was $2.5 million compared to $1.7 million for the three months ended March 31, 2020. The effective tax rates for the three months ended March 31, 2021 and 2020 were 26.3% and 9.1%, respectively. The effective tax rate for the three months ended March 31, 2021 was higher compared to the three months ended March 31, 2020 primarily due to the relative impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The federal, state and local income tax benefit for the nine months ended March 31, 2021 was $68.6 million compared to $5.2 million for the nine months ended March 31, 2020. The effective tax rates for the nine months ended March 31, 2021 and 2020 were 27.0% and 18.0%, respectively. The effective tax rate for the nine months ended March 31, 2021 was higher compared to the nine months ended March 31, 2020 primarily due to the impact of the CARES Act, which increased the interest expense deductibility limitation in the current year and also allowed the Company to carry back its taxable loss into a prior fiscal year, where the statutory tax rate was 35 %. The impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the nine months ended March 31, 2020 relative to expected pre-tax loss also contributed to a lower effective tax rate as compared to the nine months ended March 31, 2021.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

As of March 31, 2021 and June 30, 2020, the Company has total unrecognized tax benefits of $4.6 million and $4.6 million, respectively, of which $4.4 million and $4.5 million would impact the Company’s effective tax rate for each period, if recognized. As a result of the positions taken during the period, the Company has not recorded any material interest and penalties for the period ended March 31, 2021 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s statement of financial position as of March 31, 2021 and June 30, 2020. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.

The Company files income tax returns in the United States federal jurisdiction and various states. The Company’s federal tax returns for Fiscal Year 2014 and prior generally are no longer subject to review as such years are closed. The Company’s Fiscal Year 2015 through 2017 federal returns are currently under examination by the Internal Revenue Service (“IRS”). In March 2021, the Company was notified that its Fiscal Year 2020 federal return was also selected for examination. The Company has received preliminary assessments from the IRS, which are not considered material to Company’s Consolidated Statements of Operations; however, we cannot reasonably predict the final outcome of the examinations at this time. In October 2018, the Company was notified that the Commonwealth of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns. In March 2021, the Company received a preliminary assessment from the Commonwealth of Pennsylvania, which is not considered material to the Company’s Consolidated Statement of Operations.

XML

Related Party Transactions

9 Months Ended

Mar. 31, 2021

Related Party Transactions

Related Party Transactions

Note 18. Related Party Transactions

The Company had sales of $0.6 million and $0.9 million during the three months ended March 31, 2021 and 2020, respectively, to a generic distributor, Auburn Pharmaceutical Company (“Auburn”), which is a member of the Premier Buying Group. Sales to Auburn were $2.1 million for each of the nine months ended March 31, 2021 and 2020. Jeffrey Farber, a current board member, is the owner of Auburn. Accounts receivable includes amounts due from Auburn of $0.4 million and $0.7 million at March 31, 2021 and June 30, 2020, respectively.

XML

Assets Held for Sale

9 Months Ended

Mar. 31, 2021

Assets Held for Sale

Assets held for Sale

Note 19. Assets Held for Sale

In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business, which includes the manufacturing and distribution of active pharmaceutical ingredients for use in finished goods production. The Company was unable to sell the Cody API business as an ongoing operation and sold the equipment utilized by the Cody API business during Fiscal 2020. The Company ceased operations at Cody Labs, leased a portion of the real estate to a third party and intends to sell the remaining real estate. In October 2020, the Company entered into an agreement for the sale of real estate associated with the Cody API business for $3.8 million before fees and selling costs, subject to certain closing conditions. However, prior to closing, the buyer terminated the transaction in December 2020. The Company continues to actively market the real estate. As of March 31, 2021, the remaining real estate associated with the Cody API business, totaling $2.7 million, was recorded in the assets held for sale caption in the Consolidated Balance Sheet.

The following table summarizes the financial results of the Cody API business for the three and nine months ended March 31, 2021 and 2020:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Net sales	$	—	$	—	$	—	$	1,607
Pretax loss attributable to Cody API business		(110)		(1,279)		(727)		(6,340)

The pretax loss attributable to the Cody API business during the nine months ended March 31, 2020 includes a full impairment of a $1.2 million ROU lease asset that was recorded upon adoption of ASU No. 2016-02 on July 1, 2019.

XML

Subsequent Event

9 Months Ended

Mar. 31, 2021

Subsequent Event

Subsequent Event

Note 20. Subsequent Events

On April 22, 2021, the Company issued $350.0 million aggregate principal amount of 7.750% senior secured notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States to persons other than U.S. persons in reliance upon Regulation S under the Securities Act. The Notes will pay interest semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021, at a rate of 7.750% per annum in cash. The Notes will mature on April 15, 2026, unless earlier redeemed or repurchased in accordance with their terms. The Notes will be secured by first priority liens on substantially all of the assets of the Company and the guarantors, other than working capital assets pledged to secure the Company’s asset-based credit facility, as to which the Notes will be secured on a second lien basis.

On April 5, 2021, the Company entered into an Exchange Agreement with certain Participating Lenders to exchange a portion of their existing Term B Loans for Second Lien Loans pursuant to a new $190.0 million Second Lien Secured Loan Facility (“Second Lien Facility”). On April 22, 2021, in connection with the issuance of the Notes and the entrance into the Amended ABL Facility, which is discussed further below, the exchange between the Company and the Participating Lenders was consummated. From the Closing Date until the 1-year anniversary of the Closing Date, the Second Lien Loans will pay 10% paid-in-kind interest. Thereafter, the Second Lien notes will pay 5% cash interest and 5% paid-in-kind interest until maturity. The Second Lien Loans will mature on July 15, 2026. In connection with the Second Lien Facility, the Company issued to the Participating Lenders warrants to purchase up to 8,280,000 shares of common stock of the Company (the “Warrants”) at an exercise price of $6.88 per share. The Warrants will have a term of 8 years from issuance and the Participating Lenders will receive registration rights with respect to the shares of common stock of the Company to be received upon exercise of the Warrants.

In addition to the Notes Offering and the Second Lien Facility, the Company entered into an amendment (the “Amended ABL Credit Agreement”) to that certain Credit and Guaranty Agreement, dated as of December 7, 2020, among the Company, certain of its wholly-owned domestic subsidiaries party thereto, as borrowers or as guarantors, Wells Fargo Bank, National Association, as administrative agent and as collateral agent and the other lenders party thereto, for the purpose of, among other things, increasing the aggregate amount of the revolving credit facility to $45.0 million and extending the maturity thereof to the fifth anniversary of the closing date of Notes Offering (subject to a springing maturity as set forth therein.

The Company used the net proceeds of the Notes Offering and Second Lien Facility, in addition to cash on hand, to pay off the existing Term Loan B Facility in full and pay certain fees and expenses related to the transactions.

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Mar. 31, 2021

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP.

Principles of consolidation

Principles of consolidation

The Consolidated Financial Statements include the accounts of Lannett Company, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Reclassifications

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

Use of estimates

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, returns and other adjustments including a provision for the Company’s liability under the Medicare Part D program. Additionally, significant estimates and assumptions are required when determining the value of inventories and long-lived assets, including intangible assets, income taxes, contingencies and share-based compensation.

Because of the inherent subjectivity and complexity involved in these estimates and assumptions, actual results could differ from those estimates.

Foreign currency translation

Foreign currency translation

The Consolidated Financial Statements are presented in U.S. dollars, the reporting currency of the Company. The financial statements of the Company’s foreign subsidiary are maintained in local currency and translated into U.S. dollars at the end of each reporting period. Assets and liabilities are translated at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. The adjustments resulting from the use of differing exchange rates are recorded as part of stockholders’ equity in accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in foreign currencies are recognized in the Consolidated Statements of Operations under other income (loss). Amounts recorded due to foreign currency fluctuations are immaterial to the Consolidated Financial Statements.

Cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with original maturities less than or equal to three months at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value, and consist of bank deposits and money market funds. The Company maintains its cash deposits and cash equivalents at well-known, stable financial institutions. Such amounts frequently exceed insured limits. In connection with the Amendment No. 4 to the Term Loan B Facility, which is discussed in further detail in Note 10 “Long-Term Debt,” the Company is required to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent. At March 31, 2021, the Company classified this balance as restricted cash, which is included in other assets.

Presented in the table below is a reconciliation of the cash, cash equivalents and restricted cash amounts presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended March 31, 2021 and 2020.

	March 31, 2021		March 31, 2020
Cash and cash equivalents	$	81,290	$	101,455
Restricted cash, included in other assets		5,000		—
Cash, cash equivalents and restricted cash as presented on the Consolidated Statements of Cash Flows	$	86,290	$	101,455

Allowance for doubtful accounts

Allowance for doubtful accounts

On July 1, 2020, the Company adopted guidance issued by the FASB in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the Company to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are determined to be uncollectible.

Inventories

Inventories

Inventories are stated at the lower of cost or net realizable value by the first-in, first-out method. Inventories are regularly reviewed and write-downs for excess and obsolete inventory are recorded based primarily on current inventory levels, expiration date and estimated sales forecasts.

Property, Plant and Equipment

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the assets’ estimated useful lives. Repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

Intangible Assets

Intangible Assets

Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives which commences upon shipment of the product, generally for periods ranging from 5 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred.

Valuation of Long-Lived Assets, including Intangible Assets

Valuation of Long-Lived Assets, including Intangible Assets

The Company’s long-lived assets primarily consist of property, plant and equipment and definite and indefinite-lived intangible assets. Property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances (“triggering events”) indicate that the carrying amount of the asset may not be recoverable. If a triggering event is determined to have occurred, the asset’s carrying value is compared to the future undiscounted cash flows expected to be generated by the asset. If the carrying value exceeds the undiscounted cash flows of the asset, then impairment exists. Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of each fiscal year or more frequently if triggering events indicate that the asset might be impaired.

An impairment loss is measured as the excess of the asset’s carrying value over its fair value, which in most cases is calculated using a discounted cash flow model. Discounted cash flow models are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

In-Process Research and Development

In-Process Research and Development

Amounts allocated to in-process research and development in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets subject to impairment testing in accordance with the Company’s impairment testing policy for indefinite-lived intangible assets. As products in development are approved for sale, amounts will be allocated to product rights and will be amortized over their estimated useful lives. Definite-lived intangible assets are amortized over the expected lives of the related assets. The judgments made in determining the estimated fair value of in-process research and development, as well as asset lives, can materially impact our results of operations. The Company’s fair value assessments are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

Segment Information

Segment Information

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

	Three Months Ended				Nine Months Ended
(In thousands)	March 31,				March 31,
Medical Indication	2021		2020		2021		2020
Analgesic	$	3,836	$	2,811	$	10,528	$	6,806
Anti-Psychosis		11,678		27,858		38,023		78,588
Cardiovascular		16,573		21,746		52,623		67,325
Central Nervous System		24,509		18,566		71,648		57,154
Endocrinology		6,822		—		19,551		—
Gastrointestinal		16,817		20,745		52,492		56,020
Infectious Disease		10,610		21,749		55,586		51,722
Migraine		5,169		12,886		20,942		32,907
Respiratory/Allergy/Cough/Cold		2,548		2,966		6,241		8,747
Urinary		1,566		1,149		4,385		2,817
Other		8,617		8,051		24,661		27,847
Contract manufacturing revenue		3,625		5,845		16,089		17,891
Total net sales	$	112,370	$	144,372	$	372,769	$	407,824

Customer, Supplier and Product Concentration

Customer, Supplier and Product Concentration

The following table presents the percentage of total net sales, for the three and nine months ended March 31, 2021 and 2020, for certain of the Company’s products, defined as products containing the same active ingredient or combination of ingredients, which accounted for at least 10% of net sales in any of those periods:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Product 1	8	%	11	%	13	%	10	%
Product 2	8	%	17	%	8	%	18	%

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

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Customer A	29	%	29	%	27	%	25	%
Customer B	20	%	21	%	21	%	24	%
Customer C	13	%	12	%	12	%	11	%

Revenue Recognition

Revenue Recognition

The Company complies with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when (or as) we satisfy our performance obligations by transferring a promised good or service to a customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. The revenue standard impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time.” However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position.

When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments. These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual. Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.

Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity. While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions. Each major category is discussed in detail below:

Chargebacks

The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health, AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their Food and Drug Administration (“FDA”) approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug application ("ANDA’). Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

Returns

Consistent with industry practice, the Company has a product returns policy that allows customers to return product within a specified time period prior to and subsequent to the product’s expiration date in exchange for a credit to be applied to future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices, credit terms and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve for returns increases as net sales increase.

Other Adjustments

Other adjustments consist primarily of “price adjustments”, also known as “shelf-stock adjustments” and “price protections,” which are both credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available. Other adjustments also include prompt payment discounts and “failure-to-supply” adjustments. If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.

Leases

Leases

On July 1, 2019, the Company adopted ASC Topic 842, Leases, which superseded ASC Topic 840, Leases. Under ASC 842, when the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. Once a lease has been identified, the Company must determine the lease term, the present value of lease payments and the classification of the lease as either operating or financing.

The lease term is determined to be the non-cancelable period including any lessee renewal options which are considered to be reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The present value of lease payments includes fixed and certain variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. To calculate the present value of lease payments, we use our incremental borrowing rate based on the information available at commencement date, as the rate implicit in the lease is generally not readily available.

In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors.

Upon the commencement of the lease, the Company will record a lease liability and right-of-use (“ROU”) asset based on the present value of the future minimum lease payments over the lease term at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.

For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term unless an impairment has been recorded with respect to a leased asset. For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.

Cost of Sales, including Amortization of Intangibles

Cost of Sales, including Amortization of Intangibles

Cost of sales includes all costs related to bringing products to their final selling destination, which includes direct and indirect costs, such as direct material, labor and overhead expenses. Additionally, cost of sales includes product royalties, depreciation, amortization and costs to renew or extend recognized intangible assets, freight charges and other shipping and handling expenses.

Research and Development

Research and Development

Research and development costs are expensed as incurred, including all production costs until a drug candidate is approved by the FDA. Research and development expenses include costs associated with internal projects as well as costs associated with third-party research and development contracts.

Contingencies

Contingencies

Loss contingencies, including litigation-related contingencies, are included in the Consolidated Statements of Operations when the Company concludes that a loss is both probable and reasonably estimable. Legal fees for litigation-related matters are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative expenses line item.

Restructuring Costs

Restructuring Costs

The Company records charges associated with approved restructuring plans to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges based on estimated employee terminations, site closure and consolidation plans. The Company accrues severance and other employee separation costs under these actions when it is probable that a liability exists and the amount is reasonably estimable.

Share-based Compensation

Share-based Compensation

Share-based compensation costs are recognized over the vesting period, using a straight-line method, based on the fair value of the instrument on the date of grant less an estimate for expected forfeitures. The Company uses the Black-Scholes valuation model to determine the fair value of stock options, the stock price on the grant date to value restricted stock and the Monte-Carlo simulation model to determine the fair value of performance-based shares. The Black-Scholes valuation and Monte-Carlo simulation models include various assumptions, including the expected volatility, the expected life of the award, dividend yield and the risk-free interest rate as well as performance assumptions of peer companies. These assumptions involve inherent uncertainties based on market conditions which are generally outside the Company’s control. Changes in these assumptions could have a material impact on share-based compensation costs recognized in the Consolidated Financial Statements.

