UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, ~~2015~~2016

oTRANSITION 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)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

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

Class		Outstanding as of April 30, ~~2015~~2016
Common stock, par value $0.001 per share		~~36,242,710~~36,747,501

Table of Contents

Table of Contents

			Page No.
PART I.	FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS

		Consolidated Balance Sheets as of March 31, ~~2015~~2016 (unaudited) and June 30, ~~2014~~2015	3

		Consolidated Statements of Operations (unaudited) for the three and nine months ended March 31, ~~2015~~2016 and ~~2014~~2015	4

		Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended March 31, ~~2015~~2016 and ~~2014~~2015	5

		Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the nine months ended March 31, ~~2015~~2016	6

		Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, ~~2015~~2016 and ~~2014~~2015	7

		Notes to Consolidated Financial Statements (unaudited)	8

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2434

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3651

	ITEM 4.	CONTROLS AND PROCEDURES	3651

PART II.	OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS	3752

	ITEM 1A.	RISK FACTORS	3752

	ITEM 6.	EXHIBITS	3752

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANNETT COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	(Unaudited)						(Unaudited)
	March 31, 2015			June 30, 2014			March 31, 2016			June 30, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	208,772		$	105,587		$	225,446		$	200,340
Investment securities	16,614			40,693			12,959			13,467
Accounts receivable, net	79,715			61,325			183,624			91,103
Inventories, net	42,474			44,844
Inventories							116,511			46,191
Prepaid income taxes	4,604			—			15,253			—
Deferred tax assets	11,894			11,265			23,808			16,270
Other current assets	3,157			1,833			23,995			3,175
Total current assets	367,230			265,547			601,596			370,546
Property, plant and equipment, net	80,265			61,704			220,199			94,556
Intangible assets, net	1,166			927			598,418			29,090
Goodwill							313,451			141
Deferred tax assets	12,777			14,234			10,036			12,495
Other assets	1,638			361			8,676			1,938
TOTAL ASSETS	$	463,076		$	342,773		$	1,752,376		$	508,766

LIABILITIES
Current liabilities:
Accounts payable	$	16,994		$	20,982		$	33,038		$	19,195
Accrued expenses	3,843			3,901			9,181			4,928
Accrued payroll and payroll-related expenses	8,062			12,860			6,717			10,397
Rebates payable	5,889			4,558			16,993			7,553
Royalties payable							5,779			—
Restructuring liability							3,008			—
Accrued interest payable							10,823			—
Settlement liability							10,700			—
Income taxes payable	—			4,569			—			1,340
Acquisition-related contingent consideration							35,000			—
Current portion of long-term debt	134			129			45,640			135
Total current liabilities	34,922			46,999			176,879			43,548
Long-term debt, less current portion	908			1,009
Long-term debt, net							1,008,212			874
Restructuring liability							77			—
Settlement liability							13,414			—
Other liabilities							6,268			578
TOTAL LIABILITIES	35,830			48,008			1,204,850			45,000
Commitments and Contingencies (Note 13)
Commitments and Contingencies (Note 13 and 14)

STOCKHOLDERS’ EQUITY
Common stock ($0.001 par value, 100,000,000 shares authorized; 36,651,983 and 36,088,272 shares issued; 36,134,991 and 35,571,280 shares outstanding at March 31, 2015 and June 30, 2014, respectively)	37			36
Common stock ($0.001 par value, 100,000,000 shares authorized; 37,112,119 and 36,783,381 shares issued; 36,569,363 and 36,264,585 shares outstanding at March 31, 2016 and June 30, 2015, respectively)							37			37
Additional paid-in capital	233,488			216,793			279,874			236,178
Retained earnings	199,630			83,654			274,784			233,573
Accumulated other comprehensive loss	(285		)	(54		)	(280		)	(295		)
Treasury stock (516,992 shares at March 31, 2015 and June 30, 2014)	(5,959		)	(5,959		)
Treasury stock (542,756 and 518,796 shares at March 31, 2016 and June 30, 2015, respectively)							(7,277		)	(6,080		)
Total Lannett Company, Inc. stockholders’ equity	426,911			294,470			547,138			463,413
Noncontrolling Interest	335			295			388			353
Total stockholders’ equity	427,246			294,765			547,526			463,766
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	463,076		$	342,773		$	1,752,376		$	508,766

The accompanying notes are an integral part of the consolidated financial statements.

~~Table of Contents~~

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)

	Three months ended						Nine months ended						Three months ended						Nine months ended
	March 31,						March 31,						March 31,						March 31,
	2015			2014			2015			2014			2016			2015			2016			2015

Net sales	$	99,352		$	79,997		$	307,561		$	193,152		$	163,712		$	99,352		$	397,204		$	307,561
Settlement agreement													(23,598		)	—			(23,598		)	—
Total net sales													140,114			99,352			373,606			307,561
Cost of sales	23,714			23,865			73,155			74,572			75,345			23,694			155,964			73,094
JSP contract renewal cost	—			—			—			20,100
Amortization of intangibles													7,278			20			11,079			61
Gross profit	75,638			56,132			234,406			98,480			57,491			75,638			206,563			234,406
Operating expenses:
Research and development	9,159			10,583			23,358			21,113
Selling, general, and administrative	12,204			9,560			35,579			26,629
Research and development expenses													16,495			9,159			32,092			23,358
Selling, general, and administrative expenses													16,157			11,617			46,359			32,923
Acquisition and integration-related expenses													1,473			587			23,000			2,656
Restructuring expenses													4,749			—			4,749			—
Total operating expenses	21,363			20,143			58,937			47,742			38,874			21,363			106,200			58,937
Operating income	54,275			35,989			175,469			50,738			18,617			54,275			100,363			175,469
Other income (loss):
Foreign currency gain (loss)	(21		)	1			(21		)	1
Gain (loss) on sale of assets	(5		)	—			15			(55		)
Gain (loss) on investment securities	(103		)	200			592			1,765
Interest and dividend income	95			109			303			204
Investment income (loss)													204			(8		)	69			895
Interest expense	(8		)	(13		)	(119		)	(117		)	(26,988		)	(8		)	(38,820		)	(119		)
Other	—			—			—			(87		)	(46		)	(26		)	(76		)	(6		)
Total other income (loss)	(42		)	297			770			1,711			(26,830		)	(42		)	(38,827		)	770
Income before income tax	54,233			36,286			176,239			52,449
Income tax expense	17,973			13,280			60,208			18,838
Net income	36,260			23,006			116,031			33,611
Income (loss) before income tax													(8,213		)	54,233			61,536			176,239
Income tax expense (benefit)													(2,743		)	17,973			20,270			60,208
Net income (loss)													(5,470		)	36,260			41,266			116,031
Less: Net income attributable to noncontrolling interest	27			11			55			45			20			27			55			55
Net income attributable to Lannett Company, Inc.	$	36,233		$	22,995		$	115,976		$	33,566
Net income (loss) attributable to Lannett Company, Inc.													$	(5,490	)	$	36,233		$	41,211		$	115,976

Earnings per common share attributable to Lannett Company, Inc.:
Earnings (loss) per common share attributable to Lannett Company, Inc.:
Basic	$	1.01		$	0.66		$	3.25		$	1.01		$	(0.15	)	$	1.01		$	1.13		$	3.25
Diluted	$	0.97		$	0.63		$	3.13		$	0.97		$	(0.15	)	$	0.97		$	1.10		$	3.13

Weighted average common shares outstanding:
Basic	35,880,954			35,025,968			35,715,061			33,082,460			36,495,961			35,880,954			36,398,030			35,715,061
Diluted	37,210,138			36,769,593			37,082,138			34,586,007			36,495,961			37,210,138			37,383,742			37,082,138

The accompanying notes are an integral part of the consolidated financial statements.

~~Table of Contents~~

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

	Three months ended					Nine months ended						Three months ended					Nine months ended
	March 31,					March 31,						March 31,					March 31,
	2015		2014			2015			2014			2016			2015		2016		2015

Net Income	$	36,260	$	23,006		$	116,031		$	33,611
Net income (loss)												$	(5,470	)	$	36,260	$	41,266	$	116,031
Other comprehensive income (loss), before tax:
Foreign currency translation gain (loss)	35		(11		)	(231		)	(2		)	(11		)	35		15		(231		)
Total other comprehensive income (loss), before tax	35		(11		)	(231		)	(2		)	(11		)	35		15		(231		)
Income tax related to items of other comprehensive income	—		—			—			—			—			—		—		—
Total other comprehensive income (loss), net of tax	35		(11		)	(231		)	(2		)	(11		)	35		15		(231		)
Comprehensive income	36,295		22,995			115,800			33,609
Comprehensive income (loss)												(5,481		)	36,295		41,281		115,800
Less: Total comprehensive income attributable to noncontrolling interest	27		11			55			45			20			27		55		55
Comprehensive income attributable to Lannett Company Inc.	$	36,268	$	22,984		$	115,745		$	33,564
Comprehensive income (loss) attributable to Lannett Company Inc.												$	(5,501	)	$	36,268	$	41,226	$	115,745

The accompanying notes are an integral part of the consolidated financial statements.

~~Table of Contents~~

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

	Stockholders’ Equity Attributable to Lannett Company Inc.																						Stockholders’ Equity Attributable to Lannett Company Inc.
	Common Stock			Additional				Accumulated Other						Stockholders’ Equity						Total			Common Stock			Additional				Accumulated Other						Stockholders’ Equity						Total
	Shares Issued	Amount		Paid-In Capital		Retained Earnings		Comprehensive Loss			Treasury Stock			Attributable to Lannett Co., Inc.			Noncontrolling Interest			Stockholders’ Equity			Shares Issued	Amount		Paid-In Capital		Retained Earnings		Comprehensive Loss			Treasury Stock			Attributable to Lannett Co., Inc.			Noncontrolling Interest			Stockholders’ Equity

Balance, July 1, 2014	36,088	$	36	$	216,793	$	83,654	$	(54	)	$	(5,959	)	$	294,470		$	295		$	294,765
Balance, July 1, 2015																							36,783	$	37	$	236,178	$	233,573	$	(295	)	$	(6,080	)	$	463,413		$	353		$	463,766

Shares issued in connection with share-based compensation plans	564	1		4,164		—		—			—			4,165			—			4,165			329	—		3,788		—		—			—			3,788			—			3,788
Share-based compensation	—	—		4,729		—		—			—			4,729			—			4,729			—	—		8,423		—		—			—			8,423			—			8,423
Excess tax benefits on share-based compensation awards	—	—		7,802		—		—			—			7,802			—			7,802			—	—		1,565		—		—			—			1,565			—			1,565
Purchase of treasury stock																							—	—		—		—		—			(1,197		)	(1,197		)	—			(1,197		)
Issuance of warrant																							—	—		29,920		—		—			—			29,920			—			29,920
Distribution to noncontrolling interests	—	—		—		—		—			—			—			(15		)	(15		)	—	—		—		—		—			—			—			(20		)	(20		)
Other comprehensive loss, net of income tax	—	—		—		—		(231		)	—			(231		)	—			(231		)	—	—		—		—		15			—			15			—			15
Net income	—	—		—		115,976		—			—			115,976			55			116,031			—	—		—		41,211		—			—			41,211			55			41,266

Balance, March 31, 2015	36,652	$	37	$	233,488	$	199,630	$	(285	)	$	(5,959	)	$	426,911		$	335		$	427,246
Balance, March 31, 2016																							37,112	$	37	$	279,874	$	274,784	$	(280	)	$	(7,277	)	$	547,138		$	388		$	547,526

The accompanying notes are an integral part of the consolidated financial statements.

~~Table of Contents~~

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	Nine Months Ended March 31,						Nine months Ended March 31,
	2015			2014			2016			2015
OPERATING ACTIVITIES:
Net income	$	116,031		$	33,611		$	41,266		$	116,031
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,020			4,775			20,075			4,020
Deferred income tax expense (benefit)	828			(7,240		)	(123		)	828
Share-based compensation	4,729			5,833			8,423			4,729
Excess tax benefits on share-based compensation awards	(7,802		)	(5,234		)	(1,565		)	(7,802		)
Loss (gain) on sale of assets	(15		)	55			92			(15		)
Gain on investment securities	(592		)	(1,765		)
JSP contract renewal cost	—			20,100
Loss (gain) on investment securities							209			(592		)
Amortization of debt discount and other debt issuance costs							7,555			61
Settlement agreement							23,598			—
Other noncash expenses	61			175			111			—
Changes in assets and liabilities which provided (used) cash:
Trade accounts receivable	(18,390		)	(37,963		)
Changes in assets and liabilities which provided (used) cash, net of acquisition:
Accounts receivable, net							50,903			(18,390		)
Inventories	2,370			(8,834		)	13,280			2,370
Prepaid income taxes/income taxes payable	(1,371		)	2,489
Prepaid expenses and other assets	(2,663		)	(210		)
Rebates payable	1,331			5,140
Prepaid income taxes/Income taxes payable							(14,707		)	(1,371		)
Other current assets and other assets							(9,675		)	(2,663		)
Accounts payable	(3,988		)	(1,398		)	(5,405		)	(3,988		)
Accrued expenses	(58		)	6,063			(1,826		)	(58		)
Accrued payroll and payroll-related expenses	(4,798		)	172			(24,720		)	(4,798		)
Rebates payable							(376		)	1,331
Royalties payable							2,176			—
Restructuring liability							3,085			—
Accrued interest payable							10,823			—
Net cash provided by operating activities	89,693			15,769			123,199			89,693
INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(22,580		)	(20,194		)	(16,647		)	(22,580		)
Proceeds from sale of property, plant and equipment	76			48			16			76
Purchases of intangible assets	(300		)	—			—			(300		)
Acquisition, net of cash acquired							(929,581		)	—
Proceeds from sale of investment securities	61,334			20,640			32,406			61,334
Purchase of investment securities	(36,662		)	(49,778		)	(32,107		)	(36,662		)
Net cash provided by (used in) investing activities	1,868			(49,284		)	(945,913		)	1,868
FINANCING ACTIVITIES:
Proceeds from issuance of debt							910,610			—
Repayments of debt	(96		)	(5,345		)	(34,225		)	(96		)
Proceeds from issuance of stock	4,164			4,671			3,788			4,164
Payment of debt issuance costs							(32,716		)	—
Excess tax benefits on share-based compensation awards	7,802			5,234			1,565			7,802
Proceeds from stock offering	—			71,478
Deferred financing fees	—			(402		)
Purchase of treasury stock	—			(695		)	(1,197		)	—
Distributions to noncontrolling shareholders	(15		)	—
Distribution to noncontrolling shareholders							(20		)	(15		)
Net cash provided by financing activities	11,855			74,941			847,805			11,855
Effect on cash and cash equivalents of changes in foreign exchange rates	(231		)	(2		)	15			(231		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	103,185			41,424			25,106			103,185
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	105,587			42,689			200,340			105,587
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	208,772		$	84,113		$	225,446		$	208,772
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	123		$	117		$	20,357		$	123
Income taxes paid	$	60,750		$	23,589		$	35,128		$	60,750
Issuance of unsecured 12.0% Senior Notes to finance KUPI acquisition							$	200,000		$	—
Issuance of a warrant to finance KUPI acquisition							$	29,920		$	—
Acquisition-related contingent consideration							$	35,000		$	—

The accompanying notes are an integral part of the consolidated financial statements.

~~Table of Contents~~

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 U.S. generally accepted accounting principles (“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, ~~2015~~2016 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2015.~~2016. 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, ~~2014.~~2015.

Note 2. The Business And Nature of Operations

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries ~~(the~~(collectively, the “Company” or “Lannett”) develop, manufacture, package, market, and distribute solid oral and extended release (tablets and capsules), ~~extended release,~~ topical, 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 also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. (“Cody Labs”) subsidiary, providing a vertical integration benefit. Additionally, the Company distributes products under various distribution agreements, most notably the Jerome Stevens Distribution Agreement.

On November 25, 2015, the Company completed the acquisition of Kremers Urban Pharmaceuticals Inc. (“KUPI”), the U.S. specialty generic pharmaceuticals subsidiary of global biopharmaceuticals company UCB S.A. KUPI is a specialty pharmaceuticals manufacturer focused on the development of products that are difficult to formulate or utilize specialized delivery technologies. Strategic benefits of the acquisition include expanded manufacturing capacity, a diversified product portfolio and pipeline, and complementary research and development expertise.

The Company operates pharmaceutical manufacturing plants in Philadelphia, Pennsylvania, Cody, Wyoming, Carmel, New York, and ~~Cody, Wyoming. Customers of the~~Seymour, Indiana. The Company’s ~~pharmaceutical products~~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.

Note 3. Summary of Significant Accounting Policies

Principles of consolidation

The Consolidated Financial Statements include the accounts of Lannett Company, Inc., and its wholly owned subsidiaries, as well as Cody LCI Realty, LLC (“Realty”), a variable interest entity (“VIE”) in which the Company has a 50% ownership interest. Noncontrolling interest in Realty is recorded net of tax as net income attributable to the noncontrolling interest. Additionally, all intercompany accounts and transactions have been eliminated.

Business Combinations

Acquired businesses are accounted for using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The fair values and useful lives assigned to each class of assets acquired and liabilities assumed are based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset and projected future cash flows. Significant judgment is employed in determining the assumptions utilized as of the acquisition date and for each subsequent measurement period. Accordingly, changes in assumptions described above, could have a material impact on our consolidated results of operations.

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 fair value of long-lived assets, including goodwill and intangible assets, income taxes, contingencies, share-based compensation, and ~~share-based compensation.~~contingent consideration. Because of the inherent subjectivity and complexity involved in these estimates and assumptions, actual results could differ from those estimates.

~~Table of Contents~~

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 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.~~Consolidated Financial Statements.

Cash and cash equivalents

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 certificates of deposit that are readily convertible into cash. The Company maintains its cash deposits and cash equivalents at well-known, stable financial institutions. Such amounts frequently exceed insured limits.

Investment securities

The Company’s investment securities consist of publicly traded equity securities ~~and certificates of deposit with original maturities greater than three months~~ which are classified as trading investments. Investment securities are recorded at fair value based on quoted market prices from broker or dealer quotations or transparent pricing sources at each reporting date. Gains and losses are included in the Consolidated Statements of Operations under Other income (loss).

Allowance for doubtful accounts

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 ~~obligation~~obligations to the Company, and the 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

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. Depreciation expense for each of the three months ended March 31, 2016 and 2015 ~~and 2014~~ was ~~$1.4~~$4.3 million and ~~$1.2~~$1.4 million, respectively. Depreciation expense for each of the nine months ended March 31, 2016 and 2015 was $8.5 million and ~~2014 was~~ $4.0 million, ~~and $3.4 million,~~ respectively.

Intangible Assets

~~Intangible~~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, generally for periods ranging from 10 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. ~~Intangible~~Indefinite-lived intangible assets are ~~reviewed~~not amortized, but instead are tested at least annually for ~~impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.~~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 has several~~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 flow of the asset, then impairment exists. Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances 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. The judgments made in determining estimated fair values can materially impact our results of operations.

In-Process Research and Development

Amounts allocated to in-process research and development (“IPR&D”) in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets ~~related~~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 ~~Abbreviated New Drug Applications (“ANDAs”), valued~~rights and will be amortized over their estimated useful lives. These valuations reflect, among other things, the impact of changes to the development programs, the projected development and regulatory time frames and the current competitive environment. Changes in any of the Company’s assumptions may result in a reduction to the estimated fair value of the IPR&D asset and could result in future impairment charges.

Goodwill

Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at ~~$449 thousand. Amortization~~cost. Goodwill is tested for impairment on ~~these indefinite-lived intangibles will begin at such time as~~an annual basis during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company first performs a qualitative assessment to determine if the quantitative impairment test is required. If changes in circumstances indicate an asset may be impaired, the Company ~~begins shipping~~performs the ~~products~~quantitative impairment test. In accordance with accounting standards, a two-step quantitative method is used for determining goodwill impairment. In the first step, the Company determines the fair value of our reporting unit (generic pharmaceuticals). If the net book value of our reporting unit exceeds its fair value, the second step of the impairment test which requires allocation of our reporting unit’s fair value to all of its assets and ~~determines a finite useful life.~~liabilities using the acquisition method prescribed under authoritative guidance for business combinations would then be performed. Any residual fair value is allocated to goodwill. An impairment charge is recognized only if the implied fair value of our reporting unit’s goodwill is less than its carrying amount.

