Table of Contents

			Page No.
PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Consolidated Balance Sheets as of December 31, ~~2017~~2018 (unaudited) and June 30, ~~2017~~2018	3

	Consolidated Statements of Operations (unaudited) for the three and six months ended December 31, ~~2017~~2018 and ~~2016~~2017	4

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended December 31, ~~2017~~2018 and ~~2016~~2017	5

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended December 31, 2018 and 2017	6

	Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, ~~2017~~2018 and ~~2016~~2017	78

	Notes to Consolidated Financial Statements (unaudited)	89

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2833

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3846

ITEM 4.	CONTROLS AND PROCEDURES	3846

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	3947

ITEM 1A.	RISK FACTORS	3947

ITEM 6.	EXHIBITS	3947

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANNETT COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

							(Unaudited)
	(Unaudited) December 31, 2017			June 30, 2017			December 31, 2018			June 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	139,862		$	117,737		$	163,774		$	98,586
Investment securities	27,842			27,091
Accounts receivable, net	256,728			204,066			275,364			252,651
Inventories	135,591			122,604			136,128			141,635
Prepaid income taxes	1,760			16,703			—			15,159
Assets held for sale							11,422			13,976
Other current assets	6,471			6,592			7,958			4,863
Total current assets	568,254			494,793			594,646			526,870
Property, plant and equipment, net	258,206			243,148			195,607			233,247
Intangible assets, net	439,639			453,861			409,870			424,425
Goodwill	339,566			339,566			—			339,566
Deferred tax assets	30,584			52,753			100,013			22,063
Other assets	23,146			19,191			19,320			29,133
TOTAL ASSETS	$	1,659,395		$	1,603,312		$	1,319,456		$	1,575,304

LIABILITIES
Current liabilities:
Accounts payable	$	78,633		$	44,720		$	60,178		$	56,767
Accrued expenses	12,730			12,499			7,283			7,425
Accrued payroll and payroll-related expenses	16,036			4,833			15,545			7,819
Deferred revenue							23,998			—
Rebates payable	48,379			44,593			44,384			49,400
Royalties payable	5,579			3,015			9,615			5,955
Restructuring liability	4,581			5,431			5,693			6,706
Liabilities held for sale							1,204			—
Settlement liability	12,000			17,000			8,000			—
Income taxes payable							1,346			—
Short-term borrowings and current portion of long-term debt	66,845			60,117			66,845		��	66,845
Total current liabilities	244,783			192,208			244,091			200,917
Long-term debt, net	819,220			843,530			746,607			772,425
Other liabilities	2,596			6,452			2,247			3,047
TOTAL LIABILITIES	1,066,599			1,042,190			992,945			976,389
Commitments and Contingencies (Note 12 and 13)

STOCKHOLDERS’ EQUITY
Common stock ($0.001 par value, 100,000,000 shares authorized; 37,760,877 and 37,528,450 shares issued; 37,105,338, and 36,919,296 shares outstanding at December 31, 2017 and June 30, 2017, respectively)	38			37
Common stock ($0.001 par value, 100,000,000 shares authorized; 38,766,807 and 38,256,839 shares issued; 37,822,927, and 37,380,517 shares outstanding at December 31, 2018 and June 30, 2018, respectively)							39			38
Additional paid-in capital	298,337			292,780			312,322			306,817
Retained earnings	305,053			277,774			29,016			306,464
Accumulated other comprehensive loss	(347		)	(222		)	(502		)	(515		)
Treasury stock (655,539 and 609,154 shares at December 31, 2017 and June 30, 2017, respectively)	(10,285		)	(9,247		)
Treasury stock (943,880 and 876,322 shares at December 31, 2018 and June 30, 2018, respectively)							(14,364		)	(13,889		)
Total stockholders’ equity	592,796			561,122			326,511			598,915
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,659,395		$	1,603,312		$	1,319,456		$	1,575,304