Self-Insurance

Self-Insurance

The Company self-insures for certain employee medical and prescription benefits. The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure. The liability for self-insured risks is primarily calculated using independent third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported. Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The liability for self-insured risks under this plan was not material to the consolidated financial position of the Company as of March 31, 2021 and June 30, 2020.

Income Taxes

Income Taxes

The Company uses the liability method to account for income taxes as prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. The Company evaluates the need for a valuation allowance each reporting period weighing all positive and negative evidence. The factors used to assess the likelihood of realization include, but are not limited to, the Company’s forecast of future taxable income, historical results of operations, statutory expirations and available tax planning strategies and actions that could be implemented to realize the net deferred tax assets. Under ASC 740, Income Taxes, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company continues to closely monitor the need for a valuation against its deferred tax assets in light of recent pre-tax losses while also giving consideration to our forecasted taxable income, which is inherently uncertain and subject to change based on market conditions. Further near-term losses along with significant changes to our forecasted income could affect the ultimate realization of our deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative accounting standards also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, former President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law, which provides a stimulus to the U.S. economy in the form of various individual and business assistance programs as well as temporary changes to existing tax law. Among the changes to the provision in business tax laws include a five-year net operating loss carryback for the Fiscal 2019 - 2021 tax years, a deferral of the employer’s portion of certain payroll tax, and an increase in the interest expense deductibility limitation for the Fiscal 2020 and 2021 tax years. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. As a result of the CARES Act, the Company carried back its Fiscal 2020 taxable loss into the Fiscal 2015 tax year.

Earnings (Loss) Per Common Share

Earnings (Loss) Per Common Share

A dual presentation of basic and diluted earnings (loss) per common share is required on the face of the Company's Consolidated Statements of Operations as well as a reconciliation of the computation of basic earnings (loss) per common share to diluted earnings (loss) per common share. Basic earnings (loss) per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Beginning in the first quarter of Fiscal 2020, the Company's diluted earnings (loss) per common share is computed using the "if-converted" method by dividing the adjusted "if-converted" net income by the adjusted weighted average number of shares of common stock outstanding during the period. The adjusted "if-converted" net income is adjusted for interest expense and amortization of debt issuance costs, both net of tax, associated with the Company’s 4.50% Convertible Senior Notes due 2026. The weighted average number of diluted shares is adjusted for the potential dilutive effect of the exercise of stock options, treats unvested restricted stock and performance-based shares as if it were vested, and assumes the conversion of the 4.50% Convertible Senior Notes. Anti-dilutive securities are excluded from the calculation. Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss), but excluded from income (loss) for all amounts are recorded directly as an adjustment to stockholders’ equity.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the impairment model used to measure credit losses for most financial assets. We are required to recognize an allowance that reflects the Company’s current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The Company adopted this guidance in the first quarter of Fiscal 2021. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity, with changes to modify and simplify the application of U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted. The ASU requires adoption using either the retrospective basis or the modified retrospective basis. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements.

XML

Summary of Significant Accounting Policies (Tables)

9 Months Ended

Mar. 31, 2021

Summary of Significant Accounting Policies

Schedule of reconciliation of the cash, cash equivalents and restricted cash amounts

	March 31, 2021		March 31, 2020
Cash and cash equivalents	$	81,290	$	101,455
Restricted cash, included in other assets		5,000		—
Cash, cash equivalents and restricted cash as presented on the Consolidated Statements of Cash Flows	$	86,290	$	101,455

Schedule of the Company's net sales by medical indication

	Three Months Ended				Nine Months Ended
(In thousands)	March 31,				March 31,
Medical Indication	2021		2020		2021		2020
Analgesic	$	3,836	$	2,811	$	10,528	$	6,806
Anti-Psychosis		11,678		27,858		38,023		78,588
Cardiovascular		16,573		21,746		52,623		67,325
Central Nervous System		24,509		18,566		71,648		57,154
Endocrinology		6,822		—		19,551		—
Gastrointestinal		16,817		20,745		52,492		56,020
Infectious Disease		10,610		21,749		55,586		51,722
Migraine		5,169		12,886		20,942		32,907
Respiratory/Allergy/Cough/Cold		2,548		2,966		6,241		8,747
Urinary		1,566		1,149		4,385		2,817
Other		8,617		8,051		24,661		27,847
Contract manufacturing revenue		3,625		5,845		16,089		17,891
Total net sales	$	112,370	$	144,372	$	372,769	$	407,824

Summary of products which accounted for at least 10% of total net sales

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Product 1	8	%	11	%	13	%	10	%
Product 2	8	%	17	%	8	%	18	%

Summary of customers which accounted for at least 10% of total net sales

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Customer A	29	%	29	%	27	%	25	%
Customer B	20	%	21	%	21	%	24	%
Customer C	13	%	12	%	12	%	11	%

XML

Restructuring Charges (Tables)

9 Months Ended

Mar. 31, 2021

Restructuring Charges

Schedule of reconciliation of changes in restructuring liabilities associated with restructuring program

	Employee
(In thousands)	Separation Costs
Balance at June 30, 2020	$	—
Restructuring charges		4,043
Payments		(4,001)
Balance at March 31, 2021	$	42

XML

Accounts Receivable, net (Tables)

9 Months Ended

Mar. 31, 2021

Accounts Receivable, net

Schedule of accounts receivable

	March 31,		June 30,
(In thousands)	2021		2020
Gross accounts receivable	$	258,652	$	271,557
Less: Chargebacks reserve		(74,729)		(61,877)
Less: Rebates reserve		(16,446)		(24,536)
Less: Returns reserve		(38,708)		(40,796)
Less: Other deductions		(13,449)		(17,557)
Less: Allowance for doubtful accounts		(629)		(1,103)
Accounts receivable, net	$	114,691	$	125,688

Schedule of major category of revenue-related reserves

Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2020	$	61,877	$	62,711	$	40,796	$	17,557	$	182,941
Current period provision		515,196		104,795		14,545		55,213		689,749
Credits issued during the period		(502,344)		(119,212)		(16,633)		(59,321)		(697,510)
Balance at March 31, 2021	$	74,729	$	48,294	$	38,708	$	13,449	$	175,180

Reserve Category
(In thousands)	Chargebacks		Rebates		Returns		Other		Total
Balance at June 30, 2019	$	89,567	$	78,274	$	55,554	$	18,128	$	241,523
Current period provision		608,570		180,574		16,600		77,167		882,911
Credits issued during the period		(637,664)		(181,465)		(24,466)		(52,508)		(896,103)
Balance at March 31, 2020	$	60,473	$	77,383	$	47,688	$	42,787	$	228,331

XML

Inventories (Tables)

9 Months Ended

Mar. 31, 2021

Inventories

Schedule of Inventories

	March 31,		June 30,
(In thousands)	2021		2020
Raw Materials	$	47,307	$	59,703
Work-in-process		16,143		12,235
Finished Goods		49,624		70,929
Total	$	113,074	$	142,867

XML

Property, Plant and Equipment, net (Tables)

9 Months Ended

Mar. 31, 2021

Property, Plant and Equipment, net

Schedule of property, plant and equipment, net

		March 31,		June 30,
(In thousands)	Useful Lives	2021		2020
Land	—	$	1,783	$	1,783
Building and improvements	10 - 39 years		103,361		100,285
Machinery and equipment	5 - 10 years		168,858		164,704
Furniture and fixtures	5 - 7 years		3,402		3,116
Less accumulated depreciation			(119,953)		(102,983)
			157,451		166,905
Construction in progress			11,393		12,613
Property, plant and equipment, net		$	168,844	$	179,518

XML

Intangible Assets (Tables)