~~Table of Contents~~

Segment Information

The Company operates in one reportable segment, generic pharmaceuticals. As such, the Company aggregates its financial information for all products. The following table identifies the Company’s net sales by medical indication for the three and nine months ended March 31, ~~2015~~2016 and ~~2014:~~2015:

(In thousands)	For the Three Months Ended March 31,				For the Nine Months Ended March 31,				For the Three Months Ended March 31,					For the Nine months Ended March 31,
Medical Indication	2015		2014		2015		2014		2016			2015		2016			2015
Antibiotic	$	3,005	$	3,361	$	9,355	$	11,069	$	3,160		$	3,005	$	8,716		$	9,355
Cardiovascular	8,457		21,331		45,729		42,779		16,652			8,457		38,059			45,729
Central Nervous System									14,264			—		20,351			—
Gallstone	20,489		988		48,969		3,490		14,698			20,489		53,389			48,969
Gastrointestinal									21,739			—		30,431			—
Glaucoma	5,714		4,538		15,921		7,474		6,006			5,714		19,371			15,921
Gout	1,453		3,383		6,743		7,445		59			1,453		206			6,743
Migraine	6,722		4,787		19,455		9,851		5,090			6,722		16,338			19,455
Muscle Relaxant									1,193			3,738		4,246			6,377
Obesity	1,084		915		2,952		2,890		1,023			1,084		2,853			2,952
Pain Management	4,286		8,407		18,508		20,418		7,178			4,286		23,386			18,508
Respiratory									5,308			—		6,703			—
Thyroid Deficiency	36,720		28,292		114,601		74,560		38,009			36,720		116,543			114,601
Urinary									6,506			—		10,148			—
Other	11,422		3,995		25,328		13,176		12,716			7,684		34,082			18,951
Total	$	99,352	$	79,997	$	307,561	$	193,152
Contract manufacturing revenue									10,111			—		12,382			—
Net sales									163,712			99,352		397,204			307,561
Settlement agreement									(23,598		)	—		(23,598		)	—
Total net sales									$	140,114		$	99,352	$	373,606		$	307,561

Customer, Supplier and Product Concentration

The following table presents the percentage of ~~total~~ net sales, for the three and nine months ended March 31, ~~2015~~2016 and ~~2014,~~2015, 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:

	For the Three Months Ended March 31,				For the Nine Months Ended March 31,				For the Three Months Ended March 31,				For the Nine months Ended March 31,
	2015		2014		2015		2014		2016		2015		2016		2015

Product 1	37	%	35	%	37	%	39	%	23	%	37	%	29	%	37	%
Product 2	21	%	1	%	16	%	2	%	9	%	21	%	13	%	16	%
Product 3	7	%	24	%	13	%	19	%	4	%	7	%	5	%	13	%

The following table presents the percentage of ~~total~~ net sales, for the three and nine months ended March 31, ~~2015~~2016 and ~~2014,~~2015, for certain of the Company’s customers which accounted for at least 10% of net sales in any of those periods:

For the Three Months Ended
March 31,

For the Nine Months Ended
March 31,

2015

2014

2015

2014

Customer A

27
%
23
%
30
%
21
%
Customer B

15
%
7
%
10
%
7
%
Customer C

—
%
14
%
—
%
15
%

~~Customer concentration was impacted by the~~ strategic partnership between Amerisource Bergen and Walgreens, whereby Amerisource Bergen began product distribution on behalf of Walgreens in third quarter of Fiscal Year 2014, as well as other strategic partnerships between industry wholesalers and retailers.

At March 31, 2015 and June 30, 2014, four customers accounted for 80% and 67% of the Company’s net accounts receivable balance, respectively. Credit terms are offered to customers based on evaluations of the customers’ financial condition and collateral is generally not required.

	For the Three Months Ended March 31,				For the Nine months Ended March 31,
	2016		2015		2016		2015

Customer A	22	%	27	%	25	%	30	%
Customer B	17	%	15	%	16	%	10	%

The Company’s primary finished goods inventory supplier is Jerome Stevens Pharmaceuticals, Inc. (“JSP”), in Bohemia, New York. Purchases of finished goods inventory from JSP accounted for approximately ~~66%~~53% and ~~65%~~66% of the Company’s inventory purchases during the three months ended March 31, ~~2015~~2016 and ~~2014,~~2015, respectively. Purchases of finished goods inventory from JSP accounted for approximately ~~68%~~59% and ~~67%~~68% of the Company’s inventory purchases during the nine months ended March 31, ~~2015~~2016 and ~~2014,~~2015, respectively. See Note 2022 “Material Contracts with Suppliers” for more information.

~~Table of Contents~~

Revenue Recognition

The Company recognizes revenue when title and risk of loss have transferred to the customer and provisions for rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable. The Company also considers all other relevant criteria specified in Securities and Exchange Commission Staff Accounting Bulletin No. 104, Topic No. 13, ~~“Revenue Recognition”~~“Revenue Recognition”, in determining when to recognize revenue.

Net Sales Adjustments

When revenue is recognized, a simultaneous adjustment to gross sales is made for 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. The reserves, presented as a reduction of accounts receivable, totaled ~~$61.6~~$144.8 million and ~~$51.9~~$69.4 million at March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, respectively. Rebates payable at March 31, ~~2015~~2016 and June 30, ~~2014~~2015 were ~~$5.9~~$17.0 million and ~~$4.6~~$7.6 million, respectively, for certain rebate programs, primarily related to Medicare Part D and Medicaid, and certain sales allowances and other adjustments paid to indirect customers.

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. Product royalties included in cost of sales for the three months ended March 31, 2016 and 2015 were $6.2 million and $44 thousand, respectively. Product royalties included in cost of sales for the nine months ended March 31, 2016 and 2015 were $10.6 million and $129 thousand, respectively.

Research and Development

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

~~Valuation of Long-Lived Assets~~

The Company’s long-lived assets primarily consist of property, plant and equipment as well as definite-lived intangible assets. Long-lived 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 first step in the impairment test is to compare the asset’s carrying value to the future undiscounted cash flows expected to be generated by the asset. If the carrying value exceeds the undiscounted cash flow of the asset then impairment exists. 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.

Contingencies

Loss contingencies, including ~~litigation related~~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 related to litigation-related matters are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative line item.

Contingent Consideration

Contingent consideration resulting from the KUPI acquisition was recorded at its fair value on the acquisition date. The Company has agreed to a 50/50 split of the additional tax liabilities UCB will incur associated with the IRS Section 338(H)(10) tax election, up to $35.0 million. This election is expected to result in additional tax benefits to the Company of approximately $100.0 million. Decreases in the fair value of the contingent consideration will be recorded as gains in the Consolidated Statements of Operations. Decreases in the fair value of the contingent consideration obligation can result from lower tax liabilities incurred by UCB associated with the IRS Section 338(H)(10) tax election. These fair value measurements represent Level 3 measurements, as they are based on significant inputs not observable in the market.

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 benefits will be paid 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 and the stock price on the grant date to value restricted stock. The Black-Scholes valuation model includes various assumptions, including the expected volatility, the expected life of the award, dividend yield, and the risk-free interest rate. 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 financial statements.

~~Table of Contents~~

Income Taxes

The Company uses the asset and liability method to account for income taxes as prescribed by Accounting Standards Codification (“ASC”) 740, Income ~~Taxes.~~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 may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative standards issued by the Financial Accounting Standards Board (“FASB”) also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income and available tax planning strategies 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 through generating sufficient future taxable income. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share attributable to Lannett Company, Inc. is computed by dividing net income (loss) attributable to Lannett Company, Inc. common stockholders by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per common share attributable to Lannett Company, Inc. is computed by dividing net income (loss) attributable to Lannett Company, Inc. common stockholders by the weighted average number of shares outstanding during the period including additional shares that would have been outstanding related to potentially dilutive securities. These potentially dilutive securities primarily consist of stock options, ~~and~~ unvested restricted ~~stock.~~stock, and an outstanding warrant. 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 revenues, expenses, gains and losses that are included in comprehensive income (loss), but excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity.

Recent Accounting Pronouncements

In May 2014, the FASB issued ~~ASU~~Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The authoritative guidance is effective for annual reporting periods beginning after December 15, 2016. ~~Early application is not permitted.~~In July 2015, the FASB extended

the effective date of the guidance by one year to December 15, 2017. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company has elected to early adopt ASU 2015-03 as of December 31, 2015.

In July 2015, the FASB issued ASU 2015-11, Inventory — Simplifying the Measurement of Inventory. ASU 2015-11 requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Business Combinations — Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 also requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for reporting periods beginning after December 15, 2015 and is applied prospectively. Early adoption is permitted. The Company has elected to early adopt ASU 2015-16 as of March 31, 2016.

In November 2015, the FASB issued ASU 2015-17, Income Taxes — Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The guidance may be applied either prospectively or retrospectively. ASU 2015-17 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires an entity to recognize right-of-use assets and liabilities on its balance sheet for all leases with terms longer than 12 months. Lessees and lessors are required to disclose quantitative and qualitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective application, with early adoption permitted. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 clarifies several aspects of accounting for share-based compensation including the accounting for excess tax benefits and deficiencies, accounting for forfeitures and the classification of excess tax benefits on the cash flow statement. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and in interim periods within those fiscal years, with early adoption permitted. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

Note 4. Acquisitions

Kremers Urban Pharmaceuticals Inc.

On November 25, 2015, the Company completed the acquisition of Kremers Urban Pharmaceuticals Inc. (“KUPI”), the U.S. specialty generic pharmaceuticals subsidiary of global biopharmaceuticals company UCB S.A., pursuant to the terms and conditions of a Stock Purchase Agreement. KUPI is a specialty pharmaceuticals manufacturer focused on the development of products that are difficult to formulate or utilize specialized delivery technologies. Strategic benefits of the acquisition include expanded manufacturing capacity, a diversified product portfolio and pipeline, and complementary research and development expertise.

Pursuant to the terms of the Stock Purchase Agreement, Lannett purchased 100% of the outstanding equity interests of KUPI for total estimated consideration of approximately $1.21 billion, subject to a customary post-closing working capital adjustment.

The following table summarizes the fair value of total consideration transferred to KUPI shareholders at the acquisition date of November 25, 2015:

(In thousands)
Cash purchase price paid to KUPI shareholders	$	1,030,000
Estimated working capital adjustment	(46,202		)
Certain amounts reimbursable by UCB	(37,340		)
Total cash consideration transferred to KUPI shareholders	946,458
Unsecured 12.0% Senior Notes issued to UCB	200,000
Acquisition-related contingent consideration	35,000
Warrant issued to UCB	29,920
Total consideration to KUPI shareholders	$	1,211,378

The Company funded the acquisition and transaction expenses with proceeds from the issuance of the $910.0 million Senior Secured Credit Facility, $22.8 million borrowings on the Revolving Credit Facility, the issuance of the $250.0 million Senior Notes (see Note 12 “Long-term Debt”) and cash on hand of $90.1 million. Lannett also issued a warrant with an estimated fair value of $29.9 million.

As part of the acquisition, the Company and UCB have agreed to jointly make an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, and under the corresponding provisions of state law, to treat the acquisition as a deemed purchase and sale of assets for income tax purposes. The Company has agreed to reimburse UCB for 50% of the incremental tax cost of making such election, subject to a reimbursement cap of $35.0 million. This liability has been recorded as Acquisition-related contingent consideration on the Consolidated Balance Sheet. This election is expected to result in additional tax benefits to the Company of approximately $100.0 million.

The Company also agreed to contingent payments related to Methylphenidate ER provided the FDA reinstates the AB-rating and certain sales thresholds are met.

The Company used the acquisition method of accounting to account for this transaction. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at their respective fair values using assumptions that are subject to change. The Company has not finalized its valuation of certain assets and liabilities recorded in connection with this transaction. Thus, the estimated fair values recorded to date are subject to change and any changes will be recorded as adjustments to the fair value of those assets and liabilities and residual amounts will be allocated to goodwill. The final valuation adjustments may also require adjustment to the Consolidated Statements of Operations and Cash Flows.

The preliminary purchase price has been allocated to the assets acquired and liabilities assumed for the KUPI business as follows:

(In thousands)	Preliminary Purchase Price Allocation as of December 31, 2015 (a)			Measurement Period Adjustments (b)			Preliminary Purchase Price Allocation as of March 31, 2016
Cash and cash equivalents	$	16,877		$	—		$	16,877
Accounts receivable, net of revenue-related reserves	149,209			(6,190		)	143,019
Inventories	83,815			(215		)	83,600
Other current assets	12,873			(1,468		)	11,405
Property, plant and equipment	97,418			20,169			117,587
Product rights	409,000			21,000			430,000
Trade name	2,920			—			2,920
Other intangible assets	20,000			(1,000		)	19,000
In-process research and development	232,000			(103,000		)	129,000
Goodwill	240,575			72,735			313,310
Deferred tax assets	4,956			—			4,956
Other assets	4,859			—			4,859
Total assets acquired	1,274,502			2,031			1,276,533
Accounts payable	(19,249		)	—			(19,249		)
Accrued expenses	(4,161		)	(1,918		)	(6,079		)
Accrued payroll and payroll-related expenses	(20,731		)	(309		)	(21,040		)
Rebates payable	(9,816		)	—			(9,816		)
Royalties payable	(3,798		)	196			(3,602		)
Other long-term liabilities	(5,369		)	—			(5,369		)
Total net assets acquired	$	1,211,378		—			$	1,211,378

~~Table~~(a) As originally reported in the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2015.

(b) The measurement period adjustments are for 1) certain working capital adjustments and 2) updated valuations on inventories, property, plant and equipment and intangible assets. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements.

Included in the preliminary purchase price allocation above are indemnification assets totaling approximately $15.3 million, of ~~Contents~~which $10.4 million relates to compensation-related payments and $4.9 million relates to unrecognized tax benefits. The inventory balance above includes $19.1 million to reflect fair value step-up adjustments. KUPI’s intangible assets primarily consist of product rights and in-process research and development. See Note 11 “Goodwill and Intangible Assets”.

Amounts allocated to acquired in-process research and development represent an estimate of the fair value of purchased in-process technology for research projects that, as of the closing date of the acquisition, had not yet reached technological feasibility and had no alternative future use. The fair value of in-process research and development was based on the excess earnings method, which utilizes forecasts of expected cash inflows (including estimates for ongoing costs) and other contributory charges, on a project-by-project basis at the appropriate discount rate for the inherent risk in each project, and will be tested for impairment in accordance with the Company’s policy for testing indefinite-lived intangible assets.

Goodwill of $313.3 million arising from the acquisition consists largely of the value of the employee workforce and the value of products to be developed in the future. The goodwill was assigned to the Company’s only reporting unit. Goodwill recognized is expected to be fully deductible for income tax purposes.

The amounts of KUPI Revenue and Net income attributable to Lannett Company, Inc. included in the Company’s Consolidated Statements of Operations from November 25, 2015 to March 31, 2016 are as follows:

	For the Three Months Ended March 31,		For the Nine Months Ended March 31,
(In thousands, except per share data)	2016		2016
Revenues	$	69,933	$	96,064
Net income (loss) attributable to Lannett Company, Inc.	2,260		(4,047		)
Earnings (loss) per common share attributable to Lannett Company, Inc.:
Basic	$	0.06	$	(0.11	)
Diluted	$	0.06	$	(0.11	)

During the nine months ended March 31, 2016, the Company recorded $21.5 million of acquisition-related expenses directly related to the KUPI acquisition.

Unaudited Pro Forma Financial Results

The following supplemental unaudited pro forma information presents the financial results as if the acquisition of KUPI had occurred on July 1, 2014 for the three and nine months ended March 31, 2016 and 2015. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on July 1, 2014, nor are they indicative of any future results.

	For the Three Months Ended March 31,				For the Nine Months Ended March 31,
(In thousands, except per share data)	2016		2015		2016		2015
Revenues	$	163,712	$	193,612	$	520,867	$	616,083
Net income attributable to Lannett Company, Inc.	896		29,889		55,596		89,527
Earnings per common share attributable to Lannett Company, Inc.:
Basic	$	0.02	$	0.83	$	1.53	$	2.50
Diluted	$	0.02	$	0.80	$	1.49	$	2.41

The supplemental pro forma earnings for the three months ended March 31, 2016 were adjusted to exclude $8.6 million of expense related to the amortization of fair value step-up adjustments to acquisition-date inventory.

The supplemental pro forma earnings for the three months ended March 31, 2015 were adjusted to exclude $1.0 million of acquisition-related costs incurred by KUPI.

The supplemental pro forma earnings for the nine months ended March 31, 2016 were adjusted to exclude $28.9 million of acquisition-related costs, of which $21.5 million was incurred by Lannett and $7.4 million was incurred by KUPI, and $14.4 million of expense related to the amortization of fair value adjustments to acquisition-date inventory.

The supplemental pro forma earnings for the nine months ended March 31, 2015 were adjusted to include $30.7 million of acquisition-related costs, of which $21.5 million was incurred by Lannett and $9.2 million was incurred by KUPI, as well as $18.9 million of expense related to the amortization of fair value step-up adjustments to acquisition-date inventory.

Silarx

On June 1, 2015, the Company completed the acquisition of Silarx Pharmaceuticals, Inc., a New York corporation, and Stoneleigh Realty, LLC, a New York limited liability company (together “Silarx”), pursuant to the terms and conditions of a Stock Purchase Agreement. Silarx manufactures and markets high-quality liquid pharmaceutical products, including generic prescription and over-the-counter products. Silarx operates within a manufacturing facility located in Carmel, New York. Strategic benefits of the acquisition include an FDA-approved manufacturing facility, research and development expertise and added diversity to Lannett’s portfolio of existing and pipeline products.

Pursuant to the terms of the Stock Purchase Agreement, Lannett purchased 100% of the outstanding equity interests of Silarx for cash consideration totaling $42.5 million, subject to a post-closing working capital adjustment. The Company used the acquisition method of accounting to account for this transaction. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at their respective fair values using assumptions that are subject to change. Any adjustments, if necessary, will be recorded in the measurement period.

The preliminary purchase price has been allocated to the assets acquired and liabilities assumed for the Silarx business as follows:

(In thousands)
Cash	$	664
Accounts receivable, net of revenue-related reserves	4,396
Inventories	2,705
Other current assets	467
Property, plant and equipment	7,247
Product rights	10,000
In-process research and development	18,000
Goodwill	141
Other assets	9
Total assets acquired	43,629
Accounts payable	(711		)
Income taxes payable	(392		)
Total net assets acquired	$	42,526

Product rights totaling $10.0 million are comprised of currently marketed products that have an estimated useful life of 15 years. The goodwill of $141 thousand arising from the acquisition consists largely of the value of the employee workforce and the value of products to be developed in the future. The goodwill was assigned to the Company’s only reporting unit. Goodwill recognized is expected to be fully deductible for income tax purposes.

Unaudited Pro Forma Financial Results

The results of Silarx are included in the Company’s Consolidated Financial Statements from the date of acquisition. The pro forma results assuming the acquisition had occurred as of July 1, 2013 were not material to the Company’s revenues, net income, and earnings per share.

Note 5. Restructuring Charges

2016 Restructuring Program

On February 1, 2016, in connection with the acquisition of Kremers, the Company formulated a plan related to the future integration of Kremers and the Company’s businesses. The integration plan focuses on the closure of Kremers corporate functions and the consolidation of manufacturing, sales, research and development, and distribution functions. The Company estimates that it will incur an aggregate of up to approximately $23.0 million in restructuring charges for actions that have been announced or communicated since the 2016 Restructuring Program began. Of this amount, approximately $14.0 million relates to employee separation costs, approximately $1.0 million relates to contract termination costs and approximately $8.0 million relates to facility closure costs and other actions. The expenses associated with the restructuring program included in restructuring expenses during the three and nine months ended March 31, 2016 were as follows:

(In thousands)	Three and Nine Months Ended March 31, 2016
Employee separation costs	$	3,870
Contract termination costs	701
Facility closure costs	178
Total	$	4,749

A reconciliation of the changes in restructuring liabilities associated with the 2016 Restructuring Program from June 30, 2015 through March 31, 2016 is set forth in the following table:

(In thousands)	Employee Separation Costs			Contract Termination Costs		Facility Closure Costs			Total
Balance at June 30, 2015	$	—		$	—	$	—		$	—
Restructuring Charges	3,870			701		178			4,749
Payments	(1,486		)	—		(178		)	(1,664		)
Balance at March 31, 2016	$	2,384		$	701	$	—		$	3,085

Note 4.6. Accounts Receivable

Accounts receivable consisted of the following components at March 31, ~~2015~~2016 and June 30, ~~2014:~~2015:

(In thousands)	March 31, 2015			June 30, 2014			March 31, 2016			June 30, 2015
Gross accounts receivable	$	141,497		$	113,420		$	328,989		$	160,960
Less Chargebacks reserve	(32,061		)	(30,320		)	(63,064		)	(35,801		)
Less Rebates reserve	(9,321		)	(10,532		)	(34,820		)	(12,945		)
Less Returns reserve	(18,490		)	(9,341		)	(37,546		)	(19,209		)
Less Other deductions	(1,761		)	(1,787		)	(9,396		)	(1,528		)
Less Allowance for doubtful accounts	(149		)	(115		)	(539		)	(374		)
Accounts receivable, net	$	79,715		$	61,325		$	183,624		$	91,103

For the three months ended March 31, 2016, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $185.2 million, $54.5 million, $3.5 million, and $11.7 million, respectively. For the three months ended March 31, 2015, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $74.3 million, $18.4 million, $5.9 million, and $7.8 million, respectively.