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

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)

													Three months ended						Six months ended
	Three months ended December 31,						Six months ended December 31,						December 31,						December 31,
	2017			2016			2017			2016			2018			2017			2018			2017

Net sales	$	184,305		$	170,944		$	339,266		$	332,503		$	193,718		$	184,305		$	348,772		$	339,266
Cost of sales	88,914			75,154			168,467			145,974			115,751			88,914			203,441			168,467
Amortization of intangibles	7,941			7,737			15,678			16,624			8,157			7,941			16,380			15,678
Gross profit	87,450			88,053			155,121			169,905			69,810			87,450			128,951			155,121
Operating expenses:
Research and development expenses	10,722			9,939			18,131			22,310			9,723			10,722			19,533			18,131
Selling, general and administrative expenses	28,493			18,069			47,531			39,329			23,197			28,493			43,785			47,531
Acquisition and integration-related expenses	65			1,027			83			2,418			—			65			—			83
Restructuring expenses	1,035			1,712			1,562			3,764			213			1,035			1,235			1,562
Intangible asset impairment charges	—			23,000			—			88,084
Asset impairment charges													—			—			369,499			—
Total operating expenses	40,315			53,747			67,307			155,905			33,133			40,315			434,052			67,307
Operating income	47,135			34,306			87,814			14,000
Operating income (loss)													36,677			47,135			(305,101		)	87,814
Other income (loss):
Investment income	2,325			1,021			3,489			2,048			556			2,325			935			3,489
Interest expense	(20,686		)	(23,333		)	(41,598		)	(46,327		)	(21,512		)	(20,686		)	(42,945		)	(41,598		)
Other	3,386			(266		)	3,135			(263		)	(712		)	3,386			(1,008		)	3,135
Total other loss	(14,975		)	(22,578		)	(34,974		)	(44,542		)	(21,668		)	(14,975		)	(43,018		)	(34,974		)
Income (loss) before income tax	32,160			11,728			52,840			(30,542		)	15,009			32,160			(348,119		)	52,840
Income tax expense (benefit)	18,138			3,542			25,561			(9,340		)	2,647			18,138			(72,953		)	25,561
Net income (loss)	14,022			8,186			27,279			(21,202		)	$	12,362		$	14,022		$	(275,166	)	$	27,279
Less: Net income attributable to noncontrolling interest	—			14			—			34
Net income (loss) attributable to Lannett Company, Inc.	$	14,022		$	8,172		$	27,279		$	(21,236	)

Earnings (loss) per common share attributable to Lannett Company, Inc.:
Earnings (loss) per common share:
Basic	$	0.38		$	0.22		$	0.74		$	(0.58	)	$	0.33		$	0.38		$	(7.30	)	$	0.74
Diluted	$	0.37		$	0.22		$	0.72		$	(0.58	)	$	0.32		$	0.37		$	(7.30	)	$	0.72

Weighted average common shares outstanding:
Basic	37,066,902			36,810,388			37,029,483			36,754,828			37,761,176			37,066,902			37,674,200			37,029,483
Diluted	38,290,358			37,676,370			38,087,826			36,754,828			39,112,547			38,290,358			37,674,200			38,087,826

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

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)

												Three months ended					Six months ended
	Three months ended December 31,					Six months ended December 31,						December 31,					December 31,
	2017			2016		2017			2016			2018		2017			2018			2017

Net income (loss)	$	14,022		$	8,186	$	27,279		$	(21,202	)	$	12,362	$	14,022		$	(275,166	)	$	27,279
Other comprehensive income (loss), before tax:
Foreign currency translation gain (loss)	(126		)	41		(125		)	38			7		(126		)	13			(125		)
Total other comprehensive income (loss), before tax	(126		)	41		(125		)	38			7		(126		)	13			(125		)
Income tax related to items of other comprehensive income	—			—		—			—			—		—			—			—
Total other comprehensive income (loss), net of tax	(126		)	41		(125		)	38			7		(126		)	13			(125		)
Comprehensive income (loss)	13,896			8,227		27,154			(21,164		)	$	12,369	$	13,896		$	(275,153	)	$	27,154
Less: Total comprehensive income attributable to noncontrolling interest	—			14		—			34
Comprehensive income (loss) attributable to Lannett Company, Inc.	$	13,896		$	8,213	$	27,154		$	(21,198	)