9 Months Ended

Mar. 31, 2021

Intangible Assets

Summary of intangible assets, net

	Weighted	Gross Carrying Amount				Accumulated Amortization				Intangible Assets, Net
	Avg. Life	March 31,		June 30,		March 31,		June 30,		March 31,		June 30,
(In thousands)	(Yrs.)	2021		2020		2021		2020		2021		2020
Definite-lived:
KUPI product rights	15		83,955		416,154		(2,099)		(125,327)		81,856		290,827
KUPI trade name	2		2,920		2,920		(2,920)		(2,920)		—		—
KUPI other intangible assets	15		19,000		19,000		(6,778)		(5,828)		12,222		13,172
Silarx product rights	15		20,000		20,000		(4,556)		(3,556)		15,444		16,444
Other product rights	10		55,218		50,718		(8,602)		(5,426)		46,616		45,292
Total definite-lived		$	181,093	$	508,792	$	(24,955)	$	(143,057)	$	156,138	$	365,735
Indefinite-lived:
KUPI in-process research and development	—	$	4,000	$	9,000	$	—	$	—	$	4,000	$	9,000
Total indefinite-lived			4,000		9,000		—		—		4,000		9,000
Total intangible assets, net		$	185,093	$	517,792	$	(24,955)	$	(143,057)	$	160,138	$	374,735

Summary of future annual amortization expense

(In thousands)	Amortization
Fiscal Year Ending June 30,	Expense
2021	$	3,857
2022		17,026
2023		16,726
2024		16,426
2025		16,026
Thereafter		86,077
	$	156,138

XML

Long-Term Debt (Tables)

9 Months Ended

Mar. 31, 2021

Long-Term Debt

Summary of long-term debt, net

	March 31,		June 30,
(In thousands)	2021		2020
Term Loan A	$	—	$	48,844
Unamortized discount and other debt issuance costs		—		(433)
Term Loan A, net		—		48,411
Term Loan B due 2022; 6.38% as of March 31, 2021		543,348		572,857
Unamortized discount and other debt issuance costs		(16,162)		(23,278)
Term Loan B, net		527,186		549,579
4.50% Convertible Senior Notes due 2026		86,250		86,250
Unamortized discount and other debt issuance costs		(2,738)		(3,111)
4.50% Convertible Senior Notes, net		83,512		83,139
$125 million Revolving Credit Facility		—		—
$30 million ABL Credit Facility		—		—
Total debt, net		610,698		681,129
Less short-term borrowings and current portion of long-term debt		—		(88,189)
Total long-term debt, net	$	610,698	$	592,940

Summary of long-term debt amounts due

	Amounts Payable
(In thousands)	to Institutions
2022 (a)	$	39,345
2023		504,003
2024		—
2025		—
2026		—
Thereafter		86,250
Total	$	629,598

(a) The Company completed multiple transactions to refinance the existing Term Loan B Facility due 2022 on April 22, 2021. In accordance with ASC 470 Debt, the principal payments due for the twelve-month period ending March 31, 2022 are classified as non-current on the Consolidated Balance Sheet as of March 31, 2021.

XML

Commitments (Tables)

9 Months Ended

Mar. 31, 2021

Commitments

Schedule of components of lease cost

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Operating lease cost	$	463	$	642	$	1,342	$	1,713
Variable lease cost		37		32		119		93
Short-term lease cost (a)		111		194		337		473
Total	$	611	$	868	$	1,798	$	2,279

(a) Not recorded on the Consolidated Balance Sheet.

Schedule of supplemental cash flow information and non-cash activity

	Nine Months Ended
	March 31,
(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,405	$	1,439
Non-cash activity:
ROU assets obtained in exchange for new operating lease liabilities	$	2,275	$	4,317

Schedule of weighted-average remaining lease term

	Nine Months Ended
	March 31,
	2021		2020
Weighted-average remaining lease term	10	years	9	years
Weighted-average discount rate	8.5	%	7.9	%

Schedule of maturities of lease liabilities

(In thousands)	Amounts Due
2021	$	527
2022		2,045
2023		2,064
2024		2,083
2025		2,103
Thereafter		10,637
Total lease payments		19,459
Less: Imputed interest		6,113
Present value of lease liabilities	$	13,346

XML

Accumulated Other Comprehensive Loss (Tables)

9 Months Ended

Mar. 31, 2021

Accumulated Other Comprehensive Loss.

Schedule of Accumulated Other Comprehensive Loss

	March 31,
(In thousands)	2021		2020
Foreign Currency Translation
Beginning Balance, June 30	$	(627)	$	(615)
Net income (loss) on foreign currency translation (net of tax of $0 and $0)		24		(26)
Other comprehensive income (loss), net of tax		24		(26)
Total Accumulated Other Comprehensive Loss	$	(603)	$	(641)

XML

Loss Per Common Share (Tables)

9 Months Ended

Mar. 31, 2021

Loss Per Common Share

Summary of reconciliation of the Company's basic and diluted (loss) per common share

	Three Months Ended
	March 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(7,142)	$	(16,592)
Interest expense applicable to the Convertible Notes, net of tax		—		—
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax		—		—
Adjusted “if-converted” net loss	$	(7,142)	$	(16,592)
Denominator:
Basic weighted average common shares outstanding		39,511,296		38,707,049
Effect of potentially dilutive options and restricted stock awards		—		—
Effect of conversion of the Convertible Notes		—		—
Diluted weighted average common shares outstanding		39,511,296		38,707,049
Loss per common share:
Basic	$	(0.18)	$	(0.43)
Diluted	$	(0.18)	$	(0.43)

	Nine Months Ended
	March 31,
(In thousands, except share and per share data)	2021		2020
Numerator:
Net loss	$	(185,589)	$	(23,665)
Interest expense applicable to the Convertible Notes, net of tax		—		—
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax		—		—
Adjusted “if-converted” net loss	$	(185,589)	$	(23,665)
Denominator:
Basic weighted average common shares outstanding		39,340,670		38,539,850
Effect of potentially dilutive options and restricted stock awards		—		—
Effect of conversion of the Convertible Notes		—		—
Diluted weighted average common shares outstanding		39,340,670		38,539,850
Loss per common share:
Basic	$	(4.72)	$	(0.61)
Diluted	$	(4.72)	$	(0.61)

XML

Share-based Compensation (Tables)

9 Months Ended

Mar. 31, 2021

Share-based Compensation

Schedule of weighted average assumptions

	Nine Months Ended
	March 31, 2021			March 31, 2020
Risk-free interest rate		0.2	%		1.9	%
Expected volatility		82.5	%		73.7	%
Expected dividend yield		—	%		—	%
Forfeiture rate		—	%		—	%
Expected term		5.0	years		5.1	years
Weighted average fair value	$	3.86		$	4.04

Summary of stock option award activity

						Weighted
		Weighted-				Average
		Average		Aggregate		Remaining
		Exercise		Intrinsic		Contractual
(In thousands, except for weighted average price and life data)	Awards	Price		Value		Life (yrs.)
Outstanding at June 30, 2020	991	$	12.11	$	678	5.6
Granted	309	$	5.95
Exercised	(37)	$	4.12	$	61
Forfeited, expired or repurchased	(217)	$	17.17
Outstanding at March 31, 2021	1,046	$	9.51	$	62	7.4
Vested and expected to vest at March 31, 2021	1,045	$	9.51	$	62	7.4
Exercisable at March 31, 2021	383	$	14.82	$	62	5.1

Summary of non-vested restricted stock awards

		Weighted
		Average Grant -		Aggregate
(In thousands, except for weighted average price data)	Awards	date Fair Value		Intrinsic Value
Non-vested at June 30, 2020	1,344	$	8.70
Granted	894		5.74
Vested	(792)		8.49	$	4,613
Forfeited	(75)		9.57
Non-vested at March 31, 2021	1,371	$	6.85

Schedule of non-vested performance-based shares

		Weighted
		Average Grant -
(In thousands, except for weighted average price and life data)	Awards	date Fair Value
Non-vested at June 30, 2020	204	$	12.99
Granted	339	$	9.22
Performance adjustment (1)	(12)	$	25.58
Non-vested at March 31, 2021	531	$	10.29

(1) Represents the adjustment based on the performance of the September 2017 awards, which was below the Threshold goal level at the end of the three-year performance period.