For the ~~three~~nine months ended March 31, ~~2014,~~2016, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of ~~$33.3~~$424.9 million, ~~$20.5~~$124.6 million, ~~$2.3~~$14.3 million, and ~~$1.1~~$27.0 million, respectively.

For the nine months ended March 31, 2015, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $252.3 million, $58.2 million, $14.2 million, and $22.9 million, respectively. For the nine months ended March 31, 2014, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $78.5 million, $40.5 million, $5.5 million, and $18.8 million, respectively.

Note 5.7. Inventories

Inventories ~~net of allowances,~~ at March 31, ~~2015~~2016 and June 30, ~~2014~~2015 consisted of the following:

(In thousands)	March 31, 2015		June 30, 2014		March 31, 2016		June 30, 2015
Raw Materials	$	18,868	$	19,767
Raw materials					$	45,769	$	22,385
Work-in-process	4,893		5,440		22,293		5,246
Finished Goods	16,558		17,592
Packaging Supplies	2,155		2,045
Finished goods					48,449		18,560
Total	$	42,474	$	44,844	$	116,511	$	46,191

The reserve for excess and obsolete inventory was ~~$5.0~~$3.9 million and ~~$2.4~~$5.0 million at March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, respectively.

Note 6.8. Property, Plant and Equipment

Property, plant and equipment at March 31, ~~2015~~2016 and June 30, ~~2014~~2015 consisted of the following:

(In thousands)

Useful Lives

March 31,
2015

June 30,
2014

Land

—

$
4,641

$
4,641

Building and improvements

10 - 39 years

46,330

42,013

Machinery and equipment

5 - 10 years

44,311

37,678

Furniture and fixtures

5 - 7 years

1,719

1,416

Construction in progress

—

22,303

11,454

Property, plant and equipment, gross

119,304

97,202

Less accumulated depreciation

(39,039
)
(35,498
)
Property, plant and equipment, net

$
80,265

$
61,704

During each of the three and nine months ended March 31, 2015 and 2014, the Company had no impairment charges. Property, plant and equipment, net included amounts held in foreign countries in the amount of $1.2 million and $1.1 million at March 31, 2015 and June 30, 2014, respectively.

~~Table of Contents~~

(In thousands)	Useful Lives	March 31, 2016			June 30, 2015
Land	—	$	7,041		$	5,891
Building and improvements	10 - 39 years	99,642			51,446
Machinery and equipment	5 - 10 years	110,760			47,681
Furniture and fixtures	5 - 7 years	4,072			1,748
Construction in progress	—	46,839			28,228
Property, plant and equipment, gross		268,354			134,994
Less accumulated depreciation		(48,155		)	(40,438		)
Property, plant and equipment, net		$	220,199		$	94,556

Note 7.9. Fair Value Measurements

The Company’s financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, investment securities, accounts payable, accrued expenses, and debt obligations. Included in cash and cash equivalents are certificates of deposit with maturities less than or equal to three months at the date of purchase 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 carrying amount of the Company’s debt obligations approximates fair value based on current interest rates available to the Company on similar debt obligations.

The Company follows the authoritative guidance of ASC Topic 820 ~~“Fair~~Fair Value Measurements and ~~Disclosures.”~~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.

The Company’s ~~financial~~ assets and liabilities measured at fair value at March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, were as follows:

	March 31, 2015								March 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Equity securities	$	16,614	$	—	$	—	$	16,614	$	12,959	$	—	$	—	$	12,959
Total Investment Securities	$	16,614	$	—	$	—	$	16,614
Total Assets									$	12,959	$	—	$	—	$	12,959

Liabilities
Acquisition-related contingent consideration									$	—	$	—	$	35,000	$	35,000
Total Liabilities									$	—	$	—	$	35,000	$	35,000

	June 30, 2014								June 30, 2015
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Equity securities	$	15,193	$	—	$	—	$	15,193	$	13,467	$	—	$	—	$	13,467
Certificates of Deposit	25,500		—		—		25,500
Total Investment Securities	$	40,693	$	—	$	—	$	40,693
Total Assets									$	13,467	$	—	$	—	$	13,467

Note 8.10. Investment Securities

The Company uses the specific identification method to determine the cost of securities sold, which consisted entirely of securities classified as trading.

The Company had a net gain on investment securities of $125 thousand during the three months ended March 31, 2016, which included an unrealized gain related to securities still held at March 31, 2016 of $279 thousand. The Company had a net loss on investment securities of $103 thousand during the three months ended March 31, 2015, which included an unrealized loss related to securities still held at March 31, 2015 of $666 thousand.

The Company had a net ~~gain~~loss on investment securities of ~~$200~~$209 thousand during the ~~three~~nine months ended March 31, ~~2014,~~2016, which included an unrealized loss related to securities still held at March 31, ~~2014~~2016 of ~~$174~~$125 thousand.

The Company had a net gain on investment securities of $592 thousand during the nine months ended March 31, 2015, which included an unrealized loss related to securities still held at March 31, 2015 of $954 thousand. ~~The Company had a net gain on~~

Note 11. Goodwill and Intangible Assets

~~Table~~The changes in the carrying amount of ~~Contents~~

~~investment securities of $1.8 million during~~goodwill for the nine months ended March 31, ~~2014, which included an unrealized gain related to securities still held at March 31, 2014 of $740 thousand.~~2016 are as follows:

~~Note 9. Intangible Assets~~

(In thousands)	Generic Pharmaceuticals
Balance at June 30, 2015	$	141
Goodwill acquired	313,310
Balance at March 31, 2016	$	313,451

Intangible assets, net as of March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, consisted of the following:

Gross Carrying Amount

Accumulated Amortization

Intangible Assets, Net

(In thousands)

March 31,
2015

June 30,
2014

March 31,
2015

June 30,
2014

March 31,
2015

June 30,
2014

Cody Labs Import License

582

582

(261
)
(232
)
321

350

Morphine Sulfate Oral Solution NDA

202

202

(74
)
(65
)
128

137

Other ANDA Product Rights

900

600

(183
)
(160
)
717

440

$
1,684

$
1,384

$
(518
)
$
(457
)
$
1,166

$
927

	Weighted	Gross Carrying Amount				Accumulated Amortization						Intangible Assets, Net
(In thousands)	Avg. Life (Yrs.)	March 31, 2016		June 30, 2015		March 31, 2016			June 30, 2015			March 31, 2016		June 30, 2015

Definite-lived:
Cody Labs import license	15	$	582	$	582	$	(299	)	$	(269	)	$	283	$	313
KUPI product rights	15	430,000		—		(10,073		)	—			419,927		—
KUPI trade name	2	2,920		—		(513		)	—			2,407		—
KUPI other intangible assets	15	19,000		—		(445		)	—			18,555		—
Silarx product rights	15	10,000		10,000		(555		)	(56		)	9,445		9,944
Other product rights	14	653		653		(301		)	(269		)	352		384
Total definite-lived		$	463,155	$	11,235	$	(12,186	)	$	(594	)	$	450,969	$	10,641

Indefinite-lived:
KUPI in-process research and development	—	$	129,000	$	—	$	—		$	—		$	129,000	$	—
Silarx in-process research and development	—	18,000		18,000		—			—			18,000		18,000
Other product rights	—	449		449		—			—			449		449
Total indefinite-lived		147,449		18,449		—			—			147,449		18,449
Total intangible assets, net		$	610,604	$	29,684	$	(12,186	)	$	(594	)	$	598,418	$	29,090

For the three months ended March 31, ~~2015~~2016 and ~~2014,~~2015, the Company incurred amortization expense of ~~$20 thousand~~$7.6 million and ~~$467~~$20 thousand, respectively. For the nine months ended March 31, ~~2015~~2016 and ~~2014,~~2015, the Company incurred amortization expense of $11.6 million and $61 thousand, ~~and $1.4 million,~~ respectively. ~~There were no impairments related to intangible assets during each of the three and nine months ended March 31, 2015 and 2014.~~

Future annual amortization expense consisted of the following as of March 31, ~~2015:~~2016:

(In thousands)
Fiscal Year Ending June 30,

Annual Amortization Expense

2015

$
20

2016

82

2017

82

2018

82

2019

79

Thereafter

372

$
717

The amounts above do not include the product line covered by the ANDA purchased in August 2009 for $149 thousand and ANDAs purchased in September 2014 for $300 thousand. Amortization on these assets will begin when the Company begins shipping the product.

(In thousands) Fiscal Year Ending June 30,	Annual Amortization Expense
2016	$	8,035
2017	32,142
2018	31,264
2019	30,679
2020	30,672
Thereafter	318,177
	$	450,969

Note ~~10. Bank Line of Credit~~

In December 2013, the Company entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent, and another financial institution. As of March 31, 2015, the Credit Agreement provided for a revolving loan commitment in the amount of up to $50.0 million. Any loans under the Credit Agreement will bear interest at either a “Eurodollar Rate” or a “Base Rate” plus a specified margin. The Company is also required to pay a commitment fee on any undrawn commitments under the Credit Agreement ranging from 0.2% - 0.3% per annum according to the average daily balance of borrowings under the agreement. The Credit Agreement is collateralized by substantially all of the Company’s assets. In connection with securing the Credit Agreement, the Company repaid substantially all of its outstanding debt. See Note 11 “Long-Term Debt” for more information. As of March 31, 2015 and June 30, 2014, the Company had $50.0 million available under the Credit Agreement.

The Credit Agreement contains representations and warranties, affirmative, negative and financial covenants, and events of default, applicable to the Company and its subsidiaries which are customary for credit facilities of this type. As of March 31, 2015 and June 30, 2014, the Company was in compliance with all financial covenants.

~~The Credit Agreement was amended on April 21, 2015. See Note 22 “Subsequent Events” for more information.~~

~~Table of Contents~~

~~Note 11.~~12. Long-Term Debt

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 secured credit facility (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility consisted of Tranche A term loans in an aggregate principal amount of $275.0 million, Tranche B term loans 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. As of March 31, 2016, the Company had $125.0 million available under the Revolving Credit Facility. On April 8, 2016, the Company drew down the full $125.0 million Revolving Credit Facility for working capital and other general purposes.

The Term Loan A Facility will mature on November 25, 2020. The Tranche A Term Loans amortize in quarterly installments (a) through December 31, 2017 in amounts equal to 1.25% of the original principal amount of the Term Loan A Facility and (b) from January 1, 2018 through September 30, 2020 in amounts equal to 2.50% of the original principal amount of the Term Loan A Facility, with the balance payable on November 25, 2020. The Term Loan B Facility will mature on November 25, 2022. The Tranche B Term Loans amortize in equal quarterly installments in amounts equal to 1.25% of the original principal amount of the Term Loan B Facility with the balance payable on November 25, 2022. The Revolving Commitments will terminate and outstanding Revolving Loans will mature on November 25, 2020.

The Secured Credit Facility is guaranteed by all of Lannett’s significant wholly-owned domestic subsidiaries (the “Subsidiary Guarantors”) and is collateralized by substantially all present and future assets of Lannett and the Subsidiary Guarantors.

The interest rates applicable to the Term Loan Facility are based on a fluctuating rate of interest of the greater of an adjusted London Inter-bank Offered Rate (“LIBOR”) and 1.00%, plus a borrowing margin of 4.75% (for Tranche A Term Loans) or 5.375% (for Tranche B Term Loans). The interest rates applicable to the Revolving Credit Facility will be based on a fluctuating rate of interest of an adjusted LIBOR plus a borrowing margin of 4.75%. The interest rate applicable to the unused commitment for the Revolving Credit Facility is initially 0.50%. After Lannett delivers its financial statements for the fiscal quarter ending March 31, 2016, the interest margins and unused commitment fee on the Revolving Credit Facility will be subject to a leveraged based pricing grid.

The Senior Secured Credit Facility contains a number of covenants that, among other things, limit the ability of Lannett and its restricted subsidiaries to: incur more indebtedness; pay dividends; redeem stock or make other distributions of equity; make investments; create restrictions on the ability of Lannett’s restricted subsidiaries that are not Subsidiary Guarantors to pay dividends to Lannett or make intercompany transfers; create negative pledges; create liens; transfer or sell assets; merge or consolidate; enter into sale leasebacks; enter into certain transactions with Lannett’s affiliates; and prepay or amend the terms of certain indebtedness.

The Senior Secured Credit Facility contains a springing financial performance covenant that is triggered when the aggregate principal amount of outstanding Revolving Credit Loans and outstanding letters of credit as of the last day of the most recent fiscal quarter is greater than 30% of the aggregate commitments under the Revolving Credit Facility. The covenant provides that Lannett shall not permit its first lien net senior secured leverage ratio as of the last day of any four consecutive fiscal quarters (i) from and after December 31, 2015, to be greater than 4.25:1.00 (ii) from and after December 31, 2017 to be greater than 3.75:1.00 and (iii) from and after December 31, 2019 to be greater than 3.25:1.00.

The Senior Secured Credit Facility also contains a financial performance covenant for the benefit of the Tranche A Term Loan lenders which provides that Lannett shall not permit its net senior secured leverage ratio as of the last day of any four consecutive fiscal quarters (i) prior to December 31, 2017, to be greater than 4.25:1.00, (ii) as of December 31, 2017 and prior to December 31, 2019 to be greater than 3.75:1.00 and (iii) as of December 31, 2019 and thereafter to be greater than 3.25:1.00.

The Senior Secured Credit Facility also contains certain affirmative covenants, including financial and other reporting requirements.

12.0% Senior Notes due 2023

On November 25, 2015, Lannett issued $250.0 million aggregate principal amount of its unsecured 12.0% Senior Notes due 2023 under an Indenture. Interest on the Senior Notes accrues at the rate of 12.0% per annum and is payable semi-annually on June 15 and December 15 of each year. The Notes mature on December 15, 2023. The Notes are guaranteed by each of Lannett’s current and future domestic subsidiaries that guarantee Lannett’s obligations under the Secured Credit Facility. The Notes may be redeemed at par, in whole but not in part, at any time prior to October 1, 2016.

The Indenture contains covenants that, among other things, limit the ability of Lannett and Lannett’s restricted subsidiaries to: incur additional indebtedness, guarantee indebtedness or issue certain preferred shares; pay dividends on, redeem or repurchase stock or make other distributions in respect of its capital stock; repurchase, prepay or redeem subordinated indebtedness; make loans and investments; create restrictions on the ability of Lannett’s restricted subsidiaries to pay dividends to Lannett or the Subsidiary Guarantors or make other intercompany transfers; create liens; transfer or sell assets; consolidate, merge or sell or otherwise dispose of all or substantially all of its assets; enter into certain transactions with affiliates; and designate subsidiaries as unrestricted subsidiaries.

Upon the occurrence of certain events constituting a change of control triggering event, Lannett is required to make an offer to repurchase all of the Notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any to the repurchase date. If Lannett sells assets under certain circumstances, it must use the proceeds to make an offer to purchase the Notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

In connection with the Secured Credit Facility and the Senior Notes, the Company incurred an initial purchaser’s discount of $72.1 million and debt issuance costs of $32.7 million. These costs are recorded as a reduction of long-term debt in the Consolidated Balance Sheet.

Citibank Line of Credit

On November 25, 2015, in connection with the acquisition of KUPI, the Company terminated the Citibank Line of Credit.

Long-term debt, net consisted of the following:

	March 31,		June 30,		March 31,			June 30,
(In thousands)	2015		2014		2016			2015
First National Bank of Cody mortgage	$	1,042	$	1,138	$	908		$	1,009
Term Loan A due 2020					271,563			—
Unamortized discount and other debt issuance costs					(23,614		)	—
Term Loan A , net					247,949			—
Term Loan B due 2022					627,062			—
Unamortized discount and other debt issuance costs					(66,371		)	—
Term Loan B , net					560,691			—
Senior Notes due 2023, (includes $200.0 million of notes due to UCB (see Note 21))					250,000			—
Unamortized debt issuance costs					(5,696		)	—
Senior Notes, net					244,304			—
Total debt, net					1,053,852			1,009
Less current portion	134		129		(45,640		)	(135		)
Long-term debt	$	908	$	1,009
Total long-term debt, net					$	1,008,212		$	874

~~Current Portion of Long-term Debt:~~

March 31,

June 30,

(In thousands)

2015

2014

First National Bank of Cody mortgage

$
134

$
129

The Company is the primary beneficiary to a VIE called ~~Realty.~~“Realty”. The VIE owns land and a building which is leased to Cody Labs. A mortgage loan with First National Bank of Cody has been consolidated in the Company’s financial statements, along with the related land and building. The mortgage requires monthly principal and interest payments of $15 thousand. As of March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, the effective interest rate was 4.5%. per annum. The mortgage is collateralized by the land and building with a net book value of $1.5 million.

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

	Amounts Payable		Amounts Payable
(In thousands)	to Institutions		to Institutions
2015	$	134
2016	140
2017	146		$	45,640
2018	153		49,084
2019	160		59,403
2020			59,410
2021			217,542
Thereafter	309		718,454
Total	$	1,042	$	1,149,533

Weighted-average interest rates for the three and nine months ended March 31, 2016 was 9.2% and 9.4%, respectively.

Note ~~12.~~13. Legal and Regulatory Matters

Richard Asherman

On April 16, 2013, Richard Asherman (“Asherman”), the former President of and a member in Realty, filed a complaint (“Complaint”) in Wyoming state court against the Company and Cody Labs. At the same time, he also filed an application for a temporary restraining order to enjoin certain operations at Cody Labs, claiming, among other things, that Cody Labs is in violation of certain zoning laws and that Cody Labs is required to increase the level of its property insurance and to secure performance bonds for work being performed at Cody Labs. Mr. Asherman claims Cody Labs is in breach of his employment agreement and is required to pay him severance under his employment agreement, including 18 months of base salary, vesting of unvested stock options and continuation of benefits. The Company estimates that the aggregate value of the claimed severance benefits is approximately $350 thousand to $400 thousand, plus the value of any stock ~~options.~~options that he can prove was lost as a result of his termination. Mr. Asherman also asserts that the Company is in breach of the Realty Operating Agreement and, among other requested remedies, he seeks to have the Company (i) pay him 50% of the value of 1.66 acres of land that Realty previously agreed to donate to an economic development entity associated with the City of Cody, Wyoming, which contemplated transaction has since been avoided and cancelled. Although Mr. Asherman originally sought to require that Lannett acquire his interest in Realty for an unspecified price and/or to dissolve ~~Realty;~~Realty, those claims ~~were recently~~have been dismissed.

The Company strongly disputes the claims in the ~~Amended Complaint, including that the Company is required to acquire Mr. Asherman’s interest in Realty.~~Complaint. If Mr. Asherman ~~were~~is successful on his claim for breach of his employment agreement, he would be entitled to his contractual severance — 18 months’ salary plus the vesting of ~~certain~~any stock options which Mr. Asherman can prove were capable of being exercised and were actually exercised within three months of his termination. The Company does not believe that he is entitled to any payments with respect to the options, plus a continuation of benefits. The amount the Company would be required to pay to Mr. Asherman if he were successful in compelling the buyout of his interest in Realty is dependent upon the value of the real property owned by Realty. If a buyout were required, Realty would become wholly

~~Table of Contents~~

~~owned by the Company.~~ At this time the Company is unable to reasonably estimate a range or aggregate dollar amount of Mr. Asherman’s claims or of any potential loss, if any, to the Company. The Company does not believe that the ultimate resolution of the matter will have a significant impact on the Company’s financial position, or results of ~~operations.~~operations or cash flows.

Connecticut Attorney General Inquiry

In July 2014, the Company received interrogatories and subpoena from the State of Connecticut Office of the Attorney General concerning its investigation into 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. The Company maintains that it acted in compliance with all applicable laws and regulations and continues to cooperate with the Connecticut Attorney General’s investigation.