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

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

	Common Stock			Additional				Accumulated Other						Stockholders’ Equity			Three months ended December 31, 2018
	Shares Issued	Amount		Paid-In Capital		Retained Earnings		Comprehensive Loss			Treasury Stock			Attributable to Lannett Co., Inc.			Common Stock			Additional				Accumulated Other
																	Shares Issued	Amount		Paid-In Capital		Retained Earnings		Comprehensive Loss			Treasury Stock			Stockholders’ Equity
Balance, June 30, 2017	37,528	$	37	$	292,780	$	277,774	$	(222	)	$	(9,247	)	$	561,122

Balance, September 30, 2018																	38,665	$	39	$	310,135	$	16,654	$	(509	)	$	(14,295	)	$	312,024
Shares issued in connection with share-based compensation plans	233	1		805		—		—			—			806			102	—		237		—		—			—			237
Share-based compensation	—	—		4,752		—		—			—			4,752			—	—		1,950		—		—			—			1,950
Purchase of treasury stock	—	—		—		—		—			(1,038		)	(1,038		)	—	—		—		—		—			(69		)	(69		)
Other comprehensive loss, net of tax	—	—		—		—		(125		)	—			(125		)
Other comprehensive income net of tax																	—	—		—		—		7			—			7
Net income	—	—		—		27,279		—			—			27,279			—	—		—		12,362		—			—			12,362

Balance, December 31, 2017	37,761	$	38	$	298,337	$	305,053	$	(347	)	$	(10,285	)	$	592,796
Balance, December 31, 2018																	38,767	$	39	$	312,322	$	29,016	$	(502	)	$	(14,364	)	$	326,511

	Three months ended December 31, 2017
	Common Stock			Additional				Accumulated Other
	Shares Issued	Amount		Paid-In Capital		Retained Earnings		Comprehensive Loss			Treasury Stock			Stockholders’ Equity

Balance, September 30, 2017	37,672	$	38	$	295,282	$	291,031	$	(221	)	$	(9,859	)	$	576,271
Shares issued in connection with share-based compensation plans	89	—		492		—		—			—			492
Share-based compensation	—	—		2,563		—		—			—			2,563
Purchase of treasury stock	—	—		—		—		—			(426		)	(426		)
Other comprehensive loss, net of tax	—	—		—		—		(126		)	—			(126		)
Net income	—	—		—		14,022		—			—			14,022
Balance, December 31, 2017	37,761	$	38	$	298,337	$	305,053	$	(347	)	$	(10,285	)	$	592,796

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

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

	Six months ended December 31, 2018
	Common Stock			Additional					Accumulated Other
	Shares Issued	Amount		Paid-In Capital		Retained Earnings			Comprehensive Loss			Treasury Stock			Stockholders’ Equity

Balance, June 30, 2018	38,257	$	38	$	306,817	$	306,464		$	(515	)	$	(13,889	)	$	598,915
Shares issued in connection with share-based compensation plans	510	1		520		—			—			—			521
Share-based compensation	—	—		4,985		—			—			—			4,985
Purchase of treasury stock	—	—		—		—			—			(475		)	(475		)
Other comprehensive income net of tax	—	—		—		—			13			—			13
ASC 606 adjustment	—	—		—		(2,282		)	—			—			(2,282		)
Net loss	—	—		—		(275,166		)	—			—			(275,166		)
Balance, December 31, 2018	38,767	$	39	$	312,322	$	29,016		$	(502	)	$	(14,364	)	$	326,511