Schedule of allocation of share-based compensation

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Selling, general and administrative expenses	$	1,411	$	1,124	$	5,632	$	5,965
Research and development expenses		132		180		419		618
Cost of sales		320		566		1,145		1,753
Total	$	1,863	$	1,870	$	7,196	$	8,336
Tax benefit at statutory rate	$	419	$	421	$	1,619	$	1,876

XML

Assets Held for Sale (Tables)

9 Months Ended

Mar. 31, 2021

Assets Held for Sale

Schedule of financial results of the Cody API business

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
(In thousands)	2021		2020		2021		2020
Net sales	$	—	$	—	$	—	$	1,607
Pretax loss attributable to Cody API business		(110)		(1,279)		(727)		(6,340)

XML

Summary of Significant Accounting Policies - Cash (Details) - USD ($) $ in Thousands	Mar. 31, 2021	Jun. 30, 2020	Mar. 31, 2020	Jun. 30, 2019
Summary of Significant Accounting Policies
Deposit account as restricted cash in other assets	$ 5,000
Cash and cash equivalents	81,290	$ 144,329	$ 101,455
Restricted cash, included in other assets	5,000
Cash, cash equivalents and restricted cash as presented on the Consolidated Statements of Cash Flows	$ 86,290	$ 144,329	$ 101,455	$ 140,249

XML

Summary of Significant Accounting Policies - Intangible Assets (Details)	9 Months Ended
	Mar. 31, 2021
Minimum
Intangible Assets
Estimated useful lives	5 years
Maximum
Intangible Assets
Estimated useful lives	15 years

XML

Summary of Significant Accounting Policies - Segments (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)	Mar. 31, 2021 USD ($) segment	Mar. 31, 2020 USD ($)
Medical Indication Information
Total net sales	$ 112,370	$ 144,372	$ 372,769	$ 407,824
Number of reportable segments | segment			1
Analgesic
Medical Indication Information
Total net sales	3,836	2,811	$ 10,528	6,806
Anti-Psychosis
Medical Indication Information
Total net sales	11,678	27,858	38,023	78,588
Cardiovascular
Medical Indication Information
Total net sales	16,573	21,746	52,623	67,325
Central Nervous System
Medical Indication Information
Total net sales	24,509	18,566	71,648	57,154
Endocrinology
Medical Indication Information
Total net sales	6,822		19,551
Gastrointestinal
Medical Indication Information
Total net sales	16,817	20,745	52,492	56,020
Infectious Disease
Medical Indication Information
Total net sales	10,610	21,749	55,586	51,722
Migraine
Medical Indication Information
Total net sales	5,169	12,886	20,942	32,907
Respiratory/Allergy/Cough/Cold
Medical Indication Information
Total net sales	2,548	2,966	6,241	8,747
Urinary
Medical Indication Information
Total net sales	1,566	1,149	4,385	2,817
Other
Medical Indication Information
Total net sales	8,617	8,051	24,661	27,847
Contract manufacturing revenue
Medical Indication Information
Total net sales	$ 3,625	$ 5,845	$ 16,089	$ 17,891

XML

Summary of Significant Accounting Policies - Concentrations (Details) - Net sales	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Products | Product 1
Concentration risk
Concentration risk (as a percent)	8.00%	11.00%	13.00%	10.00%
Products | Product 2
Concentration risk
Concentration risk (as a percent)	8.00%	17.00%	8.00%	18.00%
Customers | Customer A
Concentration risk
Concentration risk (as a percent)	29.00%	29.00%	27.00%	25.00%
Customers | Customer B
Concentration risk
Concentration risk (as a percent)	20.00%	21.00%	21.00%	24.00%
Customers | Customer C
Concentration risk
Concentration risk (as a percent)	13.00%	12.00%	12.00%	11.00%

XML

Summary of Significant Accounting Policies - Loss per Share (Details)	Mar. 31, 2021
4.50% Convertible Senior Notes due 2026
Interest rate (as a percent)	4.50%

XML

Restructuring Charges - Restructuring Program (Details) $ in Thousands		3 Months Ended	9 Months Ended
	Jul. 10, 2020 employee	Mar. 31, 2020 USD ($)	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)
Restructuring Charges
Restructuring expenses		$ 191	$ 4,043	$ 1,771
2020 Restructuring Plan
Restructuring Charges
Positions eliminated estimate | employee	80
Restructuring expenses			4,000
Expected cost savings			$ 15,000

XML

Restructuring Charges - Restructuring Program Change (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Reconciliation of the changes in restructuring liabilities
Restructuring charges	$ 191	$ 4,043	$ 1,771
2020 Restructuring Plan
Reconciliation of the changes in restructuring liabilities
Restructuring charges		4,000
2020 Restructuring Plan | Employee Separation Costs
Reconciliation of the changes in restructuring liabilities
Restructuring charges		4,043
Payments		(4,001)
Ending balance for the period		$ 42

XML

Accounts Receivable, net (Details) - USD ($) $ in Thousands	Mar. 31, 2021	Jun. 30, 2020
Accounts receivable, net
Gross accounts receivable	$ 258,652	$ 271,557
Less: Allowance for doubtful accounts	(629)	(1,103)
Accounts receivable, net	114,691	125,688
Chargebacks
Accounts receivable, net
Less: reserve	(74,729)	(61,877)
Rebates
Accounts receivable, net
Less: reserve	(16,446)	(24,536)
Returns
Accounts receivable, net
Less: reserve	(38,708)	(40,796)
Other
Accounts receivable, net
Less: reserve	$ (13,449)	$ (17,557)

XML

Accounts Receivable, net - Revenue reserve (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Accounts receivable, net
Balance at the beginning of the period			$ 182,941	$ 241,523
Current period provision			689,749	882,911
Credits issued during the period			(697,510)	(896,103)
Balance at the end of the period	$ 175,180	$ 228,331	175,180	228,331
Chargebacks
Accounts receivable, net
Balance at the beginning of the period			61,877	89,567
Current period provision	135,400	201,000	515,196	608,570
Credits issued during the period			(502,344)	(637,664)
Balance at the end of the period	74,729	60,473	74,729	60,473
Rebates
Accounts receivable, net
Balance at the beginning of the period			62,711	78,274
Current period provision	27,100	63,800	104,795	180,574
Credits issued during the period			(119,212)	(181,465)
Balance at the end of the period	48,294	77,383	48,294	77,383
Returns
Accounts receivable, net
Balance at the beginning of the period			40,796	55,554
Current period provision	3,900	6,400	14,545	16,600
Credits issued during the period			(16,633)	(24,466)
Balance at the end of the period	38,708	47,688	38,708	47,688
Other
Accounts receivable, net
Balance at the beginning of the period			17,557	18,128
Current period provision	18,600	35,700	55,213	77,167
Credits issued during the period			(59,321)	(52,508)
Balance at the end of the period	$ 13,449	$ 42,787	$ 13,449	$ 42,787

XML

Accounts Receivable, net - Revenue reserve information (Details)	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Chargebacks
Accounts receivable, net
Percentage of provision for rebates, chargebacks, returns and other adjustments on gross sales	46.10%	45.10%	49.20%	47.80%
Rebates
Accounts receivable, net
Percentage of provision for rebates, chargebacks, returns and other adjustments on gross sales	9.20%	14.30%	10.00%	14.20%
Returns
Accounts receivable, net
Percentage of provision for rebates, chargebacks, returns and other adjustments on gross sales	1.30%	1.40%	1.40%	1.30%
Other
Accounts receivable, net
Percentage of provision for rebates, chargebacks, returns and other adjustments on gross sales	6.30%	8.00%	5.30%	6.10%