Federal Investigation into the Generic Pharmaceutical Industry

~~On November 3, 2014, the Senior Vice President of Sales and Marketing of~~In fiscal year 2015, the Company ~~was~~and certain affiliated individuals each were served with a grand jury subpoena relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The ~~subpoena requests~~subpoenas request corporate documents of the Company relating to communications or correspondence with competitors regarding the sale of generic prescription medications, but is not specifically directed to any particular product and is not limited to any particular time period. The Company maintains that it has acted in compliance with all applicable laws and regulations and continues to cooperate with the federal investigation.

On December 5, 2014, the Company was served with a grand jury subpoena related to the federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The subpoena requests corporate documents from 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. The~~products, generally for the period of 2005 through the dates of the subpoenas.

Based on reviews performed to date by outside counsel, the Company ~~maintains~~currently believes that it has acted in compliance with all applicable laws and regulations and continues to cooperate with the federal investigation.

~~Class Action - David Schaefer~~

On August 27, 2014, David Schaefer, as an alleged class representative, filed a class action complaint in the United States District Court, Eastern District of Pennsylvania (14-cv-05008) against the Company and certain of its officers, alleging violations of federal securities laws arising out of statements about the Company made in its securities filings during the period of September 10, 2013 through July 16, 2014. The complaint alleges that the statements were false and misleading because the defendants allegedly knew at the time the statements were made that the Company was in violation of Connecticut antitrust laws relating to its sale of digoxin. Mr. Schaefer’s complaint was voluntarily dismissed in September 2014.

Patent Infringement (Paragraph IV Certification)

There is substantial litigation in the pharmaceutical industry with respect to the manufacture, use, and sale of new products which are the subject of conflicting patent and intellectual property claims. Certain of these claims relate to paragraph IV certifications, which allege that an innovator patent is invalid or would not be infringed upon by the manufacture, use, or sale of the new drug.

Zomig®

The Company filed with the Food and Drug Administration an Abbreviated New Drug Application (ANDA) No. 206350, along with a paragraph IV certification, alleging that the two patents associated with the Zomig® nasal spray product (U.S. Patent No. 6,750,237 and U.S. Patent No. 67,220,767) are invalid.

In July 2014, AstraZeneca AB, AstraZeneca UK Limited, and Impax Laboratories, Inc. filed two patent infringement lawsuits in the United States District Court for the District of Delaware, alleging that the Company’s filing of ANDA No. 206350 constitutes an act of patent infringement and seeking a declaration that the two patents at issue are valid and infringed.

In September 2014, the Company filed a motion to dismiss one patent infringement lawsuit for lack of standing and responded to the second lawsuit by denying that any valid patent claim would be infringed. In the second lawsuit, the Company also counterclaimed for a declaratory judgment that the patent claims are invalid and not infringed. The Court has consolidated the two actions and denied the motion to dismiss the first action without prejudice.

~~Table~~In July 2015, the Company filed with the United States Patent and Trademark Office (USPTO) a Petition for Inter Partes Review of ~~Contents~~each of the patents in suit seeking to reject as invalid all claims of the patents in suit. The USPTO has issued a decision denying initiation of the Inter Partes Review.

Thalomid®

The Company filed with the Food and Drug Administration an Abbreviated New Drug Application (ANDA) No. 206601, along with a paragraph IV certification, alleging that the fifteen patents associated with the Thalomid drug product (U.S. Patent Nos. 6,045,501; 6,315,720; 6,561,976; 6,561,977; 6,755,784; 6,869,399; 6,908,432; 7,141,018; 7,230,012; 7,435,745; 7,874,984; 7,959,566; 8,204,763; 8,315,886; 8,589,188 and 8,626,53) 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. The Company ~~is preparing a response~~filed an answer and affirmative defenses to the ~~Complaint.~~complaint.

The Company has responded to the complaint by filing a motion challenging personal jurisdiction. The court has decided to allow limited discovery on the issue of personal jurisdiction and has administratively terminated the motion while discovery is taken on the issue.

Dilaudid®

The Company filed with the Food and Drug Administration an Abbreviated New Drug Application (ANDA) No. 207108, along with a paragraph IV certification, alleging that US Patent 6,589,960 associated with the Dilaudid® (hydromorphone oral solution) would not be infringed by the Company’s proposed hydromorphone oral solution product and/or that the patent is invalid. On August 8, 2015, Purdue Pharmaceutical Products L.P, Purdue Pharma L.P, and Purdue Pharma Technologies Inc. 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. 207108 constitutes an act of patent infringement and seeking a declaration that the patent at issue was infringed by the submission of ANDA No, 207108. The Company filed an answer and affirmative defenses to the complaint.

Although the ~~ultimate resolution~~Company cannot currently predict the length or outcome of ~~these matters is unknown, the~~paragraph IV litigation, legal ~~fees~~expenses associated with these ~~patent challenges may~~lawsuits could have a significant impact on the ~~Company’s~~ financial position, or results of operations and cash flows of the Company.

KUPI Litigation

In August 2015, KUPI received a letter from the Texas Office of the Attorney General alleging that they had inaccurately reported certain price information in violation of the Texas Medicaid Fraud Prevention Act. UCB, KUPI’s previous parent company is handling the defense and is evaluating the allegations and cooperating with the Texas Attorney General’s Office. Per the terms of the Stock Purchase Agreement the Company is fully indemnified for any losses associated with this matter. In conjunction with information received from UCB’s legal counsel, the Company is currently unable to estimate the timing or the outcome of this matter.

KUPI Patent Infringement (Paragraph IV Certification)

Nexium®

KUPI was sued on December 5, 2013, by AstraZeneca AB, Aktiebolaget Hassle, AstraZeneca LP, KBI Inc., and KBI-E Inc., alleging infringement of U.S. Patent Nos. 5,714,504, 6,369,085, 7,411,070 and 8,466,175 through submission of an abbreviated new drug application (“ANDA”) to the U.S. Food and Drug Administration for approval to market 20 mg and 40 mg esomeprazole magnesium delayed-release tablets. Since the parties were note able to reach agreement on a settlement, KUPI answered the Complaint on July 8, 2015.

Although the Company cannot currently predict the length or outcome of paragraph IV litigation, legal expenses associated with these lawsuits could have a significant impact on the financial position, results of operations and cash flows of the Company.

AWP Litigation

The Company and some of our competitors have been named as defendants in two lawsuits filed in 2016 alleging that the Company and a number of other generic pharmaceutical manufacturers caused the Average Wholesale Prices (AWPs) of our and their products to be inflated, thereby injuring government programs, entities and persons who reimbursed prescription drugs based on AWPs. The Company stopped using AWP as a basis for establishing prices in or around 2002 and dispute the allegations set forth in these lawsuits. The Company does not believe that the ultimate resolution of these lawsuits will have a significant impact on our financial position, results of operations or cash flows.

Private Antitrust Litigation

The Company and certain competitors have been named as defendants in four lawsuits filed in 2016 alleging that the Company and certain generic pharmaceutical manufacturers have conspired to fix prices of generic digoxin and doxycycline. The Company believes that we acted in compliance with all applicable laws and regulations. Accordingly, the Company disputes the allegations set forth in these class actions. The Company does not believe that the ultimate resolution of these lawsuits will have a significant impact on our financial position, results of operations or cash flows.

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 in the future ~~periods.~~could have a significant impact on the financial position, results of operations and cash flows of the Company.

Note ~~13.~~14. Commitments and Contingencies

Leases

The Company leases certain manufacturing and office equipment, in the ordinary course of ~~business, with initial lease terms not greater than 12 months.~~business. These ~~leases~~assets are typically renewed annually. Rental and lease expense was not material for all periods presented.

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) for the remainder of Fiscal 2016 and the twelve month periods ending June 30 thereafter are as follows:

(In thousands)	Amounts Due
Remainder of 2016	$	353
2017	1,718
2018	1,080
2019	1,080
2020	1,080
Thereafter	7,425
Total	$	12,736

Note ~~14.~~15. Accumulated Other Comprehensive Loss

The Company’s Accumulated Other Comprehensive Loss was comprised of the following components as of March 31, ~~2015~~2016 and ~~2014:~~2015:

(In thousands)

March 31,
2015

March 31,
2014

Foreign Currency Translation

Beginning Balance, July 1

$
(54
)
$
(47
)
Net loss on foreign currency translation (net of tax of $0 and $0)

(231
)
(2
)
Reclassifications to net income (net of tax of $0 and $0)

—

—

Other comprehensive loss, net of tax

(231
)
(2
)
Ending Balance, March 31

(285
)
(49
)
Total Accumulated Other Comprehensive Loss

$
(285
)
$
(49
)

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(In thousands)	March 31, 2016			March 31, 2015
Foreign Currency Translation
Beginning Balance, July 1	$	(295	)	$	(54	)
Net gain (loss) on foreign currency translation (net of tax of $0 and $0)	15			(231		)
Reclassifications to net income (net of tax of $0 and $0)	—			—
Other comprehensive income (loss), net of tax	15			(231		)
Ending Balance, March 31	(280		)	(285		)
Total Accumulated Other Comprehensive Loss	$	(280	)	$	(285	)

Note ~~15.~~16. Earnings Per Common Share

A dual presentation of basic and diluted earnings per common share is required on the face of the Company’s Consolidated Statement of Operations as well as a reconciliation of the computation of basic earnings per common share to diluted earnings per common share. Basic earnings per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income (loss) attributable to Lannett Company, Inc. by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed using the treasury stock method and includes the effect of potential dilution from the exercise of outstanding stock options and a warrant and treats unvested restricted stock as if it were vested. Potentially dilutive securities have been excluded in the weighted average number of common shares used for the calculation of earnings per share in periods of net loss because the effect of including such securities would be anti-dilutive. A reconciliation of the Company’s basic and diluted earnings per common share was as follows:

	Three Months Ended March 31, 2015				Three Months Ended March 31,
(In thousands, except share and per share data)	2015		2014		2016			2015

Net Income Attributable to Lannett Company, Inc.	$	36,233	$	22,995
Net income (loss) attributable to Lannett Company, Inc.					$	(5,490	)	$	36,233

Basic weighted average common shares outstanding	35,880,954		35,025,968		36,495,961			35,880,954
Effect of potentially dilutive stock options and restricted stock awards	1,329,184		1,743,625
Effect of potentially dilutive stock options, warrants and restricted stock awards					—			1,329,184
Diluted weighted average common shares outstanding	37,210,138		36,769,593		36,495,961			37,210,138

Earnings per common share attributable to Lannett Company, Inc.:
Earnings (Loss) per common share attributable to Lannett Company, Inc.:
Basic	$	1.01	$	0.66	$	(0.15	)	$	1.01
Diluted	$	0.97	$	0.63	$	(0.15	)	$	0.97

	Nine Months Ended March 31, 2015				Nine months Ended March 31,
(In thousands, except share and per share data)	2015		2014		2016		2015

Net Income Attributable to Lannett Company, Inc.	$	115,976	$	33,566
Net income attributable to Lannett Company, Inc.					$	41,211	$	115,976

Basic weighted average common shares outstanding	35,715,061		33,082,460		36,398,030		35,715,061
Effect of potentially dilutive stock options and restricted stock awards	1,367,077		1,503,547
Effect of potentially dilutive stock options, warrants and restricted stock awards					985,712		1,367,077
Diluted weighted average common shares outstanding	37,082,138		34,586,007		37,383,742		37,082,138

Earnings per common share attributable to Lannett Company, Inc.:
Basic	$	3.25	$	1.01	$	1.13	$	3.25
Diluted	$	3.13	$	0.97	$	1.10	$	3.13

The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the three months ended March 31, 2016 and 2015 were 4.4 million and ~~2014 were~~ 77 ~~thousand and 3~~ thousand, respectively. The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the nine months ended March 31, 2016 and 2015 were 2.6 million and ~~2014 were~~ 490 thousand, respectively.

Note 17. Warrant

In connection with the KUPI acquisition, Lannett issued to UCB Manufacturing a warrant to purchase up to a total of 2.5 million shares of Lannett’s common stock (the “Warrant”).

The Warrant has a term of three years (expiring November 25, 2018) and ~~9 thousand, respectively.~~an exercise price of $48.90 per share, subject to customary adjustments, including for stock splits, dividends, and combinations. The Warrant also has a “weighted average” anti-dilution adjustment provision. The estimated fair value included as part of the total consideration transferred to UCB at the acquisition date was $29.9 million. The fair value assigned to the Warrant was determined using the Black-Scholes valuation model. The Company concluded that the warrant was indexed to its own stock and therefore the Warrant has been classified as an equity instrument.

Note ~~16.~~18. Share-based Compensation

At March 31, ~~2015,~~2016, the Company had four share-based employee compensation plans (the “2003 Plan,” the 2006 Long-term Incentive Plan (“LTIP”), or “2006 LTIP”, the ~~2011 LTIP~~“2011 LTIP” and the ~~2014 LTIP)~~“2014 LTIP”). Together these plans authorized an aggregate total of 8.1 million shares to be issued. The plans have a total of ~~2.5~~2.4 million shares available for future issuances.

The Company issues 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, ~~2015,~~2016, there was ~~$11.7~~$10.8 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~~1.8 years.

~~Table of Contents~~

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 during the nine months ended March 31, ~~2015~~2016 and ~~2014 and~~2015, the estimated annual forfeiture rates used to recognize the associated compensation ~~expense:~~expense and the weighted average fair value of the options granted:

							Nine months Ended
	March 31, 2015			March 31, 2014			March 31, 2016			March 31, 2015
Risk-free interest rate	1.7		%	2.1		%	1.7		%	1.7		%
Expected volatility	52.1		%	62.9		%	48.3		%	52.1		%
Expected dividend yield	0.0		%	0.0		%	0.0		%	0.0		%
Forfeiture rate	6.5		%	7.5		%	6.5		%	6.5		%
Expected term (in years)	5.5 years			5.9 years
Expected term							5.2 years			5.5 years
Weighted average fair value	$	17.67		$	8.14		$	26.24		$	17.67

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 roll-forward as of March 31, ~~2015~~2016 and changes during the nine months then ended is presented below:

(In thousands, except for weighted average price and life data)	Awards		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (yrs.)	Awards		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (yrs.)

Outstanding at July 1, 2014	2,205		$	7.84
Outstanding at July 1, 2015								1,975		$	15.39
Granted	509		$	36.55				58		$	59.20
Exercised	(541	)	$	6.78	$	26,800		(241	)	$	12.94	$	5,975
Forfeited, expired or repurchased	(73	)	$	17.82				(42	)	$	32.61
Outstanding at March 31, 2015	2,100		$	14.73	$	111,267	7.3
Outstanding at March 31, 2016								1,750		$	16.76	$	12,369	6.5

Vested and expected to vest at March 31, 2015	2,017		$	14.29	$	107,723	7.2
Exercisable at March 31, 2015	975		$	5.84	$	60,354	5.7
Vested and expected to vest at March 31, 2016								1,721		$	16.46	$	12,341	6.5
Exercisable at March 31, 2016								1,193		$	10.55	$	11,508	5.7

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, ~~2015~~2016 and ~~7.5% for the nine months ended March 31, 2014.~~

~~Table of Contents~~2015.

A summary of restricted stock awards as of March 31, ~~2015~~2016 and changes during the nine months then ended, is presented below:

(In thousands)	Awards		Weighted Average Grant - date Fair Value		Aggregate Intrinsic Value		Awards		Weighted Average Grant - date Fair Value		Aggregate Intrinsic Value

Non-vested at July 1, 2014	15		34.66
Non-vested at July 1, 2015							98		$	37.83
Granted	103		37.97				141		$	55.95
Vested	(9	)	36.77		$	345	(58	)	$	47.30	$	3,339
Forfeited	(5	)	36.55				(8	)	$	47.62
Non-vested at March 31, 2015	104		$	37.68
Non-vested at March 31, 2016							173		$	48.97

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, 2016 and 2015, ~~and 2014, 9~~30 thousand shares and 149 thousand shares were issued under the ESPP, respectively. As of March 31, ~~2015, 435~~2016, 468 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				Three Months Ended				Nine months Ended
	March 31,				March 31,				March 31,				March 31,
(In thousands)	2015		2014		2015		2014		2016		2015		2016		2015
Selling, general and administrative	$	1,195	$	2,240	$	3,805	$	4,763
Research and development	133		225		390		443
Selling, general and administrative expenses									$	1,511	$	1,195	$	6,891	$	3,805
Research and development expenses									195		133		584		390
Cost of sales	182		324		534		627		319		182		948		534
Total	1,510		2,789		4,729		5,833		$	2,025	$	1,510	8,423		$	4,729

Tax benefit at statutory rate	$	514	$	1,053	$	1,589	$	2,160	$	739	$	514	$	3,074	$	1,589

Note ~~17.~~19. Employee Benefit Plan

The Company currently has amultiple 401k defined contribution ~~plan~~plans (the “Plan”) covering substantially all employees. Pursuant to the Plan provisions, the Company is 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. Contributions to the Plan during the three months ended March 31, 2016 and 2015 ~~and 2014~~ were ~~$226~~$629 thousand and ~~$169~~$226 thousand, respectively. Contributions to the Plan during the nine months ended March 31, 2016 and 2015 were $1.1 million and ~~2014 were~~ $582 ~~thousand and $528~~ thousand, respectively.

Note ~~18.~~20. Income Taxes

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

The federal, state and local income tax ~~expense~~benefit for the three months ended March 31, ~~2015 and 2014~~2016 was $2.7 million compared to income tax expense of $18.0 million ~~and $13.3 million, respectively. The effective tax rates~~ for the three months ended March 31, ~~2015 and 2014 were 33% and 37%, respectively. The effective tax rate for~~2015. During the three months ended March 31, ~~2015 was lower compared to the three months ended~~2016 and March 31, ~~2014 due primarily to~~2015, the ~~effect of changes in local tax laws~~effective rate was 33.4% and ~~domestic manufacturing deductions recorded in Fiscal 2015. Research-related tax credits also contributed to the lower rate.~~ 33.1%, respectively. The federal, state and local income tax expense for the nine months ended March 31, 2016 and 2015 was $20.3 million and ~~2014 was~~ $60.2 million, ~~and $18.8 million, respectively. The effective tax rates were 34% and 36%,~~ respectively. The effective tax rate for the nine months ended March 31, ~~2015~~2016 was 32.9% compared to 34.2% for the nine months ended March 31, 2015. The effective tax rate for the nine months ended March 31, 2016 was lower compared to the nine months ended March 31, ~~2014~~2015 due

~~Table of Contents~~

primarily to higher benefits related to research and experimentation credits recorded as a result of a tax law extension passed in late 2015, with a retroactive January 1, 2015 effective date, the effect of changes in ~~local~~the Company’s state tax ~~laws and~~profile as result of the KUPI acquisition, partially offset by a lower domestic manufacturing ~~deductions recorded in Fiscal 2015. Research-related tax credits also contributed to the lower rate.~~deduction.

As of March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, the Company reported total unrecognized tax benefits of $5.8 million and $578 thousand, ~~and $428 thousand,~~ respectively. The increase was related to the acquisition of KUPI. As a result of the positions taken during the period, the Company has not recorded any interest and penalties for the period ended March 31, ~~2015~~ 2016in the statement of operations and no cumulative interest and penalties have been recorded in the Company’s statement of financial position as of March 31, ~~2015~~2016 and June 30, ~~2014.~~2015. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses. The Company does not believe that the total unrecognized tax benefits will significantly increase or decrease in the next twelve months.

The Company files income tax returns in the United States federal jurisdiction ~~Pennsylvania,~~ and ~~New Jersey.~~various states. The Company’s tax returns for Fiscal Year ~~2011~~2012 and prior generally are no longer subject to review as such years generally are closed. The Company believes that an unfavorable resolution for open tax years would not be material to the financial position of the Company.

Note ~~19.~~21. Related Party Transactions

The Company had sales of ~~$226 thousand~~$1.3 million and ~~$375~~$226 thousand during the three months ended March 31, ~~2015~~2016 and ~~2014,~~2015, respectively, to a generic distributor, Auburn Pharmaceutical Company (“Auburn”). Sales to Auburn for the nine months ended March 31, 2016 and 2015 ~~and 2014~~ were ~~$1.3~~$2.2 million and ~~$1.4~~$1.3 million, respectively. Jeffrey Farber, Chairman of the Board, ~~and the son of William Farber, Chairman Emeritus of the Board of Directors,~~ is the owner of Auburn. Accounts receivable includes amounts due from Auburn of ~~$685 thousand~~$1.1 million and ~~$980~~$727 thousand at March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, respectively.