	Six months ended December 31, 2017
	Common Stock			Additional				Accumulated Other
	Shares Issued	Amount		Paid-In Capital		Retained Earnings		Comprehensive Loss			Treasury Stock			Stockholders’ Equity

Balance, June 30, 2017	37,528	$	37	$	292,780	$	277,774	$	(222	)	$	(9,247	)	$	561,122
Shares issued in connection with share-based compensation plans	233	1		805		—		—			—			806
Share-based compensation	—	—		4,752		—		—			—			4,752
Purchase of treasury stock	—	—		—		—		—			(1,038		)	(1,038		)
Other comprehensive loss, net of tax	—	—		—		—		(125		)	—			(125		)
Net income	—	—		—		27,279		—			—			27,279
Balance, December 31, 2017	37,761	$	38	$	298,337	$	305,053	$	(347	)	$	(10,285	)	$	592,796

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

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	Six Months Ended December 31,						Six Months Ended December 31,
	2017			2016			2018			2017
OPERATING ACTIVITIES:
Net income (loss)	$	27,279		$	(21,202	)	$	(275,166	)	$	27,279
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	27,354			27,963			28,622			27,354
Deferred income tax expense (benefit)	22,169			(24,709		)	(77,950		)	22,169
Share-based compensation	4,752			4,173			4,985			4,752
Excess tax benefits on share-based compensation awards	—			(705		)
Intangible asset impairment charge	—			88,084
Asset impairment charges							369,499			—
Loss on sale of assets	233			267			644			233
Loss (gain) on investment securities	(2,834		)	(1,697		)	—			(2,834		)
Amortization of debt discount and other debt issuance costs	9,987			10,509			8,934			9,987
Other noncash expenses	87			1,056
Other noncash (income) expenses							(510		)	87
Changes in assets and liabilities which provided (used) cash:							—
Accounts receivable, net	(52,662		)	(17,219		)	(25,887		)	(52,662		)
Inventories	(12,987		)	(15,334		)	2,156			(12,987		)
Prepaid income taxes/Income taxes payable	15,040			1,827			17,516			15,040
Other assets	(8,160		)	(7,099		)	(678		)	(8,160		)
Accounts payable							3,701			28,913
Accrued expenses							(4		)	231
Accrued payroll and payroll-related expenses							8,501			11,203
Deferred revenue							23,998			—
Rebates payable	3,786			14,891			(5,016		)	3,786
Royalties payable	2,564			(1,577		)	3,660			2,564
Restructuring liability	(850		)	1,217			(1,013		)	(850		)
Settlement liability	—			(3,000		)	8,000			—
Accounts payable	28,913			9,052
Accrued expenses	231			2,415
Accrued payroll and payroll-related expenses	11,203			(1,662		)
Net cash provided by operating activities	76,105			67,250			93,992			76,105
INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(26,402		)	(21,324		)	(12,030		)	(26,402		)
Proceeds from sale of property, plant and equipment	17			33			14,091			17
Proceeds from sale of outstanding loan to Variable Interest Entity (“VIE”)							5,600			—
Purchase of intangible asset	(2,038		)	—			(2,000		)	(2,038		)
Proceeds from sale of investment securities	44,924			31,019			—			44,924
Purchase of investment securities	(42,841		)	(27,098		)	—			(42,841		)
Net cash used in investing activities	(26,340		)	(17,370		)
Net cash provided by (used in) investing activities							5,661			(26,340		)
FINANCING ACTIVITIES:
Repayments of long-term debt	(27,283		)	(26,618		)	(33,422		)	(27,283		)
Purchase of noncontrolling interest	—			(1,500		)
Proceeds from issuance of stock	806			1,785			521			806
Excess tax benefits on share-based compensation awards	—			705
Payment of debt issuance costs							(1,102		)	—
Purchase of treasury stock	(1,038		)	(1,806		)	(475		)	(1,038		)
Net cash (used in) financing activities	(27,515		)	(27,434		)
Net cash used in financing activities							(34,478		)	(27,515		)
Effect on cash and cash equivalents of changes in foreign exchange rates	(125		)	38			13			(125		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	22,125			22,484			65,188			22,125
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	117,737			224,769			98,586			117,737
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	139,862		$	247,253		$	163,774		$	139,862
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of capitalized interest of $974 thousand and $876 thousand for the six months ended December 31, 2017 and 2016, respectively)	$	31,250		$	34,986
Income taxes paid (received)	$	(7,567	)	$	13,553
Interest paid (net of capitalized interest of $0 and $974 thousand for the six months ended December 31, 2018 and 2017, respectively)							$	34,190		$	31,250
Income taxes paid (refunded)							$	(11,993	)	$	(7,567	)
Credits issued pursuant to a Settlement Agreement	$	5,000		$	—		$	—		$	5,000