XML

Inventories (Details) - USD ($) $ in Thousands	Mar. 31, 2021	Jun. 30, 2020
Inventories:
Raw Materials	$ 47,307	$ 59,703
Work-in-process	16,143	12,235
Finished Goods	49,624	70,929
Net inventory	$ 113,074	$ 142,867

XML

Inventories - Additional information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Inventories:
Provision for inventory write-downs	$ 400	$ 2,400	$ 23,613	$ 8,486

XML

Property, Plant and Equipment, net (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Jun. 30, 2020
Property, Plant and Equipment, net
Less: accumulated depreciation	$ (119,953)		$ (119,953)		$ (102,983)
Property, plant and equipment, net before construction in progress	157,451		157,451		166,905
Property, plant and equipment, net	168,844		168,844		179,518
Depreciation expense	5,800	$ 6,200	17,200	$ 17,900
Held in foreign countries
Property, Plant and Equipment, net
Property, plant and equipment, net	500		500		500
Land
Property, Plant and Equipment, net
Property, plant and equipment, gross	1,783		1,783		1,783
Building and improvements
Property, Plant and Equipment, net
Property, plant and equipment, gross	103,361		103,361		100,285
Machinery and equipment
Property, Plant and Equipment, net
Property, plant and equipment, gross	168,858		168,858		164,704
Furniture and fixtures
Property, Plant and Equipment, net
Property, plant and equipment, gross	3,402		3,402		3,116
Construction in progress
Property, Plant and Equipment, net
Property, plant and equipment, net	$ 11,393		$ 11,393		$ 12,613

XML

Property, Plant and Equipment, net - Useful Lives (Details)	9 Months Ended
	Mar. 31, 2021
Building and improvements | Minimum
Property, Plant and Equipment, net
Useful Lives	10 years
Building and improvements | Maximum
Property, Plant and Equipment, net
Useful Lives	39 years
Machinery and equipment | Minimum
Property, Plant and Equipment, net
Useful Lives	5 years
Machinery and equipment | Maximum
Property, Plant and Equipment, net
Useful Lives	10 years
Furniture and fixtures | Minimum
Property, Plant and Equipment, net
Useful Lives	5 years
Furniture and fixtures | Maximum
Property, Plant and Equipment, net
Useful Lives	7 years

XML

Fair Value Measurements (Details) - USD ($) $ / shares in Units, $ in Millions	Mar. 31, 2021	Dec. 31, 2020	Jun. 30, 2020
KUPI | In-process research and development
Debt Instrument [Line Items]
Indefinite-lived intangible assets fair value		$ 4.0
KUPI | Product rights
Debt Instrument [Line Items]
Definite-lived intangible assets fair value		$ 84.0
Term loan
Debt Instrument [Line Items]
Estimated fair value of loan	$ 518.0		$ 608.0
4.50% Convertible Senior Notes due 2026
Debt Instrument [Line Items]
Estimated fair value of loan	$ 53.0		$ 58.0
Interest rate (as a percent)	4.50%
Initial conversion price	$ 15.29

XML

Intangible Assets - Definite-lived (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2021	Mar. 31, 2021	Jun. 30, 2020
Finite-Lived Intangible Assets
Gross Carrying Amount	$ 181,093	$ 181,093	$ 508,792
Accumulated Amortization	(24,955)	(24,955)	(143,057)
Intangible Assets, Net	156,138	$ 156,138	365,735
Product rights | KUPI
Finite-Lived Intangible Assets
Weighted Avg. Life		15 years
Gross Carrying Amount	83,955	$ 83,955	416,154
Accumulated Amortization	(2,099)	(2,099)	(125,327)
Intangible Assets, Net	81,856	$ 81,856	290,827
Definite-lived intangible assets impairment	193,000
Product rights | Silarx
Finite-Lived Intangible Assets
Weighted Avg. Life		15 years
Gross Carrying Amount	20,000	$ 20,000	20,000
Accumulated Amortization	(4,556)	(4,556)	(3,556)
Intangible Assets, Net	15,444	$ 15,444	16,444
Trade name | KUPI
Finite-Lived Intangible Assets
Weighted Avg. Life		2 years
Gross Carrying Amount	2,920	$ 2,920	2,920
Accumulated Amortization	(2,920)	$ (2,920)	(2,920)
Other intangible assets
Finite-Lived Intangible Assets
Weighted Avg. Life		10 years
Gross Carrying Amount	55,218	$ 55,218	50,718
Accumulated Amortization	(8,602)	(8,602)	(5,426)
Intangible Assets, Net	46,616	$ 46,616	45,292
Other intangible assets | KUPI
Finite-Lived Intangible Assets
Weighted Avg. Life		15 years
Gross Carrying Amount	19,000	$ 19,000	19,000
Accumulated Amortization	(6,778)	(6,778)	(5,828)
Intangible Assets, Net	$ 12,222	$ 12,222	$ 13,172

XML

Intangible Assets - Indefinite lived (Details) - USD ($) $ in Thousands	3 Months Ended
	Dec. 31, 2020	Mar. 31, 2021	Jun. 30, 2020
Indefinite-lived
Indefinite-lived assets, net		$ 4,000	$ 9,000
Total intangible assets - Gross Carrying Amount		185,093	517,792
Accumulated Amortization		(24,955)	(143,057)
Total intangible assets, Net		160,138	374,735
In-process research and development | KUPI
Indefinite-lived
Indefinite-lived assets, net		$ 4,000	$ 9,000
Indefinite-lived intangible assets impairment	$ 5,000

XML

Intangible Assets - Future Amortization (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		9 Months Ended
	Nov. 30, 2020	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Jun. 30, 2020
Finite-Lived Intangible Assets
Amortization expense		$ 3,900	$ 8,300	$ 21,100	$ 23,500
Cost of sales		82,063	$ 94,380	298,738	$ 258,699
Future annual amortization expense:
2021		3,857		3,857
2022		17,026		17,026
2023		16,726		16,726
2024		16,426		16,426
2025		16,026		16,026
Thereafter		86,077		86,077
Intangible Assets, Net		$ 156,138		$ 156,138		$ 365,735
Recro [Member]
Finite-Lived Intangible Assets
Cost of sales	$ 5,000

XML

Long-Term Debt - Net (Details) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
	Nov. 25, 2020	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Dec. 07, 2020	Jun. 30, 2020
Long-term debt
Debt, gross		$ 629,598		$ 629,598
Total debt, net		610,698		610,698			$ 681,129
Less short-term borrowings and current portion of long-term debt							(88,189)
Long-term debt, net		$ 610,698		$ 610,698			592,940
Weighted average interest rate (as a percent)		7.90%	8.60%	7.90%	9.00%
Payment for extinguishment of debt				$ 78,353	$ 129,989
Term Loan A due 2020
Long-term debt
Debt, gross							48,844
Unamortized discount and other debt issuance costs							(433)
Total debt, net							48,411
Payment for extinguishment of debt	$ 42,000
Term Loan B due 2022
Long-term debt
Debt, gross		$ 543,348		543,348			572,857
Unamortized discount and other debt issuance costs		(16,162)		(16,162)			(23,278)
Total debt, net		$ 527,186		$ 527,186			549,579
Interest rate (as a percent)		6.38%		6.38%
4.50% Convertible Senior Notes due 2026
Long-term debt
Debt, gross		$ 86,250		$ 86,250			86,250
Unamortized discount and other debt issuance costs		(2,738)		(2,738)			(3,111)
Total debt, net		$ 83,512		$ 83,512			$ 83,139
Interest rate (as a percent)		4.50%		4.50%
Revolving Credit Facility due 2020
Long-term debt
Maximum borrowing capacity		$ 125,000		$ 125,000
ABL Credit Facility
Long-term debt
Maximum borrowing capacity		$ 30,000		$ 30,000		$ 30,000