As part of the acquisition of KUPI, the Company issued $200.0 million unsecured 12.0% Senior Notes and a warrant with a fair value of $29.2 million to UCB. Accounts payables include amounts due to UCB of $2.1 million at March 31, 2016. Purchases of authorized generics from UCB totaled $4.3 million and $5.6 million for the three and nine months ended March 31, 2016, respectively. Accounts receivable includes amounts due from UCB of $3.0 million. Sales to UCB for the three and nine months ended March 31, 2016 were $3.0 million and $3.0 million, respectively.

In the Company’s opinion, the terms of these transactions were not more favorable to Auburn or UCB than would have been to a non-related party.

Note ~~20.~~22. Material Contracts with Suppliers

Jerome Stevens Pharmaceuticals Distribution Agreement:

The Company’s primary finished goods inventory supplier is JSP, in Bohemia, New York. Purchases of finished goods inventory from JSP accounted for approximately 6653% and ~~65%~~66% of the Company’s inventory purchases in the three months ended March 31, ~~2015~~2016 and ~~2014,~~2015, respectively. Purchases of finished goods inventory from JSP accounted for ~~68%~~59% and ~~67%~~68% of the Company’s inventory purchases in the nine months ended March 31, ~~2015~~2016 and ~~2014,~~2015, respectively.

On March 23, 2004, the Company entered into an agreement with JSP for the exclusive distribution rights in the United States to the current line of JSP products, in exchange for 4.0 million shares of the Company’s common stock. The JSP products covered under the agreement included Butalbital, Aspirin, Caffeine with Codeine Phosphate Capsules; Digoxin Tablets; Levothyroxine Sodium Tablets, sold generically and under the brand name Unithroid®. On August 19, 2013, the Company entered into an agreement with JSP to extend its initial contract to continue as the exclusive distributor in the United States of three JSP products: Butalbital, Aspirin, Caffeine with Codeine Phosphate Capsules USP; Digoxin Tablets USP; and Levothyroxine Sodium Tablets USP. The amendment to the original agreement extends the initial contract, which was due to expire on March 22, 2014, for five years through March 2019. In connection with the amendment, the Company issued a total of 1.5 million shares of the Company’s common stock to JSP and JSP’s designees. In accordance with its policy related to renewal and extension costs for recognized intangible assets, the Company recorded a $20.1 million expense in cost of sales, which represents the fair value of the shares on August 19, 2013. If the parties agree to a second five year extension from March 23, 2019 to March 23, 2024, the Company is required to issue to JSP or its designees an additional 1.5 million shares of the Company’s common stock. Both Lannett and JSP have the right to terminate the contract if one of the parties does not cure a material breach of the contract within thirty (30) days of notice from the non-breaching party.

During the renewal term of the agreement, the Company is required to use commercially reasonable efforts to purchase, ~~minimum dollar quantities of JSP products. Specifically, the Company is required to purchase,~~ in the aggregate, $31 million of products from JSP each year. ~~The Company has met the minimum purchase requirement for Fiscal 2015, but there~~There is no guarantee that the Company will be able to ~~continue to do so in~~meet the minimum purchase requirement for Fiscal 2016 and in the future. If the Company does not meet the minimum purchase requirements, JSP’s sole remedy is to terminate the agreement.

~~Table of Contents~~

Note ~~21.~~23. Cody Expansion Project

On December 20, 2012, the Company, through its subsidiaries Realty and Cody Labs, entered into an agreement (“the Agreement”) with the City of Cody, Wyoming (“City of Cody”) and Forward Cody Wyoming, Inc. (“Forward Cody”), an unrelated non-profit corporation, which involves the construction of a building of approximately 24,000 square feet (the “Project”). As part of the Agreement, Cody was obligated to make an additional capital investment in its existing facilities in the amount of $5.2 million and create an additional 45 full time positions within three years starting June 30, 2011; Realty was required to contribute 1.66 acres of land to Forward Cody and enter into a ~~25 year~~25-year lease agreement with Forward Cody for the Project. Realty will make annual rent payments totaling $108 thousand beginning on the date a Certificate of Occupancy permit is issued by the City of Cody and the Project is legally available for occupancy. Cody will sublease the property from Realty. Upon the fifth anniversary of occupancy, Realty may, at its discretion, purchase the Project from Forward Cody. The purchase option continues until Realty purchases the Project. Nothing in the Agreement should be deemed to create any relationship between Forward Cody and Realty other than the relationship of landlord and tenant.

In June 2014, the Company amended the Agreement including changing the size of the building, eliminating the requirements to contribute any land, and removing Realty as a party to the agreement. Additionally, Cody Labs is required to provide a capital contribution to the project in the amount of $565 thousand. None of the revisions are expected to be material to the Company’s results of operations or financial ~~position,~~position.

The Company’s 25 year lease with Forward Cody commenced in April 2015.

Note 24. Settlement Agreement

On March 7, 2016, Lannett Company, Inc. (“Lannett”) entered into a Settlement Agreement Release and Mutual Release (“Settlement Agreement”) with one of its former customers, pursuant to which Lannett and such customer resolved all disputes between the parties with respect to the termination of the direct sales business relationship by Lannett on December 31, 2013.

Pursuant to the terms of the Settlement Agreement, Lannett will pay to one of its former customers the following amounts: (a) in calendar year 2016, $8.0 million in cash; (b) in calendar year 2017, at the discretion of the customer, either $8.0 million in cash or ~~cashflows.~~a $10.0 million credit memorandum to be applied against invoices for the purchase of products from Lannett or any of its subsidiaries by such customer; and (c) in calendar year 2018, at the discretion of the customer, either $10.0 million in cash or a $12.0 million credit memorandum to be applied against invoices for the purchase of products from Lannett or any of its subsidiaries by such customer.

As a result of the settlement agreement, the Company recorded a reduction to net sales in the amount of $23.6 million, which represents the net present value of the future cash payments.

Note ~~22.~~25. Subsequent Events

~~First Amendment to the Credit Agreement~~

On April ~~21, 2015,~~8, 2016, the Company ~~entered into a First Amendment to~~drew down the Credit Agreement (the “First Amendment”), pursuant to which the parties amended the terms of the Credit Agreement originally entered into on December 18, 2013 with Citibank, N.A., as administrative agent and certain other financial institutions party thereto as lenders. The First Amendment increases the Company’s revolving line of credit from $50.0full $125.0 million to $120.0 million (the “Credit Facility”), consisting of revolving loans, swingline loans not to exceed an aggregate principal amount of $5.0 million and letters of credit not to exceed a maximum aggregate principal amount of $5.0 million. The First Amendment also includes an accordion feature that will allow the Company to increase theRevolving Credit Facility by a total of up to an additional $30.0 million, subject to securing additional commitments from existing lenders or new lending institutions. The First Amendment also modified certain financial covenants, most notably permitted acquisitionsfor working capital and capital expenditures. Permitted acquisitions increased from $100.0 million to $200.0 million individually and in the aggregate for each fiscal year. Total permitted acquisitions over the remaining term of the Credit Agreement were increased to $600.0 million. Capital expenditure covenants were also increased over the term of the Credit Agreement based on certain leverage ratios, as defined. At closing, the Company had $120.0 million available for borrowing under the Credit Facility.other general purposes.

~~Table of Contents~~

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

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, ~~including without limitation,~~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 ~~the Company’s~~our filings with the Securities and Exchange ~~Commission.~~Commission (the “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.

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, 2015. All references to “Fiscal 2016” or “Fiscal Year 2016” shall mean the fiscal year ended June 30, 2016, and all references to “Fiscal 2015” or “Fiscal Year 2015” shall mean the fiscal year ended June 30, 2015.

Company Overview

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries ~~(the~~(collectively, the “Company” or, “Lannett”, “we” or”us”) develop, manufacture, package, market, and distribute solid oral and extended release (tablets and capsules), ~~extended release,~~ 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 also manufactures active pharmaceutical ingredients through its Cody Labs subsidiary, providing a vertical integration benefit. 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, soft gel, injectable, and oral dosages.

The Company operates pharmaceutical manufacturing plants in Philadelphia, Pennsylvania, Cody, Wyoming, Carmel, New York and ~~Cody, Wyoming. Customers of the~~Seymour, Indiana. The Company’s ~~pharmaceutical products~~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.

2016 Restructuring Plan

On February 1, 2016, in connection with the acquisition of KUPI, the Company formulated a plan related to the future integration of KUPI and the Company’s businesses. The integration plan focuses on the closure of KUPI’s corporate functions and the consolidation of manufacturing, sales, research and development, and distribution functions. The Company estimates that it will incur an aggregate of up to approximately $23.0 million in restructuring charges for actions that have been announced or communicated since the 2016 Restructuring Program began. Of this amount, approximately $14.0 million relates to employee separation costs, approximately $1.0 million relates to contract termination costs and approximately $8.0 million relates to facility closures costs and other actions.

The plan is expected to result in cost synergies of approximately $40.0 million during the 12 months following the close of the acquisition, including $27.0 million in fiscal 2016, and is currently estimated to generate annualized synergies of approximately $50.0 million by the end of fiscal 2018 and achieve an ultimate annual run rate of approximately $65.0 million by the end of fiscal 2020.

These amounts are preliminary estimates based on the information currently available to management. It is possible that additional charges and future cash payments could occur in relation to the restructuring actions.

Financial Summary

For the third quarter of Fiscal Year ~~2015,~~2016, net sales increased to $163.7 million, which included $69.9 million of net sales from the recently acquired KUPI. Excluding the impact of KUPI, net sales decreased 6% as compared to the same prior-year period primarily due to pricing pressures and increased competition, partially offset by increased volumes. Total net sales, which included a $23.6 million reduction for a settlement agreement, increased to $140.1 million from $99.4 million ~~representing 24% growth over~~in the ~~third quarter of Fiscal Year 2014.~~prior-year period. Gross profit, ~~increased~~including the $23.6 million settlement agreement, decreased to ~~$75.6~~$57.5 million compared to ~~$56.1~~$75.6 million in the prior-year period and gross profit percentage ~~increased~~decreased to ~~76%~~41% compared to ~~70%~~76% in the prior-year period. Excluding the impact of KUPI and the settlement agreement, gross profit as a percentage of net sales decreased to 71%. R&D expenses ~~decreased 13%~~increased 80% to $16.5 million compared to $9.2 million ~~compared to~~in the third quarter of Fiscal Year ~~2014~~2015 while SG&A expenses increased ~~28%~~39% to ~~$12.2~~$16.2 million from ~~$9.6~~$11.6 million. Acquisition and integration-related expenses increased to $1.5 million from $587 thousand in the prior-year period. Restructuring expenses increased to $4.7 million as a result of implementing the 2016 Restructuring Program. Operating income for the third quarter of Fiscal Year ~~2015~~2016 was ~~$54.3~~$18.6 million compared to ~~$36.0~~$54.3 million in the third quarter of Fiscal Year ~~2014.~~2015. Net ~~income~~loss attributable to Lannett Company, Inc. for the third quarter of Fiscal Year ~~2015~~2016 was $5.5 million, or $0.15 per share compared to net income attributable to Lannett Company, Inc. of $36.2 million or $0.97 ~~per diluted share compared to $23.0 million or $0.63~~ per diluted share in the third quarter of Fiscal Year ~~2014.~~2015.

For the first nine months of Fiscal ~~2015,~~2016, net sales increased to $397.2 million, which included $96.1 million of net sales from the recently acquired KUPI. Excluding the impact of KUPI, net sales decreased 2% as compared to the same prior-year period primarily due to pricing pressures and increased competition, partially offset by increased volumes. Total net sales, which included a $23.6 million reduction for a settlement agreement, increased to $373.6 million from $307.6 million ~~representing 59% growth over~~in the prior-year period. Gross profit, ~~increased $135.9~~including the $23.6 million settlement agreement decreased to $206.6 million compared to $234.4 million ~~compared to~~in the prior-year period ~~which included the $20.1 million charge related to the JSP contract renewal. Gross~~and gross profit percentage ~~increased~~decreased to ~~76%~~55% compared to ~~51%~~76% in the prior-year period. Excluding the impact of KUPI and the settlement agreement, gross profit as a percentage of net sales decreased to 72%. R&D expenses increased ~~11%~~37% to $32.1 million compared to $23.4 million ~~compared to~~in the ~~prior-year period~~first nine months of Fiscal 2015 while SG&A expenses increased ~~34%~~41% to ~~$35.6~~$46.4 million from ~~$26.6~~$32.9 million. Acquisition and integration-related expenses increased to $23.0 million from $2.7 million in the prior-year period. Restructuring expenses increased to $4.7 million as a result of implementing the 2016 Restructuring Program. Operating income for the first nine months of Fiscal ~~2015~~2016 was ~~$175.5~~$100.4 million compared to ~~$50.7~~$175.5 million in the prior-year period. Net income attributable to Lannett Company, Inc. for the first nine months of Fiscal ~~2015~~2016 was $41.2 million, or $1.10 per diluted share compared to $116.0 million or $3.13 per diluted ~~share. Comparatively, net income attributable to Lannett Company, Inc.~~share in the ~~prior year was $33.6 million, or $0.97 per diluted share and included the $20.1 million pre-tax charge related to the JSP contract renewal.~~prior-year period.

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

~~Table of Contents~~

Results of Operations - Three months ended March 31, ~~2015~~2016 compared with the three months ended March 31, ~~2014~~2015

Total net sales, which included a $23.6 million reduction for a settlement agreement (see Note 24), increased to $140.1 million from $99.4 million in the prior-year period.

Net sales increased ~~24%~~65% to ~~$99.4~~$163.7 million for the three months ended March 31, ~~2015.~~2016. The following table identifies the Company’s net product sales by medical indication for the three months ended March 31, ~~2015~~2016 and ~~2014:~~2015:

(In thousands)	Three Months Ended March 31,				Three Months Ended March 31,
Medical Indication	2015		2014		2016			2015
Antibiotic	$	3,005	$	3,361	$	3,160		$	3,005
Cardiovascular	8,457		21,331		16,652			8,457
Central Nervous System					14,264			—
Gallstone	20,489		988		14,698			20,489
Gastrointestinal					21,739			—
Glaucoma	5,714		4,538		6,006			5,714
Gout	1,453		3,383		59			1,453
Migraine	6,722		4,787		5,090			6,722
Muscle Relaxant					1,193			3,738
Obesity	1,084		915		1,023			1,084
Pain Management	4,286		8,407		7,178			4,286
Respiratory					5,308			—
Thyroid Deficiency	36,720		28,292		38,009			36,720
Urinary					6,506			—
Other	11,422		3,995		12,716			7,684
Total	$	99,352	$	79,997
Contract manufacturing revenue					10,111			—
Net sales					163,712			99,352
Settlement agreement					(23,598		)	—
Total net sales					$	140,114		$	99,352

~~Product price increases~~Revenues from the KUPI acquisition of $69.9 million and increased volumes of $11.7 million contributed ~~$29.5 million~~ to the overall increase in net sales, partially offset by ~~decreased volumes~~product price decreases of ~~$10.1~~$17.3 million. ~~The Company experienced favorable trends in product pricing on several key products during the period, as discussed below.~~ Although the Company has benefited in the past from ~~these~~ favorable pricing trends, the trends are stabilizing and in, some instances, beginning to reverse. During the period the Company experienced pricing pressure and increased competition on several products. The level of competition in the marketplace is constantly changing and the Company cannot ~~guarantee~~predict with certainty that these ~~pricing~~ trends will continue.

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

Medical indication	Sales volume change %		Sales price change %		Sales volume change %		Sales price change %		Acquisition change %
Antibiotic	(3)	%	(7)	%	59	%	(54	)%	—	%
Cardiovascular	(41)	%	(20)	%	42	%	(45	)%	100	%
Central Nervous System					—	%	—	%	100	%
Gallstone	52	%	1923	%	(16	)%	(13	)%	—	%
Gastrointestinal					—	%	—	%	100	%
Glaucoma	(6)	%	32	%	14	%	(9	)%	—	%
Gout	(57)	%	—	%	(95	)%	(1	)%	—	%
Migraine	(8)	%	48	%	(6	)%	(18	)%	—	%
Muscle Relaxant					(55	)%	(13	)%	—	%
Obesity	20	%	(1)	%	(3	)%	(2	)%	—	%
Pain Management	(22)	%	(27)	%	8	%	59	%	—	%
Respiratory					—	%	—	%	100	%
Thyroid Deficiency	(4)	%	34	%	25	%	(21	)%	—	%
Urinary					—	%	—	%	100	%

Cardiovascular. Net sales of drugs used for cardiovascular treatment increased by $8.2 million. The increase was primarily attributable to additional net sales from cardiovascular products acquired in the KUPI acquisition. Excluding the impact of KUPI, net sales of drugs used for cardiovascular treatment remained consistent with increases in volumes being equally offset by price decreases.

Central Nervous System. Net sales of central nervous system products increased by $14.3 million. The increase in net sales was attributable to net sales from the Methylphenidate Hydrochloride Extended Release tablets acquired in the KUPI acquisition.

Methylphendidate Hydrochloride Extended Release Tablets

During a teleconference in November 2014, the U.S. Food and Drug Administration (“FDA”) informed KUPI that it had concerns about whether generic versions of Concerta (methylphenidate hydrochloride extended release tablets), including KUPI’s Methylphenidate ER product, are therapeutically equivalent to Concerta. The FDA indicated that its concerns were based in part on adverse event reports concerning lack of effect and its analyses of pharmacokinetic data. The FDA informed KUPI that it was changing the therapeutic equivalence rating of its product from “AB” (therapeutically equivalent) to “BX.” A BX-rated drug is a product for which the data are insufficient to determine therapeutic equivalence; it is still approved and can be prescribed, but the FDA does not recommend it as automatically substitutable for the brand name drug at the pharmacy. The FDA has indicated that there are no safety issues with KUPI’s product.

During the November 2014 teleconference, the FDA also asked KUPI to either voluntarily withdraw its product or to conduct new bioequivalence (BE) testing in accordance with the recommendations for demonstrating bioequivalence to Concerta proposed in a new draft BE guidance that the FDA issued earlier in November. The FDA had approved the KUPI product (and originally granted it an AB rating) in 2013, on the basis of KUPI data showing its product met BE criteria set forth in draft BE guidance that the FDA had issued in 2012. The FDA’s position concerning the KUPI product was the subject of a public announcement by the agency. The Company agreed to conduct new BE studies per the new draft BE guidance. KUPI submitted the data from those studies to the FDA in June 2015 and is in ongoing discussions about the product.

There can be no assurance as to when or if the Company will receive the “AB” rating, however, if the Company were to receive the “AB” rating, net sales of the product could increase subject to market factors existing at that time. The Company also agreed to potential acquisition-related contingent payments to UCB related to Methylphenidate ER if the FDA reinstates the AB-rating and certain sales thresholds are met.

Gallstone. Net sales of drugs used for gallstones decreased by $5.8 million. The decrease in net sales was primarily attributable to decreased volumes, and to a lesser extent, a decrease in the average selling price of key products.

Gastrointestinal. Net sales of gastrointestinal products increased by ~~$19.5~~$21.7 million. The increase in net sales was primarily attributable to ~~price increases on key products. Higher volumes also contributed to~~sales of gastrointestinal products acquired in the ~~increase in net sales.~~KUPI acquisition.

~~Thyroid Deficiency.~~Pain Management. Net sales of ~~drugs used for the treatment of thyroid deficiency~~pain management products increased ~~by $8.4 million, primarily as a result of price increases on key products.~~

~~Migraine.~~ ~~Net sales of drugs used to treat migraines increased by $1.9~~$2.9 million. The increase in net sales was ~~primarily~~mainly attributable to price increases on ~~key products.~~

~~Glaucoma.~~the Company’s C-Topical® Solution product as well as a higher average net sales price. Net sales ~~of drugs used for~~was lower in the ~~treatment of Glaucoma increased by $1.2 million. The increase in net sales was primarily attributable to price increases on key products.~~

~~Cardiovascular.~~ ~~Net sales of drugs used for cardiovascular treatment decreased by $12.9 million primarily~~prior-period quarter as a result of several new entrants in the market for products used to treat congestive heart failure. The Company experienced lower volumes and additional competition as expected. The Company currently anticipates net sales from cardiovascular products in the fourth quarter of Fiscal 2015 to be comparable to net sales from cardiovascular products in the third quarter of Fiscal 2015.

~~Table of Contents~~

~~Pain Management.~~ ~~Net sales of pain management products decreased $4.1 million. The decrease in net sales was attributable to lower volumes as well as a lower average net sales price due to~~ an increase in return reserves related to a voluntary recall of one lot of product manufactured at the Company’s facility in Cody, Wyoming due to incorrect labeling. The Company ~~continues~~is continuing to ~~actively market~~move forward with its ~~C-Topical® Solution product utilizing a group of brand representatives in anticipation of~~Phase III trial and anticipates filing an NDA ~~filing. Higher~~application in calendar year 2016.