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

LANNETT COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Interim Financial Information

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for the presentation of interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited financial statements do not include all the information and footnotes necessary for a comprehensive presentation of the financial position, results of operations and cash flows for the periods presented. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for the three and six months ended December 31, ~~2017~~2018 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2018.~~2019. 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, ~~2017.~~2018. The Consolidated Balance Sheet ~~for the fiscal year ended~~as of June 30, ~~2017~~2018 was derived from audited financial statements.

Note 2. The Business ~~And~~and Nature of Operations

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company” or “Lannett”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, nasal and oral solution finished dosage forms of drugs that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the ~~Company, most notably under the Jerome Stevens Distribution Agreement.~~Company. The Company also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. (“Cody Labs”) subsidiary ~~providing~~primarily for use in its finished dosage forms. In the first quarter of Fiscal 2019, the Company approved a ~~vertical integration benefit.~~plan to sell the Cody API business. See Note 22 “Assets Held for Sale” for more information.

On November 25, 2015, the Company completed the acquisition of Kremers Urban Pharmaceuticals, Inc. (“KUPI”), the former U.S. specialty generic pharmaceuticals subsidiary of global biopharmaceuticals company UCB ~~S.A~~S.A. (“UCB”). 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 Seymour, Indiana. The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations.In the second quarter of Fiscal 2019, the Company ceased manufacturing functions at its State Road facility in Philadelphia, Pennsylvania. The Company discontinued distribution from its Townsend Road facility in Philadelphia, Pennsylvania as of January 31, 2019. The Company intends to sell its Townsend Road facility by the end of Fiscal 2019.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. ~~GAAP.~~GAAP”).

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 had a 50% ownership interest until November 30, 2016, when the Company acquired the remaining 50% interest. Noncontrolling interest in Realty was recorded net of tax as net income attributable to the noncontrolling interest. Additionally, allsubsidiaries. All intercompany accounts and transactions have been eliminated. ~~In December 2017, the Company legally dissolved Realty.~~

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 and share-based compensation.

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

Foreign currency translation

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

Cash 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~~consisted of publicly-traded equity securities which ~~are~~were classified as trading investments. Investment securities ~~are~~were recorded at fair value based on quoted market prices from broker or dealer quotations or transparent pricing sources at each reporting date. Realized and unrealized gains and losses are included in the Consolidated Statements of Operations under Other income (loss). In May 2018, the Company liquidated the remainder of the investment securities portfolio. As of December 31, 2018 and June 30, 2018, the Company does not own investment securities.

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 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

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

Property, Plant and Equipment

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

Intangible Assets

Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives, generally for periods ranging from 10 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred.