XML

Long-Term Debt - Maturity (Details) $ in Thousands	Mar. 31, 2021 USD ($)
Long-term Debt, Rolling Maturity
2022	$ 39,345
2023	504,003
Thereafter	86,250
Total	$ 629,598

XML

Long-Term Debt - Credit and Guaranty Agreement (Details) $ in Millions	Dec. 07, 2020 USD ($) D	Mar. 31, 2021 USD ($)
Debt Instrument [Line Items]
Deposit account as restricted cash in other assets		$ 5
ABL Credit Facility
Debt Instrument [Line Items]
Maximum borrowing capacity	$ 30	30
Applicate margin rate (as a percent)	2.50%
Unused capacity commitment fee (as a percent)	0.50%
Designated action and Excess Availability	30 days
Fixed charge coverage ratio	1.10
Minimum fixed charge coverage ratio percentage	15.00%
Consecutive business days | D	3
ABL Credit Facility | LIBOR
Debt Instrument [Line Items]
Variable interest rate (as a percent)	0.75%
Term Loan B due 2022
Debt Instrument [Line Items]
Minimum amount to be maintained in deposit account	$ 5
Minimum liquidity to be maintained as on last day of each month.	$ 15
Deposit account as restricted cash in other assets		$ 5

XML

Legal, Regulatory Matters and Contingencies (Details)			1 Months Ended		9 Months Ended
	Aug. 07, 2020 USD ($)	May 22, 2019 USD ($)	Aug. 31, 2019 USD ($) product	Nov. 30, 2016 item	Mar. 31, 2021 tranche product Distributor lawsuit	Jun. 30, 2018 product	Oct. 31, 2017 product
Government Pricing
Legal, Regulatory Matters and Contingencies
Settlement payment | $		$ 9,400,000
Reimbursement of overpayment | $			$ 8,100,000
Private Antitrust and Consumer Protection Litigation
Legal, Regulatory Matters and Contingencies
Number of drugs | product			135		18		6
Number of manufacturers and distributors | Distributor					30
Number of Tranches | tranche					3
Private Antitrust and Consumer Protection Litigation | Minimum
Legal, Regulatory Matters and Contingencies
Number of lawsuits | lawsuit					100
End Payer Plaintiffs
Legal, Regulatory Matters and Contingencies
Number of drugs | product						14
Indirect Reseller Plaintiffs
Legal, Regulatory Matters and Contingencies
Number of drugs | product						15
Shareholder Litigation
Legal, Regulatory Matters and Contingencies
Number of officers | item				2
Litigation settlement amount payable to other party | $	$ 600,000

XML

Commitments - Leases (Details) - USD ($) $ in Thousands	1 Months Ended	9 Months Ended
	Feb. 28, 2021	Mar. 31, 2021	Mar. 31, 2020	Jun. 30, 2020
Commitments
Right-of-use asset		$ 10,762		$ 9,343
Present value of lease liabilities		13,346		10,900
ROU current liability		2,040		$ 1,097
ROU assets obtained in exchange for new operating lease liabilities	$ 2,300	$ 2,275	$ 4,317

XML

Commitments - Components of lease cost (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Commitments
Operating lease cost	$ 463	$ 642	$ 1,342	$ 1,713
Variable lease cost	37	32	119	93
Short-term lease cost	111	194	337	473
Total lease cost	$ 611	$ 868	$ 1,798	$ 2,279

XML

Commitments - Cash flow information (Details) - USD ($) $ in Thousands	1 Months Ended	9 Months Ended
	Feb. 28, 2021	Mar. 31, 2021	Mar. 31, 2020
Lease cash flow
Operating cash flows from operating leases.		$ 1,405	$ 1,439
ROU assets obtained in exchange for new operating lease liabilities	$ 2,300	$ 2,275	$ 4,317
Weighted-average
Weighted-average remaining lease term		10 years	9 years
Weighted-average discount rate		8.50%	7.90%

XML

Commitments - Maturities of lease liabilities (Details) - USD ($) $ in Thousands	Mar. 31, 2021	Jun. 30, 2020
Maturities of lease liabilities
2021	$ 527
2022	2,045
2023	2,064
2024	2,083
2025	2,103
Thereafter	10,637
Total lease payments	19,459
Less: Imputed interest	6,113
Present value of lease liabilities	$ 13,346	$ 10,900

XML

Commitments - Other Commitment (Details) $ in Millions		12 Months Ended
	Feb. 08, 2021 USD ($)	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)	Jun. 30, 2017 USD ($)	Mar. 31, 2021 USD ($)
License and Collaboration Agreement With HEC
Commitments
Maximum amount to be loaned		$ 32.0
License and Collaboration Agreement, Excess Development Cost Split Ratio		1
License and Collaboration Agreement With HEC | First ten years
Commitments
License and Collaboration Agreement, Profit Split Ratio		1
License and Collaboration Agreement, Profit Split Period		10 years
License and Collaboration Agreement With HEC | Next five years
Commitments
License and Collaboration Agreement, Profit Split Ratio		1.5
License and Collaboration Agreement, Profit Split Period		5 years
License And Collaboration Agreement With Sunshine | Sunshine
Commitments
Maximum amount to be loaned	$ 32.0
License And Collaboration Agreement With Sunshine | First ten years | Sunshine
Commitments
License and Collaboration Agreement, Profit Split Ratio	1
License and Collaboration Agreement, Profit Split Period	10 years
License And Collaboration Agreement With Sunshine | Next five years | Sunshine
Commitments
License and Collaboration Agreement, Profit Split Ratio	1.5
License and Collaboration Agreement, Profit Split Period	5 years
Variable interest entity
Commitments
Maximum amount to be loaned				$ 15.0
Expiration period				7 years
Loans receivable fixed rate (as a percent)				2.00%
Percentage of outstanding loan			50.00%
Proceeds from sale of loan			$ 5.6
Loan receivable					$ 6.6

XML

Accumulated Other Comprehensive Loss (Details) - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Accumulated Other Comprehensive Loss.
Beginning Balance	$ (627)	$ (615)
Net income (loss) on foreign currency translation (net of tax of $0 and $0)	24	(26)
Other comprehensive income (loss), net of tax	24	(26)
Total Accumulated Other Comprehensive Loss	(603)	(641)
Net income (loss) on foreign currency translation, tax	$ 0	$ 0

XML

Loss Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Numerator:
Net loss	$ (7,142)	$ (16,592)	$ (185,589)	$ (23,665)
Adjusted "if-converted" net loss	$ (7,142)	$ (16,592)	$ (185,589)	$ (23,665)
Denominator:
Basic weighted average common shares outstanding	39,511,296	38,707,049	39,340,670	38,539,850
Diluted weighted average common shares outstanding	39,511,296	38,707,049	39,340,670	38,539,850
Loss per common share:
Basic (in dollars per share)	$ (0.18)	$ (0.43)	$ (4.72)	$ (0.61)
Diluted (in dollars per share)	$ (0.18)	$ (0.43)	$ (4.72)	$ (0.61)
Anti-dilutive shares excluded in the computation of diluted earnings per share	8,100,000	7,800,000	8,100,000	6,000,000.0

XML

Share-based Compensation - Employee Compensation Plans (Details) shares in Millions, $ in Millions	9 Months Ended
	Mar. 31, 2021 USD ($) ShareBasedCompensationPlan shares
Stock-based Compensation
Number of share-based employee compensation plans | ShareBasedCompensationPlan	2
Additional shares for future issuances	3.0
Aggregate number of shares authorized for issuance	8.0
Shares for future issuances	3.0
Share-based compensation awards maximum contractual term	10 years
Total unrecognized compensation cost related to non-vested share-based compensation awards granted under the Plans | $	$ 11.2
Maximum
Stock-based Compensation
Share-based compensation awards vesting period	3 years
Weighted average period during which the cost is expected to be recognized	2 years 2 months 12 days