Thyroid Deficiency. Net sales of drugs used for the treatment of thyroid deficiency increased by $1.3 million, primarily as a result of increased volumes, partially offset by a price concession to secure a long-term customer commitment.

Urinary. Net sales of ~~the Company’s Oxycodone HCl Oral Solution product which~~urinary products increased by $6.5 million. The increase in net sales was ~~re-launched~~primarily attributable to net sales of urinary products acquired in the ~~second~~KUPI acquisition.

Contract manufacturing revenue. Contract manufacturing revenue for the third quarter of Fiscal ~~2015 helped~~2016 totaled $10.1 million, which was attributable to ~~offset~~ the ~~decrease in net sales.~~acquisition of KUPI.

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 March 31:

(In thousands) Customer Distribution Channel	March 31, 2015		March 31, 2014		March 31, 2016			March 31, 2015
Wholesaler/Distributor	$	75,740	$	50,418	$	118,330		$	75,740
Retail Chain	14,043		23,218		25,220			14,043
Mail-Order Pharmacy	9,569		6,361		10,051			9,569
Total	$	99,352	$	79,997
Contract manufacturing revenue					10,111			—
Net sales					163,712			99,352
Settlement agreement					(23,598		)	—
Total net sales					$	140,114		$	99,352

Net sales to wholesaler/distributor and retail chain increased primarily as a result of ~~increased~~additional net sales related to the KUPI acquisition. Excluding the impact of KUPI, net sales to wholesaler/distributor and mail-order pharmacy decreased as a result of decreases in a variety of products for thyroid deficiency and ~~gallstone, partially offset by decreases in~~ cardiovascular, as discussed above. ~~Additionally, the increase in net sales to wholesaler/distributor was impacted by the~~ strategic partnership between Amerisource Bergen and Walgreens, whereby Amerisource Bergen began product distribution on behalf of Walgreens in third quarter of Fiscal Year 2014. Other strategic partnerships between industry wholesalers and retailers also impacted net sales to wholesaler/distributor and retail chain. Mail-order pharmacy net sales increased primarily as a result of increased sales of drugs used for the treatment of thyroid deficiency, as discussed above.

Cost of ~~Sales.~~Sales, including amortization of intangibles. Cost of sales for the third quarter of Fiscal ~~2015 decreased slightly~~2016 increased $58.9 million to ~~$23.7~~$82.6 million. The ~~decrease is~~increase primarily reflected additional costs from the acquisition of KUPI, as well as the effects of purchase accounting related to ~~lower~~the amortization of inventory step-up totaling $8.6 million and ~~other regulatory expenses partially offset by increased provisions for excess~~depreciation of property, plant and ~~obsolete inventory. Amortization expense~~equipment step-up totaling $388 thousand. Product royalties included in cost of sales totaled $6.2 million for the third quarter of Fiscal 2016 and $44 thousand for the third quarter of Fiscal 2015. Amortization of intangible assets included in cost of sales totaled $7.3 million for the third quarter of Fiscal 2016 and $20 thousand for the third quarter of Fiscal ~~2015~~2015. The increase primarily reflected additional amortization of the acquired intangibles from the acquisition of KUPI and ~~$467 thousand for the third quarter of Fiscal 2014.~~Silarx.

Gross Profit. Gross profit for the third quarter of Fiscal ~~2015 increased 35%~~2016 decreased 24% to ~~$75.6~~$57.5 million or ~~76%~~41% of total net sales. In comparison, gross profit for the third quarter of Fiscal ~~2014~~2015 was ~~$56.1~~$75.6 million or ~~70%~~76% of total net sales. Excluding the impact of KUPI and the settlement agreement, gross profit as a percentage of net ~~sales.~~sales decreased to 71%. The ~~third quarter of Fiscal 2015~~decrease in gross profit percentage ~~increase~~ was ~~mainly~~ attributable to ~~product price increases~~the settlement agreement, the dilutive impact of gross profit margins of KUPI products, additional amortization of intangibles, as well as amortization of inventory step-up and ~~changes in~~depreciation of property, plant and equipment step-up related to the ~~mix~~acquisition of ~~products sold, as discussed above.~~KUPI.

~~While the~~The Company is continuously ~~striving~~seeking to keep product costs low, however there can be no guarantee that gross profit percentages will stay consistent in future periods. Pricing pressure from competitors, changes in product mix and the costs of producing or purchasing new drugs may also fluctuate in future periods. ~~Changes in future product sales mix may also occur.~~

Research and ~~Development.~~Development Expenses. Research and development expenses for the third quarter ~~decreased 13%~~increased 80% to $16.5 million in Fiscal 2016 from $9.2 million in Fiscal ~~2015 from $10.6 million in Fiscal 2014.~~2015. The ~~decrease is~~increase was primarily due to ~~lower third party contract lab expenses costs totaling $2.0 million, partially offset by increased costs associated with bio-equivalency studies~~the acquisition of KUPI and Silarx, which resulted in additional research and development expenses. Increased product development activities also contributed to the ~~clinical trial for the Company’s C-Topical® Solution product totaling $684 thousand.~~increase in research and development expenses.

Selling, General and ~~Administrative.~~Administrative Expenses. Selling, general and administrative expenses increased ~~28%~~39% to ~~$12.2~~$16.2 million in the third quarter of Fiscal ~~2015~~2016 compared with ~~$9.6~~$11.6 million in Fiscal ~~2014.~~2015. The increase was primarily due to ~~increased compensation related expenses totaling $1.3 million, increased acquisition-related expenses totaling $991 thousand, higher legal expenses totaling $462 thousand as well as~~the acquisition of KUPI and Silarx, which resulted in additional ~~expenses related to marketing the Company’s C-Topical® Solution product.~~selling, general and administrative expenses.

~~While the~~The Company is focused on controlling ~~costs,~~operating expenses and has implemented its 2016 restructuring plan as noted above, however increases in personnel ~~costs may have an ongoing~~ and ~~lasting impact on the administrative cost structure. Other~~other costs ~~are being incurred~~ to facilitate ~~improvements~~enhancements in the Company’s ~~infrastructure.~~infrastructure and expansion may continue to impact operating expenses in future periods.

Acquisition and Integration-related Expenses. Acquisition and integration-related expenses increased $886 thousand compared to the prior-year period. The increase was mainly due to post-acquisition integration costs related to KUPI.

Restructuring Expenses. Restructuring expenses increased $4.7 million compared to the prior-year period as a result of implementing the 2016 Restructuring Program on February 1, 2016.

Other Income (Loss). Interest expense in the third quarter of Fiscal ~~2015~~2016 totaled ~~$8 thousand~~$27.0 million compared to ~~$13~~$8 thousand in Fiscal ~~2014. Interest~~2015. The increase was due to interest on debt obligations used to finance the acquisition of KUPI, as well as amortization of debt discount and ~~dividend~~other debt issuance costs. The weighted average interest rate for the third quarter of Fiscal 2016 was 9.2%. Investment income ~~totaling $95~~totaled $204 thousand in the third quarter of Fiscal ~~2015 was lower~~2016 compared with ~~$109~~an investment loss of $8 thousand in the third quarter of Fiscal 2014. The Company also recorded a net loss on investment securities during the third quarter of Fiscal 2015 totaling $103 thousand compared to a net gain on investment securities totaling $200 thousand in Fiscal 2014.2015.

Income Tax. The Company recorded an income tax ~~expense~~benefit in the third quarter of Fiscal ~~2015~~2016 of ~~$18.0~~$2.7 million compared to ~~$13.3~~income tax expenses of $18.0 million in the third quarter of Fiscal ~~2014. The effective tax rate for~~2015. During the three months ended March 31, ~~2015 was 33%, compared to 37% for the three months ended March 31, 2014. The effective tax rate for the three months ended~~2016 and March 31, 2015, the effective rate was ~~lower~~

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~~compared to the three months ended March 31, 2014 due primarily to the effect of changes in local tax laws~~33.4% and ~~domestic manufacturing deductions recorded in Fiscal 2015. Research-related tax credits also contributed to the lower rate.~~33.1%, respectively.

Net ~~Income.~~Income (Loss). For the three months ended March 31, ~~2015,~~2016, the Company reported net ~~income~~loss attributable to Lannett Company, Inc. of ~~$36.2~~$5.5 million, or ~~$0.97~~$0.15 per ~~diluted~~ share. Comparatively, net income attributable to Lannett Company, Inc. in the ~~prior year~~corresponding prior-year period was ~~$23.0~~$36.2 million, or ~~$0.63~~$0.97 per diluted share.

Results of Operations - Nine months ended March 31, ~~2015~~2016 compared with the nine months ended March 31, ~~2014~~2015

Total net sales, which included a $23.6 million reduction for a settlement agreement (see Note 24), increased to $373.6 million from $307.6 million in the prior-year period.

Net sales increased ~~59%~~29% to ~~$307.6~~$397.2 million for the nine months ended March 31, ~~2015.~~2016. The following table identifies the Company’s net product sales by medical indication for the nine months ended March 31, ~~2015~~2016 and ~~2014:~~2015:

(In thousands)	Nine Months Ended March 31,				Nine months Ended March 31,
Medical Indication	2015		2014		2016			2015
Antibiotic	$	9,355	$	11,069	$	8,716		$	9,355
Cardiovascular	45,729		42,779		38,059			45,729
Central Nervous System					20,351			—
Gallstone	48,969		3,490		53,389			48,969
Gastrointestinal					30,431			—
Glaucoma	15,921		7,474		19,371			15,921
Gout	6,743		7,445		206			6,743
Migraine	19,455		9,851		16,338			19,455
Muscle Relaxant					4,246			6,377
Obesity	2,952		2,890		2,853			2,952
Pain Management	18,508		20,418		23,386			18,508
Respiratory					6,703			—
Thyroid Deficiency	114,601		74,560		116,543			114,601
Urinary					10,148			—
Other	25,328		13,176		34,082			18,951
Total	$	307,561	$	193,152
Contract manufacturing revenue					12,382			—
Net sales					397,204			307,561
Settlement agreement					(23,598		)	—
Total net sales					$	373,606		$	307,561

~~Product price increases~~Revenues from the KUPI acquisition of $96.1 million and increased volumes of $35.8 million contributed ~~$133.5 million~~ to the overall increase in net sales, partially offset by ~~decreased volumes~~product price decreases of ~~$19.1~~$42.3 million. ~~The Company experienced favorable trends in product pricing on several key products during the period, as discussed below.~~ Although the Company has benefited in the past from ~~these~~ favorable

pricing trends, the trends are stabilizing and in some instances beginning to reverse. During the period the Company experienced pricing pressure and increased competition on several products. The level of competition in the marketplace is constantly changing and the Company cannot ~~guarantee~~predict with certainty that these ~~pricing~~ trends will continue.

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

Medical indication	Sales volume change %		Sales price change %		Sales volume change %		Sales price change %		Acquisition change %
Antibiotic	(7)	%	(9)	%	12	%	(19	)%	—	%
Cardiovascular	(44)	%	51	%	(16	)%	(31	)%	30	%
Central Nervous System					—	%	—	%	100	%
Gallstone	(12)	%	1315	%	17	%	(8	)%	—	%
Gastrointestinal					—	%	—	%	100	%
Glaucoma	(11)	%	124	%	21	%	1	%	—	%
Gout	(10)	%	—	%	(97	)%	—	%	—	%
Migraine	(16)	%	113	%	(3	)%	(13	)%	—	%
Muscle Relaxant					(21	)%	(12	)%	—	%
Obesity	12	%	(10)	%	(5	)%	2	%	—	%
Pain Management	—	%	(9)	%	3	%	24	%	—	%
Respiratory					—	%	—	%	100	%
Thyroid Deficiency	(4)	%	58	%	23	%	(21	)%	—	%
Urinary					—	%	—	%	100	%

~~Thyroid Deficiency.~~Cardiovascular. Net sales of drugs used for ~~the~~cardiovascular treatment ~~of thyroid deficiency increased~~decreased by ~~$40.0~~$7.7 million, primarily as a result of ~~price increases on key products.~~decreased volumes due to several new entrants in the market for products used to treat congestive heart failure, as well as pricing pressures. The decreases were partially offset by net sales from cardiovascular products acquired in the KUPI acquisition.

Central Nervous System. Net sales of central nervous system products increased by $20.4 million. The increase in net sales was attributable to net sales from the Methylphenidate Hydrochloride Extended Release tablets acquired in the KUPI acquisition.

Gallstone. Net sales of drugs used for gallstones increased by ~~$45.5~~$4.4 million. The increase in net sales was primarily attributable to increased volumes, partially offset by price ~~increases on key products.~~decreases.

~~Migraine.~~Gastrointestinal. Net sales of ~~drugs used to treat migraines~~gastrointestinal products increased by ~~$9.6 million. The increase in net sales was attributable to price increases on key products, partially offset by decreased volumes.~~

~~Glaucoma.~~ ~~Net sales of drugs used for the treatment of Glaucoma increased by $8.4~~$30.4 million. The increase in net sales was primarily attributable to ~~price increases on key products.~~sales of gastrointestinal products acquired in the KUPI acquisition.

~~Cardiovascular.~~Glaucoma. Net sales of drugs used for ~~cardiovascular~~the treatment of glaucoma increased by ~~$3.0 million,~~$3.5 million. The increase in net sales was primarily ~~as a result~~attributable to increased volumes.

Gout. Net sales of ~~price increases on products~~drugs used to treat ~~congestive heart failure, partially offset~~gout decreased by ~~lower volumes.~~

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$6.5 million. The ~~Company experienced lower volumes and additional competition beginning~~decrease in ~~the third quarter of Fiscal 2015. The Company anticipates~~ net sales was attributable to decreased volumes resulting from ~~cardiovascular products in~~ the ~~fourth quarter~~loss of ~~Fiscal 2015 to be comparable to net sales from cardiovascular products in the third quarter of Fiscal 2015.~~a customer contract.

Pain Management. Net sales of pain management products ~~decreased $1.9~~increased $4.9 million. The ~~decrease~~increase in net sales was ~~primarily~~mainly attributable to price increases on the Company’s C-Topical® Solution product as well as a ~~lower~~higher average net sales ~~price resulting from~~price. Net sales was lower in the comparable prior-year period as a result of an increase in return reserves related to a voluntary recall of one lot of product manufactured at the Company’s facility in Cody, Wyoming due to incorrect labeling. The Company ~~continues~~is continuing to ~~actively market~~move forward with its ~~C-Topical® Solution product utilizing a group of brand representatives in anticipation of~~Phase III trial and anticipates filing an NDA ~~filing.~~application in calendar year 2016.

Respiratory. Net sales of respiratory products increased by $6.7 million. The ~~decrease~~increase in net sales was primarily attributable to sales of respiratory products acquired in the KUPI acquisition.

Thyroid Deficiency. Net sales of drugs used for the treatment of thyroid deficiency increased by $1.9 million, as a result of increased volumes, partially offset by ~~higher volumes~~a price concession to secure a long-term customer commitment.

Urinary. Net sales of urinary products increased by $10.1 million. The increase in net sales was primarily attributable to sales of urinary products acquired in the ~~Company’s Oxycodone HCl Oral Solution product~~KUPI acquisition.

Contract manufacturing revenue. Contract manufacturing sales for the first nine months of Fiscal 2016 totaled $12.4 million, which was ~~re-launched in~~entirely attributable to the ~~second quarter~~acquisition of ~~Fiscal 2015 as well as higher volumes of the Company’s C-Topical® Solution product.~~KUPI.

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 March ~~31:~~31, 2016 and 2015:

(In thousands) Customer Distribution Channel	March 31, 2015		March 31, 2014		March 31, 2016			March 31, 2015
Wholesaler/Distributor	$	224,684	$	122,551	$	291,497		$	224,684
Retail Chain	47,059		57,172		64,358			47,059
Mail-Order Pharmacy	35,818		13,429		28,967			35,818
Total	$	307,561	$	193,152
Contract manufacturing revenue					12,382			—
Net sales					397,204			307,561
Settlement agreement					(23,598		)	—
Total net sales					$	373,606		$	307,561

Net sales to wholesaler/distributor increased as a result of increased sales in a variety of products for thyroid deficiency, gallstone and cardiovascular, as discussed above. Additionally, the increase in net sales to wholesaler/distributor was impacted by the strategic partnership between Amerisource Bergen and Walgreens, whereby Amerisource Bergen began product distribution on behalf of Walgreens in third quarter of Fiscal Year 2014. Other strategic partnerships between industry wholesalers and retailers also impacted net sales to wholesaler/distributor and retail ~~chain. Mail-order pharmacy net sales~~chain increased primarily as a result of ~~increased~~additional net sales related to the KUPI acquisition. Mail-order pharmacy net sales decreased primarily as a result of lower cardiovascular drug sales as well as drugs used for the treatment of ~~thyroid deficiency, as discussed above.~~gallstones to a specific mail-order pharmacy customer.

Cost of ~~Sales.~~Sales, including amortization of intangibles. Cost of sales for the first nine months of Fiscal ~~2015 decreased $21.5~~2016 increased $93.9 million to ~~$73.2~~$167.0 million. The ~~decrease was~~increase primarily ~~attributable to~~reflected additional costs from the ~~nonrecurring $20.1 million charge~~acquisition of KUPI, as well as the effects of purchase accounting related to the ~~JSP contract renewal recorded in the first quarter~~amortization of ~~Fiscal Year 2014. The remaining decrease primarily reflected the impact~~inventory step-up totaling $14.4 million and depreciation of ~~decreased volumes~~property, plant and ~~lower amortization, partially offset by increased provisions for excess and obsolete inventory. Amortization expense~~equipment step-up totaling $388 thousand. Product royalties included in cost of sales totaled $10.6 million for the first nine months of Fiscal 2016 and $129 thousand for the first nine months of Fiscal 2015. The increase was primarily the result of additional product royalties from the acquisition of KUPI. Amortization of intangible assets included in cost of sales totaled $11.1 million for the first nine months of Fiscal 2016 and $61 thousand for the first nine months of Fiscal ~~2015~~2015. The increase primarily reflected additional amortization of the acquired intangibles from the acquisition of KUPI and ~~$1.4 million for the first nine months of Fiscal 2014.~~Silarx.

Gross Profit. Gross profit for the first nine months of Fiscal ~~2015 increased 138%~~2016 decreased 12% to ~~$234.4~~$206.6 million or ~~76%~~55% of total net sales. In comparison, gross profit for the first nine months of Fiscal ~~2014~~2015 was ~~$98.5~~$234.4 million or ~~51%~~76% of total net sales. Excluding the impact of KUPI and the settlement agreement, gross profit as a percentage of net ~~sales.~~sales decreased to 72%. The ~~charge related to the JSP contract renewal negatively impacted~~decrease in gross ~~margin percentage by 10% points in~~profit percentages for the first nine months of Fiscal ~~Year 2014. The remaining increase in~~2016 was attributable to the settlement agreement, the dilutive impact of gross profit margins of KUPI products, additional amortization of intangibles, as well as amortization of inventory step-up and depreciation of property, plant and equipment step-up related to the acquisition of KUPI. Product mix and pricing pressures also contributed to lower gross profit as a percentage ~~was due to product price increases.~~of net sales during the third quarter of Fiscal 2016.

Research and ~~Development.~~Development Expenses. Research and development expenses for the first nine months increased ~~11%~~37% to $32.1 million in Fiscal 2016 from $23.4 million in Fiscal ~~2015 from $21.1 million in Fiscal 2014.~~2015. The increase was primarily due to ~~increased product~~the acquisition of KUPI and Silarx, which resulted in additional research and development ~~costs totaling $1.6 million as well as costs associated with bio-equivalency studies and the clinical trial for the Company’s C-Topical® Solution product totaling $1.7 million.~~expenses. The increase was partially offset by ~~decreased third-party~~lower contract ~~lab expenses totaling $2.6 million. Compensation-related~~laboratory and ~~other miscellaneous expenses also contributed to the increase.~~bio-equivalency studies expenses.

Selling, General and ~~Administrative.~~Administrative Expenses. Selling, general and administrative expenses increased ~~34%~~41% to ~~$35.6~~$46.4 million in the first nine months of Fiscal ~~2015~~2016 compared with ~~$26.6~~$32.9 million in Fiscal ~~2014.~~2015. The increase was primarily due to the acquisition of KUPI and Silarx, which resulted in additional ~~acquisition-related expenses totaling $3.0 million as well as~~selling, general and administrative expenses. Additional compensation-related costs, including separation payments associated with the retirement of an ~~increase in legal expenses totaling $1.5 million. Compensation related expenses~~executive officer, also contributed ~~an additional $1.4 million.~~to the increase.