Valuation of Long-Lived Assets, including Intangible Assets other than Goodwill

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

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

In-Process Research and Development

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

Goodwill

Goodwill, which ~~represents~~represented the excess of purchase price over the fair value of net assets acquired, iswas carried at cost. Goodwill iswas tested for impairment on an annual basis on the first day of the fourth quarter of each fiscal year or more frequently if events or ~~changes in circumstances~~triggering events indicate that the asset might be impaired. The Company ~~first performs~~utilized a ~~qualitative~~quantitative 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 impairment test. The Company first determines~~ the fair value of our reporting unit (generic pharmaceuticals). based on market data as well as projected cash flows. If the ~~net book~~carrying value of our reporting unit ~~exceeds~~exceeded its fair value, the difference ~~will~~would be recorded as a goodwill impairment, not to exceed the carrying amount of goodwill. 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 judgments made in determining the estimated fair value of goodwill can materially impact our results of operations.

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 six months ended December 31, ~~2017~~2018 and ~~2016:~~2017:

(In thousands)	For the Three Months Ended December 31,				For the Six Months Ended December 31,				Three Months Ended December 31,				Six Months Ended December 31,
Medical Indication	2017		2016		2017		2016		2018		2017		2018		2017
Antibiotic	$	3,552	$	4,792	$	6,900	$	8,572	$	4,187	$	3,552	$	8,276	$	6,900
Anti-Psychosis	22,799		15,365		37,791		32,685		14,036		22,799		24,924		37,791
Cardiovascular	10,135		11,975		21,441		24,669		25,680		10,135		47,450		21,441
Central Nervous System	6,925		10,555		15,742		20,904		6,187		6,925		13,384		15,742
Gallstone	5,282		13,425		11,846		26,308		2,489		5,282		4,703		11,846
Gastrointestinal	15,055		18,977		29,608		37,029		10,009		15,055		25,048		29,608
Glaucoma	2,164		5,311		4,832		11,095		512		2,164		1,060		4,832
Migraine	15,484		7,863		30,499		15,023		12,551		15,484		22,288		30,499
Muscle Relaxant	3,219		3,004		7,010		6,536		3,121		3,219		6,300		7,010
Pain Management	6,128		7,439		11,889		14,047		8,968		6,128		13,915		11,889
Respiratory	2,230		2,957		3,876		5,170		1,163		2,230		2,178		3,876
Thyroid Deficiency	68,794		45,431		116,008		85,269		88,477		68,794		142,354		116,008
Urinary	2,840		4,693		5,837		9,794		1,606		2,840		3,158		5,837
Other	13,105		11,133		25,802		22,314		6,827		13,105		21,168		25,802
Contract manufacturing revenue	6,593		8,024		10,185		13,088		7,905		6,593		12,566		10,185
Net sales	$	184,305	$	170,944	$	339,266	$	332,503	$	193,718	$	184,305	$	348,772	$	339,266

Customer, Supplier and Product Concentration

The following table presents the percentage of total net sales, for the three and six months ended December 31, ~~2017~~2018 and ~~2016,~~2017, 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 December 31,				For the Six Months Ended December 31,				Three Months Ended December 31,				Six Months Ended December 31,
	2017		2016		2017		2016		2018		2017		2018		2017

Product 1	37	%	27	%	34	%	26	%	46	%	37	%	41	%	34	%
Product 2	12	%	8	%	10	%	9	%	7	%	12	%	7	%	10	%

The following table presents the percentage of total net sales, for the three and six months ended December 31, ~~2017~~2018 and ~~2016,~~2017, 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 December 31,				For the Six Months Ended December 31,				Three Months Ended December 31,				Six Months Ended December 31,
	2017		2016		2017		2016		2018		2017		2018		2017

Customer A	22	%	28	%	25	%	28	%	18	%	22	%	23	%	25	%
Customer B	19	%	20	%	20	%	20	%	14	%	—		8	%	—
Customer C	13	%	4	%	8	%	4	%	14	%	19	%	16	%	20	%
Customer D									13	%	5	%	11	%	5	%
Customer E									3	%	13	%	3	%	8	%

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 34% and 39% of the Company’s inventory purchases during the three months ended December 31, 2018 and 2017, ~~and 2016.~~respectively. Purchases of finished goods inventory from JSP accounted for approximately ~~36%~~33% and ~~38%~~36% of the Company’s inventory purchases during the six months ended December 31, ~~2017~~2018 and ~~2016,~~2017, respectively. See Note 21 “Material Contracts with Suppliers” for more information.