XML

Share-based Compensation - Options Valuation (Details) - Stock options - $ / shares	9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Assumptions used to estimate fair values
Risk-free interest rate (as a percent)	0.20%	1.90%
Expected volatility (as a percent)	82.50%	73.70%
Expected dividend yield (as a percent)	0.00%
Expected term (in years)	5 years	5 years 1 month 6 days
Weighted average fair value (in dollars per share)	$ 3.86	$ 4.04

XML

Share-based Compensation - Options Rollforward (Details) - Stock options - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	9 Months Ended	12 Months Ended
	Mar. 31, 2021	Jun. 30, 2020
Awards
Outstanding at the beginning of the period (in shares)	991
Granted (in shares)	309
Exercised (in shares)	(37)
Forfeited, expired or repurchased (in shares)	(217)
Outstanding at the end of the period (in shares)	1,046	991
Vested and expected to vest, Awards (in shares)	1,045
Exercisable at the end of the period (in shares)	383
Weighted-Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 12.11
Granted (in dollars per share)	5.95
Exercised (in dollars per share)	4.12
Forfeited, expired or repurchased (in dollars per share)	17.17
Outstanding at the end of the period (in dollars per share)	9.51	$ 12.11
Vested and expected to vest, Weighted-Average Exercise Price (in dollars per share)	9.51
Exercisable at the end of the period (in dollars per share)	$ 14.82
Aggregate Intrinsic Value
Outstanding at the beginning of the period (in dollars)	$ 678
Exercised (in dollars)	61
Outstanding at the end of the period (in dollars)	62	$ 678
Vested and expected to vest, Aggregate Intrinsic Value	62
Exercisable at the end of the period (in dollars)	$ 62
Weighted Average Remaining Contractual Life (yrs.)
Outstanding at the end of the period (in years)	7 years 4 months 24 days	5 years 7 months 6 days
Vested and expected to vest (in years)	7 years 4 months 24 days
Exercisable at the end of the period (in years)	5 years 1 month 6 days

XML

Share-based Compensation - Restricted Stock (Details) - Restricted stock - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Stock-based Compensation
Annual forfeiture rate used to calculate compensation expense (as a percent)	6.50%	6.50%
Awards
Non-vested at the beginning of the period (in shares)	1,344
Granted (in shares)	894
Vested (in shares)	(792)
Forfeited (in shares)	(75)
Non-vested at the end of the period (in shares)	1,371
Weighted Average Grant-date Fair Value
Non-vested at the beginning of the period (in dollars per share)	$ 8.70
Granted (in dollars per share)	5.74
Vested (in dollars per share)	8.49
Forfeited (in dollars per share)	9.57
Non-vested at the end of the period (in dollars per share)	$ 6.85
Aggregate Intrinsic Value
Vested	$ 4,613

XML

Share-based Compensation - Performance-Based Shares (Details) - Performance-Based Shares shares in Thousands	9 Months Ended
	Mar. 31, 2021 $ / shares shares
Stock-based Compensation
Share-based compensation awards vesting period	3 years
Awards
Non-vested at the beginning of the period (in shares) | shares	204
Granted (in shares) | shares	339
Performance adjustment (in shares) | shares	(12)
Non-vested at the end of the period (in shares) | shares	531
Weighted Average Grant-date Fair Value
Non-vested at the beginning of the period (in dollars per share) | $ / shares	$ 12.99
Granted (in dollars per share) | $ / shares	9.22
Performance adjustment (in dollars per share) | $ / shares	25.58
Non-vested at the end of the period (in dollars per share) | $ / shares	$ 10.29

XML

Share-based Compensation - Employee Stock Purchase Plan (Details) - shares shares in Thousands	9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Apr. 01, 2003
Stock-based Compensation
Shares authorized for issuance (in shares)	8,000
Employee Stock Purchase Plan
Stock-based Compensation
Purchase price of stock as percent of market fair value (in percent)	85.00%
Compensation authorized by the employee to be withheld for stock purchase (in percent)	10.00%
Shares authorized for issuance (in shares)			1,100
Shares issued (in shares)	81	83
Cumulative shares issued (in shares)	991

XML

Share-based Compensation - Cost (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Share-based compensation costs
Share based compensation	$ 1,863	$ 1,870	$ 7,196	$ 8,336
Tax benefit at statutory rate	419	421	1,619	1,876
Selling, general and administrative
Share-based compensation costs
Share based compensation	1,411	1,124	5,632	5,965
Research and development
Share-based compensation costs
Share based compensation	132	180	419	618
Cost of sales
Share-based compensation costs
Share based compensation	$ 320	$ 566	$ 1,145	$ 1,753

XML

Employee Benefit Plan (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
	Jan. 01, 2021	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Employee Benefit Plan
Company matching contributions (as a percent)	50.00%			50.00%
Maximum company contribution (as a percent)	2.00%			4.00%
Contributions to the plan		$ 0.3	$ 0.6	$ 1.3	$ 1.7

XML

Income Taxes - Quarter (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Dec. 31, 2017	Jun. 30, 2020
Reconciliation of federal statutory rate to effective rate
Income tax benefit	$ (2,544)	$ (1,664)	$ (68,600)	$ (5,185)
Effective income tax rate (as a percent)	26.30%	9.10%	27.00%	18.00%
Federal income tax at statutory rate (as a percent)					35.00%
Unrecognized tax benefits	$ 4,600		$ 4,600			$ 4,600
Unrecognized tax benefits that would impact rate	4,400		4,400			4,500
Unrecognized tax benefits cumulative interest and penalties recorded	$ 0		$ 0			$ 0

XML

Related Party Transactions (Details) - Auburn - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Jun. 30, 2020
Related Party Transactions
Sales to related party	$ 0.6	$ 0.9	$ 2.1	$ 2.1
Accounts receivable related party	$ 0.4		$ 0.4		$ 0.7

XML

Assets Held for Sale (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Oct. 31, 2020	Jun. 30, 2020
Assets Held for Sale
Assets held for sale	$ 2,678		$ 2,678			$ 2,678
Disposal group held for sale | Cody API Restructuring Plan
Assets Held for Sale
Potential sales amount					$ 3,800
Assets held for sale	2,700		2,700
Net sales				$ 1,607
Pretax loss attributable to Cody API business	$ (110)	$ (1,279)	$ (727)	(6,340)
Impairment of the ROU lease asset				$ 1,200

XML

Subsequent Events (Details) - USD ($) $ / shares in Units, $ in Millions	Apr. 22, 2021	Apr. 05, 2021	Mar. 31, 2021	Dec. 07, 2020
ABL Credit Facility
Subsequent Events
Maximum borrowing capacity			$ 30.0	$ 30.0
Subsequent Events | 7.750% Senior secured notes due 2026
Subsequent Events
Principal Amount	$ 350.0
Interest rate (as a percent)	7.75%
Subsequent Events | Second Lien Facility
Subsequent Events
Principal Amount		$ 190.0
Common stock under the warrant		8,280,000
Warrants exercise price (in dollars per share)		$ 6.88
Warrants term		8 years
Subsequent Events | Second Lien Facility | Interest rate, after first year
Subsequent Events
Paid-in-kind interest rate (as a percent)		5.00%
Cash interest rate (as a percent)		5.00%
Subsequent Events | Second Lien Facility | Interest rate, first year
Subsequent Events
Paid-in-kind interest rate (as a percent)		10.00%
Subsequent Events | ABL Credit Facility
Subsequent Events
Maximum borrowing capacity		$ 45.0