~~While the~~The Company is focused on controlling ~~costs,~~operating expenses and has implemented its 2016 restructuring plan as noted above, however increases in personnel ~~costs may have an ongoing~~ and ~~longer lasting impact on the administrative cost structure. Other~~other costs ~~are being incurred~~ to facilitate ~~improvements~~enhancements in the Company’s ~~infrastructure.~~infrastructure and expansion may continue to impact operating expenses in future periods.

Acquisition and Integration-related Expenses. Acquisition and integration-related expenses increased $20.3 million compared to the prior-year period. The increase was due to costs associated with the acquisition of KUPI, including investment banking, legal and accounting fees as well as post-acquisition integration costs.

Restructuring Expenses. Restructuring expenses increased $4.7 million compared to the prior-year period as a result of implementing the 2016 Restructuring Program on February 1, 2016.

Other Income (Loss). Interest expense in the first nine months of Fiscal ~~2015~~2016 totaled ~~$119 thousand~~$38.8 million compared to ~~$117~~$119 thousand in Fiscal ~~2014. Interest~~2015. The increase was due to interest on debt obligations used to finance the acquisition of KUPI, as well as amortization of debt discount and ~~dividend~~other debt issuance costs. The weighted average interest rate for the first nine months of Fiscal 2016 was 9.4%. Investment income ~~totaling $303 thousand~~ in the first nine months of Fiscal ~~2015 was higher compared with~~

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~~$204 thousand in the first nine months of Fiscal 2014. The Company also recorded a net gain on investment securities during the first nine months of Fiscal 2015 totaling $592~~2016 totaled $69 thousand compared to ~~a net gain on~~ investment ~~securities totaling $1.8 million~~income of $895 thousand in Fiscal ~~2014.~~2015.

Income Tax. The Company recorded income tax expense in the first nine months of Fiscal ~~2015~~2016 of ~~$60.2~~$20.3 million compared to ~~$18.8~~$60.2 million in the first nine months of Fiscal ~~2014.~~2015. The effective tax rate for the nine months ended March 31, ~~2015~~2016 was ~~34%~~32.9% compared to ~~36%~~34.2% for the nine months ended March 31, ~~2014.~~2015. The effective tax rate for the nine months ended March 31, ~~2015~~2016 was lower compared to the nine months ended March 31, ~~2014~~2015 due primarily to higher benefits related to research and experimentation credits recorded as a result of a tax law extension passed in late 2015, with a retroactive January 1, 2015 effective date, the effect of changes in ~~local~~the Company’s state tax ~~laws and~~profile as result of the KUPI acquisition, partially offset by a lower domestic manufacturing deductions recorded in Fiscal 2015. Research-related tax credits also contributed to the lower rate. Additionally, the Company expects its overall effective tax rate will be 34% to 35% for the full year ended June 30, 2015.deduction.

Net Income. For the nine months ended March 31, ~~2015,~~2016, the Company reported net income attributable to Lannett Company, Inc. of ~~$116.0~~$41.2 million, or ~~$3.13~~$1.10 per diluted share. Comparatively, net income attributable to Lannett Company, Inc. in the ~~prior year~~corresponding prior-year period was ~~$33.6~~$116.0 million, or ~~$0.97~~$3.13 per diluted ~~share, which included the charge related to the JSP contract renewal equal to $0.36 per diluted~~ share.

Liquidity and Capital Resources

Cash Flow

~~The~~Through November 25, 2015, the date of the KUPI acquisition, the Company ~~has~~had historically financed its operations with cash flow generated from operations supplemented with borrowings from various government agencies and financial institutions. At March 31, ~~2015,~~2016, working capital was ~~$332.3~~$424.7 million as compared to ~~$218.5~~$327.0 million at June 30, ~~2014,~~2015, an increase of ~~$113.8~~$97.7 million. Current product portfolio sales as well as sales related to future product approvals are anticipated to continue to generate positive cash flow from operations.

Net cash provided by operating activities of $123.2 million for the nine months ended March 31, 2016 reflected net income of $41.3 million, adjustments for non-cash items of $58.4 million, as well as cash provided by changes in operating assets and liabilities of $23.5 million. In comparison, net cash from operating activities of $89.7 million for the nine months ended March 31, 2015 reflected net income of $116.0 million, adjustments for non-cash items of $1.3 million, as well as cash used by changes in operating assets and liabilities of $27.6 million. ~~In comparison,~~

Significant changes in operating assets and liabilities, net ~~cash provided~~of acquisition, from June 30, 2015 to March 31, 2016 were comprised of:

· A decrease in accounts receivable of $50.9 million mainly due to lower gross accounts receivable outstanding and the timing of collections during the quarter ended March 31, 2016 compared to the quarter ended June 30, 2015. The Company’s days sales outstanding (“DSO”) at March 31, 2016, based on gross sales for the three months ended March 31, 2016 and gross accounts receivable at March 31, 2016, was 73 days. The level of DSO at March 31, 2016 was comparable to the Company’s expectation that DSO will be in the 70 to 80 day range based on customer payment terms.

· A decrease in inventories of $13.3 million primarily due to the timing of customer order fulfillment.

· An increase in accrued interest payable of $10.8 million related to interest on the $250.0 million unsecured 12.0% Senior Notes.

· An increase in other current assets totaling $9.7 million primarily related to state income taxes reimbursable from UCB.

· A decrease in accounts payable totaling $5.4 million due to the timing of payments.

· An increase in prepaid income taxes/income taxes payables totaling $14.7 million. The amount was mainly due to estimated tax payments, partially offset by ~~operating activities of $15.8 million~~current tax liabilities associated with pre-tax income for the nine months ended March 31, ~~2014 reflected net income~~2016.

· A decrease in accrued payroll and payroll-related costs of ~~$33.6~~$24.7 million ~~adjustments for non-cash items of $16.7 million,~~primarily related to payments made in the third quarter in connection with compensation accrued by KUPI prior to the acquisition as well as ~~cash used by changes~~payments made in ~~operating assets and liabilities of $34.5 million.~~August 2015 in connection with incentive compensation accrued in Fiscal Year 2015.

Significant changes in operating assets and liabilities from June 30, 2014 to March 31, 2015 were comprised of:

· An increase in accounts receivable of $18.4 million mainly due to an increase in gross accounts receivable resulting from increased sales partially offset by increases in total revenue-related reserves. The Company’s days sales outstanding (“DSO”) at March 31, 2015, based on gross sales for the three months ended March 31, 2015 and gross accounts receivable

at March 31, 2015, was 63 days. The level of DSO at March 31, 2015 was comparable to the Company’s expectation that DSO will be in the 60 to 70 day range based on 60 day payment terms for most customers.

· A decrease in accrued payroll and payroll related costs of $4.8 million primarily related to Fiscal Year 2015 payments of incentive compensation and tax withholdings accrued in Fiscal Year 2014, partially offset by incentive compensation costs accrued during Fiscal Year 2015.

· A decrease in accounts payable of $4.0 million due to the timing of payments at the beginning of Fiscal Year 2015.

· A decrease in inventories of $2.4 million. The decrease was primarily due to an increase in excess and obsolescence reserves recorded during Fiscal 2015.

~~Significant changes~~Net cash used in ~~operating assets and liabilities from June 30, 2013 to~~investing activities of $945.9 million for the nine months ended March 31, ~~2014 were comprised of:~~

·~~An increase in accounts receivable of $38.0 million~~2016 is mainly ~~due to an increase in gross accounts receivable as a~~the result of ~~increased sales,~~the acquisition of KUPI totaling $929.6 million (net of cash acquired), purchases of investment securities of $32.1 million and purchases of property, plant and equipment of $16.6 million, partially offset by increases in total revenue-related reserves. The Company’s days sales outstanding (“DSO”) at March 31, 2014, based on annualized gross sales and gross accounts receivable at March 31, 2014, was 66 days. The levelproceeds from the sale of ~~DSO at March 31, 2014 was comparable to the Company’s expectation that DSO will be in the 60 to 70 day range based on 60 day payment terms for most customers.~~

·~~A decrease in income taxes payable totaling $154 thousand and an increase in prepaid income taxes totaling $2.6 million, mainly resulting from Fiscal 2014 expected taxable income offset by the timing~~investment securities of ~~estimated tax payments made during Fiscal 2014 and tax benefits from stock options exercised.~~

·~~An increase in inventories of $8.8 million primarily due to the timing of customer order fulfillment.~~

·~~An increase in accrued expenses of $6.1 million due to an increase in rebates accrued resulting from sales qualifying for existing rebate programs.~~

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$32.4 million. Net cash provided by investing activities of $1.9 million for the nine months ended March 31, 2015 is mainly the result of proceeds from the sale of investment securities of $61.3 million, partially offset by purchases of investment securities of $36.7 million and purchases of property, plant and equipment of $22.6 million.

In addition to cash, the Company also issued to UCB $200.0 million of unsecured 12.0% Senior Notes and a warrant with a fair value of $29.9 million as consideration to acquire KUPI. The Company also has agreed to a 50/50 split of the additional tax liabilities UCB will incur associated with the IRS Section 338(H)(10) tax election, up to $35.0 million. This amount is recorded on the Consolidated Balance Sheet as Acquisition-related contingent consideration.

Net cash ~~used in investing~~provided by financing activities of ~~$49.3~~$847.8 million for the nine months ended March 31, ~~2014~~2016 was primarily ~~related~~due to ~~purchases~~proceeds from the issuance of ~~property, plant~~debt totaling $910.6 million, proceeds from issuance of stock pursuant to stock compensation plans of $3.8 million and ~~equipment~~excess tax benefits on stock option exercises of ~~$20.2 million, primarily two new building purchases, and purchases of investment securities of $49.8~~$1.5 million, partially offset by ~~proceeds from the sale~~debt repayments of ~~investment securities~~$34.2 million, payments of ~~$20.6~~debt issuance costs totaling $32.7 million and purchases of treasury stock totaling $1.2 million.

Net cash provided by financing activities of $11.9 million for the nine months ended March 31, 2015 was primarily due to proceeds from the issuance of stock pursuant to stock compensation plans of $4.2 million and excess tax benefits on stock option exercises of $7.8 million, partially offset by debt repayments of $96 thousand. Net cash provided by financing activities of $74.9 million for the nine months ended March 31, 2014 was primarily due to proceeds from an offering of the Company’s common stock of $71.5 million, proceeds from the issuance of stock pursuant to stock compensation plans of $4.7 million and excess tax benefits on stock option exercises of $5.2 million, partially offset by debt repayments of $5.3 million.

Credit ~~Facilities~~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 various capital investments and potential strategic opportunities. These borrowing arrangements as of March 31, ~~2015~~2016 are as follows:

~~In December 2013, the Company~~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”) ~~with Citibank, N.A.~~among certain of its wholly-owned domestic subsidiaries, as guarantors, Morgan Stanley Senior Funding, Inc., as administrative agent and ~~another financial institution. As of March 31, 2015, the Credit Agreement provided~~collateral agent, and other lenders providing for a secured credit facility (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility consisted of Tranche A term loans in an aggregate principal amount of $275.0 million, Tranche B term loans in an aggregate principal amount of $635.0 million, and a revolving ~~loan commitment~~credit facility providing for revolving loans in ~~the~~an aggregate principal amount of up to ~~$50.0~~$125.0 million.

The Term Loan A Facility will mature on November 25, 2020. The Tranche A Term Loans amortize in quarterly installments (a) through December 31, 2017 in amounts equal to 1.25% of the original principal amount of the Term Loan A Facility and (b) from January 1, 2018 through September 30, 2020 in amounts equal to 2.50% of the original principal amount of the Term Loan A Facility, with the balance payable on November 25, 2020. The Term Loan B Facility will mature on November 25, 2022. The Tranche B Term Loans amortize in equal quarterly installments in amounts equal to 1.25% of the original principal amount of the Term Loan B Facility with the balance payable on November 25, 2022. Any ~~loans under the~~outstanding Revolving Loans will mature on November 25, 2020.

The Secured Credit ~~Agreement will bear interest at either a “Eurodollar Rate” or a “Base Rate” plus a specified margin. The Company~~Facility is ~~also required to pay a commitment fee on any undrawn commitments under the Credit Agreement ranging from 0.2% - 0.3% per annum according to the average daily balance~~guaranteed by all of ~~borrowings under the agreement. The Credit Agreement~~Lannett’s significant wholly-owned domestic subsidiaries (the “Subsidiary Guarantors”) and is collateralized by substantially all present and future assets of Lannett and the Subsidiary Guarantors.

The interest rates applicable to the Term Loan Facility are based on a fluctuating rate of interest of the ~~Company’s assets. In connection~~greater of an adjusted LIBOR and 1.00%, plus a borrowing margin of 4.75% (for Tranche A Term Loans) or 5.375% (for Tranche B Term Loans). The interest rates applicable to the Revolving Credit Facility will be based on a fluctuating rate of interest of an adjusted LIBOR plus a borrowing margin of 4.75%. The interest rate applicable to the unused commitment for the Revolving Credit Facility is initially 0.50%. After

Lannett’s first full fiscal quarter following the closing, the interest margins and unused commitment fee on the Revolving Credit Facility will be subject to a leveraged based pricing grid.

The Senior Secured Credit Facility contains a number of covenants that, among other things, limit the ability of Lannett and its restricted subsidiaries to: incur more indebtedness; pay dividends; redeem stock or make other distributions of equity; make investments; create restrictions on the ability of Lannett’s restricted subsidiaries that are not Subsidiary Guarantors to pay dividends to Lannett or make intercompany transfers; create negative pledges; create liens; transfer or sell assets; merge or consolidate; enter into sale leasebacks; enter into certain transactions with ~~securing~~Lannett’s affiliates; and prepay or amend the terms of certain indebtedness.

The Senior Secured Credit ~~Agreement,~~Facility contains a springing financial performance covenant that is triggered when the ~~Company repaid~~aggregate principal amount of outstanding Revolving Credit Facility and outstanding letters of credit as of the last day of the most recent fiscal quarter is greater than 30% of the aggregate commitments under the Revolving Credit Facility. The covenant provides that Lannett shall not permit its first lien net senior secured leverage ratio as of the last day of any four consecutive fiscal quarters (i) from and after December 31, 2015, to be greater than 4.25:1.00 (ii) from and after December 31, 2017 to be greater than 3.75:1.00 and (iii) from and after December 31, 2019 to be greater than 3.25:1.00.

The Senior Secured Credit Facility also contains certain affirmative covenants, including financial and other reporting requirements.

12.0% Senior Notes due 2023

The Indenture contains covenants that, among other things, limit the ability of Lannett and Lannett’s restricted subsidiaries to: incur additional indebtedness, guarantee indebtedness or issue certain preferred shares; pay dividends on, redeem or repurchase stock or make other distributions in respect of its capital stock; repurchase, prepay or redeem subordinated indebtedness; make loans and investments; create restrictions on the ability of Lannett’s restricted subsidiaries to pay dividends to Lannett or the Subsidiary Guarantors or make other intercompany transfers; create liens; transfer or sell assets; consolidate, merge or sell or otherwise dispose of all or substantially all of its ~~outstanding debt. As~~assets; enter into certain transactions with affiliates; and designate subsidiaries as unrestricted subsidiaries.

Upon the occurrence of ~~March 31,~~certain events constituting a change of control triggering event, Lannett is required to make an offer to repurchase all of the Notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any to the repurchase date. If Lannett sells assets under certain circumstances, it must use the proceeds to make an offer to purchase the Notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

Citibank Line of Credit

On November 25, 2015, ~~and June 30, 2014,~~in connection with the acquisition of KUPI, the Company ~~had $50.0 million available under~~terminated the ~~Credit Agreement.~~

~~The Credit Agreement contains representations and warranties, affirmative, negative and financial covenants, and events~~Citibank Line of default, applicable to the Company and its subsidiaries which are customary for credit facilities of this type. As of March 31, 2015 and June 30, 2014, the Company was in compliance with all financial covenants.

~~The Credit Agreement was amended on April 21, 2015. See Note 22 “Subsequent Events” for more information.~~Credit.

The Company is the primary beneficiary to a VIE called Realty. The VIE owns land and a building which is being leased to Cody Labs. A mortgage loan with First National Bank of Cody has been consolidated in the Company’s financial statements, along with the related land and building. The mortgage requires monthly principal and interest payments of $15 thousand. As of March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, the effective rate was 4.5%. per annum. The mortgage is collateralized by the land and building with a net book value of $1.5 million. As of March 31, ~~2015, $1.0 million~~2016, $908 thousand is outstanding under the mortgage loan, of which ~~$134~~$140 thousand is classified as currently due.

Other Liquidity Matters

Material Suppliers

During the renewal term of the JSP distribution agreement, the Company is required to use commercially reasonable efforts to purchase, in the aggregate, $31 million of products from JSP each year. There is no guarantee that the Company will be able to meet the minimum purchase requirement for Fiscal 2016 and in the future. If the Company does not meet the minimum purchase requirements, JSP’s sole remedy is to terminate the agreement.

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

Research and Development Arrangements

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

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Prospects for the Future

Lannett continues to experience substantial improvement year over year in many important financial metrics. Each year, with staff additions, our knowledge, skills and talent ~~increase, as the Company learns from its experience.~~increase. The Company is strengthening and building momentum to ~~push to the next level~~grow within the generic pharmaceutical ~~industry. There are~~industry by embarking on several strategic initiatives, ~~on which~~including the ~~Company is embarking to continue its growth.~~recently completed acquisition of Kremers Urban Pharmaceuticals, Inc.

One initiative at the core of the Company’s strategy is to continue leveraging the asset we acquired in 2007, Cody Labs. In July 2008, the DEA granted Cody Labs a license to directly import concentrated poppy straw for conversion into opioid-based APIs for use in various dosage forms for pain management. The value of this license comes from the ~~fact that, to date, only six other companies in the U.S. have been granted this license. This license, along with~~successful development of patentable processes. Cody Labs’ expertise in API development and manufacture, allows the Company to perform in a market with high barriers to entry ~~no foreign competition,~~ and limited foreign and domestic competition.

Because of this vertical integration, the Company has direct control of ~~its supply~~those APIs that Cody manufactures and can avoid increased costs or supply chain interruptions associated with buying APIs from third-party manufacturers, thereby achieving higher ~~margins than generic products historically produce.~~margins. The Company can also leverage this vertical integration not only for direct supply of opioid-based APIs, but also for the manufacture of non-opioid-based ~~APIs.~~controlled drugs.

The Company believes that ~~the~~ demand for controlled ~~substance,~~substances and pain management drugs will continue ~~to grow as~~based upon the “Baby Boomer” ~~generation ages.~~demographics. By concentrating additional resources in the development of opioid-based APIs and dosage forms, the Company is well-positioned to take advantage of this opportunity. The Company is currently vertically integrated on two products, with several others in various stages of development.

One product ~~which~~that the Company manufactures is a cocaine hydrochloride solution. This product is being manufactured and marketed under the ~~brand~~product name C-Topical® Solution. This product is an analgesic topical solution, with vasoconstriction as a side effect, for use primarily by ear, nose and throat ~~doctors~~physicians during surgical procedures. This product represents the Company’s first foray into the brand market. Selling brand versus generic products ~~requires~~require a dedicated sales force to detail and educate physicians on the product. The Company strongly believes that C-Topical®, once ~~the~~ clinical trials are completed and the FDA has granted approval, will be an important contributor to total revenue, with higher than average profit margins as a result of vertical integration.

The Company’s strategic goal is to continue investing in controlled substance product development so that ~~within five years,~~by 2019 at least 50% of revenues from manufactured products are derived from controlled substance products which carry with them higher-than-average gross margins. As the Company continues to invest in, and focus on process and manufacturing optimization, Cody Labs will continue to be an important part of our future growth plan.

In addition to focusing on the development and manufacture of opioid-based APIs and dosage forms, the Company has made a ~~strategic~~ decision to develop products ~~both in-house and with external partners,~~ which require a paragraph four (P-IV) certification when filing the ANDA. A P-IV certification is required when an ANDA is submitted for a product for which the innovator’s patent has not yet expired. The certification must state whether the patent on the reference listed drug (RLD) is being challenged on grounds of it being invalid, or if the patent is being circumvented. This path to product approval represents ~~a major~~an opportunity for generic drug companies because they do not have to wait until a particular patent expires to potentially enter the market. Secondly, if a company is the ~~first to file~~first-to-file a P-IV certification on a product, and they successfully invalidate or circumvent the patent, the FDA may grant 180 days of market exclusivity. This allows the generic manufacturer to be the sole competitor to the brand company for six months ~~during which time it~~unless an authorized generic is launched.