Revenue Recognition

~~The~~On July 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when ~~title~~(or as) we satisfy our performance obligations by transferring a promised good or service to a customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and ~~risk~~(ii) we do not generally receive consideration until the performance obligation is fully satisfied. The new revenue standard impacts the timing of ~~loss~~the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time”. However, the recognition of these arrangements over time does not currently have ~~transferred~~a material impact on the Company’s consolidated results of operations or financial position. The Company adopted ASC 606 using the modified retrospective method. Refer to the ~~customer and provisions~~“Recent Accounting Pronouncements” section of this footnote for rebates, promotional adjustments, price adjustments, returns, chargebacks and other potential adjustments are reasonably determinable and collection is reasonably assured. The Company also considers all other relevant criteria specified in Securities and Exchange Commission Staff Accounting Bulletin No. 104, Topic No. 13, “~~Revenue Recognition~~~~”, in determining when to recognize revenue.~~further discussion of the impact of the adoption.

~~Net Sales Adjustments~~

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

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

Chargebacks

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

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a ~~reduction~~result of ~~accounts receivable, totaled $155.5 million~~the Patient Protection and ~~$175.8 million at December 31, 2017 and June 30, 2017, respectively.~~ ~~Rebates payable at December 31, 2017 and June 30, 2017 totaled $48.4 million and $44.6 million, respectively,~~Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a new cost-sharing program for certain ~~rebate programs, primarily related to~~ Medicare Part D ~~and Medicaid~~beneficiaries designed primarily for the sale of brand drugs and certain ~~sales allowances~~generic drugs if their Food and Drug Administration (“FDA”) approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug application (“ANDA’). 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 ~~paid~~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 ~~indirect~~reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available. Other adjustments also include prompt payment discounts and “failure-to-supply” adjustments. If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.

Cost of Sales, including Amortization of Intangibles

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

Research and Development ~~Expenses~~

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

Contingencies

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

Restructuring Costs

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

~~Share-Based~~Share-based Compensation

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

conditions which are generally outside the Company’s control. Changes in these assumptions could have a material impact on share-based compensation costs recognized in the consolidated financial statements.

Self-Insurance

Effective January 1, 2017, the Company self-insures for certain employee medical and prescription benefits. The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure. The liability for self-insured risks is primarily calculated using independent ~~third party~~third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported. Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The liability for self-insured risks under this plan as of December 31, ~~2017~~2018 totaled ~~$3.2~~$2.9 million and was not material to the financial position of the Company as of June 30, ~~2017.~~2018.

Income Taxes

The Company uses the 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 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.

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

On December 22, 2017, President Trump signed the Tax Cut and Jobs Act legislation (“2017 Tax Reform”) into law, which included a broad range of tax reform provisions affecting businesses, including corporate tax rates, business deductions and international tax provisions. Many of these provisions significantly differ from ~~current~~the then-current U.S. tax law, resulting in pervasive financial reporting implications. As a result of the new law, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of 2017 Tax Reform. SAB 118 requires registrants to report the tax effects of 2017 Tax Reform, inclusive of provisional amounts for which the accounting is incomplete but a reasonable estimate can be determined. SAB 118 also allows for a measurement period of up to one year in cases where a registrant reports a provisional amount or is unable to reasonably estimate the impact of 2017 Tax Reform. In the second quarter of Fiscal 2019, the Company finalized the provisional amounts without any further adjustments, in accordance with the expiration of the SAB 118 measurement period.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share ~~attributable to the Company~~ is computed by dividing net income ~~attributable to Lannett Company, Inc. common stockholders~~(loss) by the weighted average number of shares outstanding during the period. Diluted earnings (loss) ~~per common share attributable to the Company~~ is computed by dividing net income ~~attributable to Lannett Company, Inc. common stockholders~~(loss) 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 consist of stock options, unvested restricted stock and performance-based ~~shares and an outstanding warrant.~~shares. Anti-dilutive securities are excluded from the calculation. Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.