During this market exclusivity period, the generic manufacturer will capture a significant portion of the market from the brand company, albeit at ~~lower~~discounted prices.

One challenge for generic manufacturers with this strategy is the level of legal costs required. Before a product is selected for development, the Company must perform a thorough review of the existing patents and determine if they are going to try to invalidate the patent or try to circumvent it. In either case, once the Company submits a P-IV the brand company will have 45 days to respond with a determination on whether they are going to file a suit against the generic company to defend their patent. A generic company needs to be prepared not only for the time and effort associated with a protracted legal challenge, but the associated fees which can easily reach in excess of several million dollars. This strategy provides a ‘high risk, high reward’ path to product approval. The Company filed its first ANDA with a P-IV certification in Fiscal ~~Year~~ 2013. ~~To date,~~As of March 31, 2016, we have 13 paragraph IV certifications pending with the FDA, of which five were filed ~~five P-IV certifications.~~by Lannett, four by Silarx, and four by KUPI. Three of the paragraph IV certifications are currently being challenged. In response to our ~~P-IV~~paragraph IV certification with respect to the Zomig® nasal spray product, AstraZeneca AB, AstraZeneca UK Limited and Impax Laboratories, Inc. filed two patent infringement complaints against the Company in July 2014. ~~With the right research~~In response to our paragraph IV certification with respect to Thalomid®, Celegene Corporation and ~~analysis performed up front,~~Children’s Medical Center Corporation filed a patent infringement lawsuit against the Company ~~believes it can target suitable products~~in January 2015. In response to our paragraph IV certification with respect to Dilaudid®, Purdue Pharmaceutical Products L.P, Purdue Pharma L.P, and Purdue Pharma Technologies Inc. filed a patent infringement lawsuit against the Company in August 2015. The Company is in various stages of responding to the patent infringement claims. Refer to Note 13 “Legal and Regulatory Matters” for ~~which to file a P-IV certification, be successful, and reap the rewards of limited competition.~~additional information.

~~Another area of focus for the~~The Company ~~relates to~~is also focused on mergers, acquisitions and other strategic alliances, whether new or continuing. The Company is party to supply and development agreements with international companies, including Azad Pharma AG, Aenova (formerly Swiss ~~Caps~~Caps) of Switzerland, ~~Pharma 2B (formerly Pharmaseed), The GC Group of Israel~~ and HEC Pharm Group, Sunshine Lake LLC, Sumitomo Pharma Co, Ltd., Tubilux Pharma as well as domestic companies, including JSP, Silarx, Cerovene, Symplemed, Inc., and Summit Bioscience LLC. The Company is currently in negotiations on similar agreements with other companies, and is actively seeking additional strategic partnerships, through which it will market and distribute products manufactured in-house or by third parties.

~~Table~~ Additionally, the Company recently completed its acquisition of ~~Contents~~Silarx Pharmaceuticals, Inc. and Kremers Urban Pharmaceuticals, Inc. The Company plans to continue evaluating potential merger and acquisition opportunities that are a strategic fit and accretive to the business.

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~~SEC requires the use of estimates and assumptions. A listing of the Company’s significant accounting policies are detailed in Note 3 “Summary of Significant Accounting Policies.” A subsection of these accounting policies have 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 estimate was 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 Goodwill and Intangible Assets, In-Process Research and Development, and Share-based Compensation.

Revenue Recognition

The Company recognizes revenue when title and risk of loss have transferred to the customer and provisions for estimates, including rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable. The Company also considers all other relevant criteria specified in ~~Securities and Exchange Commission~~SEC Staff Accounting Bulletin No. 104, Topic No. 13, “Revenue Recognition”, in determining when to recognize revenue.

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. The reserves presented as a reduction of accounts receivable totaled ~~$61.6~~$144.8 million and ~~$51.9~~$69.4 million at March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, respectively. Rebates payable at March 31, ~~2015~~2016 and June 30, ~~2014~~2015 were ~~$5.9~~$17.0 million and ~~$4.6~~$7.6 million, respectively, for certain rebate programs, primarily related to Medicare Part D and Medicaid, and certain sales allowances and other adjustments paid to indirect customers.

The following table identifies the activity and ending balances of each major category of revenue reserve for the nine months ended March 31, ~~2015~~2016 and ~~2014:~~2015:

Reserve Category (In thousands)	Chargebacks			Rebates			Returns			Other			Total			Chargebacks			Rebates			Returns			Other			Total
Balance at July 1, 2014	$	30,320		$	15,091		$	9,341		$	1,787		$	56,539
Balance at July 1, 2015																$	35,801		$	20,498		$	19,209		$	1,528		$	77,036
Additions related to the KUPI acquisition																44,863			38,425			18,003			6,920			108,211
Current period provision	252,290			58,190			14,208			22,875			347,563			424,852			124,631			14,318			26,982			590,783
Credits issued during the period	(250,549		)	(58,071		)	(5,059		)	(22,901		)	(336,580		)	(442,452		)	(131,740		)	(13,984		)	(26,034		)	(614,210		)
Balance at March 31, 2015	$	32,061		$	15,210		$	18,490		$	1,761		$	67,522
Balance at March 31, 2016																$	63,064		$	51,814		$	37,546		$	9,396		$	161,820

Reserve Category (In thousands)	Chargebacks			Rebates			Returns			Other			Total			Chargebacks			Rebates			Returns			Other			Total
Balance at July 1, 2013	$	7,267		$	3,581		$	6,689		$	1,000		$	18,537
Balance at July 1, 2014																$	30,320		$	15,091		$	9,341		$	1,787		$	56,539
Current period provision	78,477			40,465			5,458			18,801			143,201			252,290			58,190			14,208			22,875			347,563
Credits issued during the period	(66,032		)	(28,119		)	(2,924		)	(17,909		)	(114,984		)	(250,549		)	(58,071		)	(5,059		)	(22,901		)	(336,580		)
Balance at March 31, 2014	$	19,712		$	15,927		$	9,223		$	1,892		$	46,754
Balance at March 31, 2015																$	32,061		$	15,210		$	18,490		$	1,761		$	67,522

For the three months ending March 31, ~~2015~~2016 and ~~2014,~~2015, as a percentage of gross sales the provision for chargebacks was ~~36.1%~~45.0% and ~~23.9%~~36.1%, the provision for rebates was ~~9.0%~~13.2% and ~~14.7%~~9.0%, the provision for returns was ~~2.9%~~0.8% and ~~1.6%~~2.9%, and the provision for other adjustments was ~~3.8%~~2.9% and ~~0.8%~~3.8%, respectively.

For the nine months ending March 31, ~~2015~~2016 and ~~2014,~~2015, as a percentage of gross sales the provision for chargebacks was ~~38.5%~~43.4% and ~~23.3%~~38.5%, the provision for rebates was ~~8.9%~~12.7% and ~~12.0%~~8.9%, the provision for returns was ~~2.2%~~1.5% and ~~1.6%~~2.2%, and the provision for other adjustments was ~~3.5%~~2.8% and ~~5.6%~~3.5%, respectively.

The increase in total reserves from June 30, ~~2014~~2015 to March 31, ~~2015~~2016 was due to increases in ~~substantially~~ all reserve ~~categories. The increases resulted from increased~~categories primarily as a result of reserves acquired in connection the acquisition of KUPI. Excluding KUPI, the chargebacks and rebates reserve decreased due to lower gross sales, ~~to wholesalers related to~~as well as the ~~strategic partnership between Amerisource Bergen and Walgreens, whereby Amerisource Bergen began product distribution on behalf~~timing of ~~Walgreens in third quarter of Fiscal Year 2014. Other strategic partnerships between industry wholesalers and retailers also impacted net sales to wholesaler/distributor and retail~~

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~~chain. The return reserve increased due to~~ ~~a voluntary recall of one lot of product manufactured at the Company’s facility in Cody, Wyoming due to incorrect labeling.~~credits taken. The activity in the “Other” category for the nine months ended March 31, ~~2015~~2016 and ~~2014~~2015 includes shelf-stock, shipping and other sales adjustments including prompt payment discounts. Historically, we have not recorded any material amounts in the current period related to reversals or additions of prior period reserves. If the Company were to record a material reversal or addition of any prior period reserve amount it would be separately disclosed.

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.”~~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 New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug Application (“ANDA”). Because our drugs used for the treatment of thyroid deficiency and our Morphine Sulfate Oral Solution product were both approved by the FDA as 505(b)(2) NDAs, they are considered “brand” drugs for purposes of the PPACA. 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

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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.

Inventories

Inventories are stated at the lower of cost or market determined by the first-in, first-out method. Inventories are regularly reviewed and provisions for excess and obsolete inventory are recorded based primarily on current inventory levels and estimated sales forecasts. During the three months ended March 31, ~~2015~~2016 and ~~2014,~~2015, the Company recorded provisions for excess and obsolete inventory of ~~$2.1~~$1.6 million and ~~$811 thousand,~~$2.1 million, respectively. During the nine months ended March 31, ~~2015~~2016 and ~~2014,~~2015, the Company recorded provisions for excess and obsolete inventory of $4.4 million and $5.0 million, ~~and $1.9 million,~~ respectively.

Income Taxes

The Company uses an asset and liability approach to account for income taxes as prescribed by ASC 740, Income Taxes. Deferred taxes are recorded to reflect the tax consequences on future years of events that the Company has already recognized in the financial statement or tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effect of changes in tax law or tax rates in the period during which the new law is enacted. 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 through generating sufficient future taxable

income. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company’s future effective income tax rate is highly reliant on future projections of taxable income, tax legislation, and potential tax planning strategies. A change in any of these factors could materially affect the effective income tax rate of the Company in future periods.

Business Combinations

Valuation of Long-Lived Assets, including Goodwill and Intangible Assets

The Company’s long-lived assets primarily consist of property, plant and equipment, ~~as well as definite-lived~~definite and indefinite-lived intangible ~~assets. Intangible~~ assets, ~~are stated at cost less accumulated amortization~~ and were not material to the consolidated financial statements at March 31, 2015 or June 30, 2014. Amortization is computed on a straight-line basis over the assets’ estimated useful lives, generally for periods ranging from 10 to 15 years. goodwill.

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, generally for periods ranging from 5 to 39 years. Definite-lived intangible assets are stated at cost less accumulated amortization and are amortized on a straight-line basis over the assets’ estimated useful lives, generally for periods ranging from 10 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets.

~~Long-lived~~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. The nature and timing of triggering events by their very nature are unpredictable; however, management regularly considers the performance of an asset as compared to its expectations, industry events, industry and economic trends, as well as any other relevant information known to management when determining if a triggering event occurred.

If a triggering event is determined to have occurred, the first step in the impairment test is to compare the asset’s carrying value to the undiscounted cash flows expected to be generated by the asset. If the carrying value exceeds the undiscounted cash flow of the asset, then an impairment exists. 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. The judgments made in determining the estimated fair value can materially impact our results of operations.

34Goodwill and indefinite-lived intangible assets, including in-process research and development, are not amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment annually during the fourth quarter of each fiscal year, or more frequently whenever events or changes in circumstances (“triggering events”) indicate that the asset might be impaired. The Company first performs a qualitative assessment to determine if the quantitative impairment test is required. If changes in circumstances indicate an asset may be impaired, the Company performs the quantitative test. The quantitative impairment test consists of a Step I analysis that requires a comparison between the reporting unit’s fair value and carrying amount. If the fair value of the reporting unit exceeds its carrying amount, impairment does not exist and no further analysis is required. A Step II analysis would be required if the fair value of the reporting unit is lower than its carrying amount. If the carrying amount of a reporting unit exceeds the fair value, Step II of the quantitative impairment test requires the allocation of the reporting unit fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations with any residual fair value being allocated to goodwill or indefinite-lived intangibles. An impairment charge is recognized only when the implied fair value of the reporting unit’s goodwill or indefinite-lived intangible is less than its carrying amount. The judgments made in determining the estimated fair value of goodwill and indefinite-lived intangible asset 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. The Company has one reportable

~~Table of Contents~~segment and one reporting unit, generic pharmaceuticals. For the three and nine months ended March 31, 2016 and 2015, no impairment charges were recorded.

In-Process Research and Development

Acquired businesses are accounted for using the acquisition method of accounting. The acquisition purchase price is allocated to the net assets of the acquired business at their respective fair values. Amounts allocated to in-process research and development are recorded at fair value and are considered indefinite-lived intangible assets subject to the impairment testing in accordance with the Company’s impairment testing policy for indefinite-lived intangible assets as described above. 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 life of the asset. 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. For the three and nine months ended March 31, 2016, there were no triggering events that would indicate that impairment exists.

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 and the market price on the grant date to value restricted stock. The Black-Scholes valuation model includes various assumptions, including the expected volatility, the expected life of the award, dividend yield, and the risk-free interest rate. 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 financial statements.

The following table presents the weighted average assumptions used to estimate fair values of the stock options granted during the nine months ended March 31, ~~2015~~2016 and ~~2014~~2015 and the estimated annual forfeiture rates used to recognize the associated compensation expense:

							Nine Months Ended
	March 31, 2015			March 31, 2014			March 31, 2016			March 31, 2015
Risk-free interest rate	1.7		%	2.1		%	1.7		%	1.7		%
Expected volatility	52.1		%	62.9		%	48.3		%	52.1		%
Expected dividend yield	0.0		%	0.0		%	0.0		%	0.0		%
Forfeiture rate	6.5		%	7.5		%	6.5		%	6.5		%
Expected term (in years)	5.5 years			5.9 years
Expected term							5.2 years			5.5 years
Weighted average fair value	$	17.67		$	8.14		$	26.24		$	17.67

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The authoritative guidance is effective for annual reporting periods beginning after December 15, 2016. ~~Early application is not permitted.~~In July 2015, the FASB extended the effective date of the guidance by one year to December 15, 2017. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company has elected to early adopt ASU 2015-03 as of December 31, 2015.

35In September 2015, the FASB issued ASU 2015-16, Business Combinations — Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 also requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for reporting periods beginning after December 15, 2015 and is applied prospectively. Early adoption is permitted. The Company has elected to early adopt ASU 2015-16 as of March 31, 2016.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 clarifies several aspects of accounting for share-based compensation including the accounting for excess tax benefits and deficiencies, accounting for forfeitures and the classification of excess tax benefits on the cash flow statement. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and in interim periods within those fiscal years, with early adoption permitted. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

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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 Secured Credit Facility. Based on the variable-rate debt outstanding at March 31, 2016, each 1/8% increase in interest rates would yield $1.1 million of incremental annual interest expense.

A mortgage loan with First National Bank of Cody has been consolidated in the Company’s financial statements, along with the related land and building. The mortgage requires monthly principal and interest payments of $15 thousand. As of March 31, ~~2015~~2016 and June 30, ~~2014,~~2015, the effective interest rate was 4.5%. per annum. The mortgage is collateralized by the land and building with a net book value of $1.5 million. As of March 31, ~~2015, $1.0 million~~2016, $908 thousand is outstanding under the mortgage loan.

In December 2013, the Company entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent and certain other financial institutions. As of March 31, 2015, the Credit Agreement provided for a revolving loan commitment in the amount of up to $50.0 million. Any loans under the Credit Agreement will bear interest at either a “Eurodollar Rate” or a “Base Rate” plus a specified margin. The Company is also required to pay a commitment fee on any undrawn commitments under the Credit Agreement ranging from 0.2% - 0.3% per annum according to the average daily balance of borrowings under the agreement. The Credit Agreement is collateralized by substantially all of the Company’s assets. As of March 31, 2015 and June 30, 2014, the Company had $50.0 million available under the Credit Agreement.

~~The Credit Agreement was amended on April 21, 2015. See Note 22 “Subsequent Events” for more information.~~

The Company invests 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~~We acquired KUPI on November 25, 2015 and are currently in the process of integrating KUPI’s into our existing internal controls over financial reporting. Except for any changes in internal controls related to the integration of KUPI, there has been no change in Lannett’s internal control over financial reporting during the three and nine months ended March 31, ~~2015~~2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in Note ~~12.~~13. “Legal and Regulatory Matters” 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~~Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2014~~2015 includes a detailed description of its risk factors.

In addition to the ~~third quarter~~information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of ~~Fiscal 2015,~~our Annual Report on Form 10-K for the ~~Company updated Item 1A. Risk Factors to include the following:~~fiscal year ended June 30, 2015.

~~Under~~Risks Related to our Bylaws, individuals or entities that bring certain claims or join such claims may be obligated to reimburse the Company for the expenses it reasonably incurs in connection with such actions if the claim proves unsuccessful.Operations

~~Our Bylaws provide,~~A relatively small group of products may represent a significant portion of our revenues, gross profit, or net earnings from time to time.

Sales of a limited number of our products from time to time represent a significant portion of our revenues, gross profit, and net earnings. For the ~~fullest extent permitted by law,~~nine months ended March 31, 2016 and 2015, our top five products in terms of sales, in the ~~event that any current or former stockholder (the “Claimant”) (x) initiates or asserts (1) any derivative action or proceeding brought on behalf~~aggregate, represented approximately 57% and 78%, respectively, of our net sales. For the ~~Company, (2) any claim or counterclaim or other action against the Company or any~~fiscal years ended June 30, 2015, 2014 and 2013, our top five products in terms of its directors, officers, employees or agents, including but not limited to federal securities law claims (each of the foregoing, a “Claim”), or joins any such Claim as a named party, or (y) joins, offers substantial assistance to or has a direct financial interest in any Claim and (z) the Claimant or the party who has brought such Claim does not thereby obtain a judgment on the merits that substantially achieves the full equitable, legal and monetary remedies or relief soughtsales, in the ~~Claim, such Claimant shall be obligated to reimburse the Company for all costs, fees~~aggregate, represented approximately 78%, 74% and expenses of any kind (including attorneys’ fees and the fees of experts) actually incurred by the Company in defending such Claim or in indemnifying any officer, director or third party for the costs, fees and expenses incurred by any such officer, director or third party in connection with such Claim. The Company believes that the term “judgment on the merits” means the determination of a court or jury after all relevant facts have been presented in evidence. Additionally, the Company believes that a Claimant would need to prevail on a majority of the claims brought by such Claimant, be awarded a majority of the damages and other monetary relief sought by such Claimant, and be awarded a majority of the equitable and other relief sought by such Claimant in order to “substantially achieve” the full remedy sought in a claim. Please note, however, that the court hearing any Claim would make the ultimate determination as to the meanings of such phrases and the applicability or non-applicability of this bylaw provision with respect to any Claim brought by a Claimant. Although this provision69%, respectively, of our ~~Bylaws was adopted to deter frivolous lawsuits, it also may deter stockholder litigation that may be~~net sales. If the volume or pricing of our largest selling products declines in the ~~best interests~~future, our business, financial condition, results of ~~the Company~~ operations, cash flows, and/or ~~our stockholders.~~share price could be materially adversely affected.

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.

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SIGNATURES

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

			LANNETT COMPANY, INC.

Dated: May ~~8, 2015~~	10, 2016	By:	/s/ Arthur P. Bedrosian
			Arthur P. Bedrosian
			Chief Executive Officer


Dated: May ~~8, 2015~~	10, 2016	By:	/s/ Martin P. Galvan
			Martin P. Galvan
			Vice President of Finance, Chief Financial Officer and Treasurer


Dated: May ~~8, 2015~~	10, 2016	By:	/s/ G. Michael Landis
			G. Michael Landis
			Director of Financial Reporting and Principal Accounting Officer

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Exhibit Index

~~10.30~~	~~Employment Agreement of John Abt~~	~~Filed Herewith~~

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith

32	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Herewith

101.INS	XBRL Instance Document

101.SCH	XBRL Extension Schema Document

101.CAL	XBRL Calculation Linkbase Document

101.DEF	XBRL Definition Linkbase Document

101.LAB	XBRL Label Linkbase Document

101.PRE	XBRL Presentation Linkbase Document

3954

(In thousands)	Useful Lives	March 31, 2015			June 30, 2014
Land	—	$	4,641		$	4,641
Building and improvements	10 - 39 years	46,330			42,013
Machinery and equipment	5 - 10 years	44,311			37,678
Furniture and fixtures	5 - 7 years	1,719			1,416
Construction in progress	—	22,303			11,454
Property, plant and equipment, gross		119,304			97,202
Less accumulated depreciation		(39,039		)	(35,498		)
Property, plant and equipment, net		$	80,265		$	61,704