Comprehensive Income (Loss)

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, which created ASC Topic 606 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, 2017. Based on a ~~preliminary~~ review of the contracts representing a substantial portion of our revenues, which is primarily generated from product sales, the Company determined that the updated guidance does not ~~expect the guidance to~~ have a material impact on our disclosures or the timing and recognition of our revenues. Under the new standard, the Company estimates certain amounts as variable consideration, specifically any “failure-to-supply” adjustments at the point of product sale in future periods.

The ~~Company is in~~new revenue standard also impacts the ~~process~~timing of ~~establishing and documenting key accounting policies, conducting training and education throughout~~ the ~~organization, and evaluating impacts~~Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time”. However, the recognition of these arrangements over time does not currently have a material impact on ~~business processes, information technology, and controls resulting from~~the Company’s consolidated results of operations or financial position.

The cumulative impact of the adoption of ~~this new standard. The Company also continues~~ASC 606 resulted in a $2.3 million adjustment, net of tax, to accumulate the necessary information to determine the cumulative effects of the accounting change to be recorded upon adoption of the guidance. The Company intends to use the modified retrospective approach upon implementation.

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 noncurrentopening retained earnings on ~~the balance sheet. The guidance may be applied either prospectively or retrospectively. The guidance became effective for the Company in the first quarter of Fiscal~~July 1, 2018. Accordingly, the Company currently presents all deferred tax assets and liabilities as noncurrent on the balance sheet. All prior period amounts have also been reclassified to conform with the current year presentation.

In February 2016, the FASB issued ASU 2016-02, ~~Leases.~~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. In December 2018, the FASB issued ASU 2018-20, Leases — Narrow Scope Improvements for lessors, which allows entities to choose an additional transition method of adoption, under which an entity initially applies the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earinings in the period of adoption. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows — Classification of Certain Cash Receipts and Cash ~~Payments.~~Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ~~ASU 2016-15 is effective for annual reporting periods,~~The standard was adopted on July 1, 2018 and ~~interim periods therein, beginning after December 15, 2017. The Company is currently in~~did not have an impact on the ~~process of assessing the impact this guidance will have on the~~Company’s consolidated financial statements.

Note 4. Restructuring Charges

Cody Restructuring Program

On June 29, 2018, the Company announced a restructuring plan with respect to Cody Labs (the “Cody Restructuring Plan”). The plan focuses on a more select set of opportunities which will result in streamlined operations, improved efficiencies and a reduced cost structure. The Company currently estimates that it will incur approximately $4.5 million of total costs to implement the Cody Restructuring Plan, comprised primarily of approximately $3.0 million of severance and employee-related costs.

The expenses associated with the Cody Restructuring Plan included in restructuring expenses (credits) during the three and six months ended December 31, 2018 were as follows:

	Three Months Ended			Six Months Ended
(In thousands)	December 31, 2018			December 31, 2018
Employee separation costs (credits)	$	(640	)	$	(496	)
Facility closure costs	—			—
Total	$	(640	)	$	(496	)

In the second quarter of Fiscal 2019, the Company adjusted separation costs related to changes in stock price for unvested equity awards, which will be paid upon termination to certain employees.

A reconciliation of the changes in restructuring liabilities associated with the Cody Restructuring Plan from June 30, 2018 through December 31, 2018 is set forth in the following table:

(In thousands)	Employee Separation Costs			Facility Closure Costs		Total
Balance at June 30, 2018	$	3,092		$	—	$	3,092
Restructuring Charges	(496		)	—		(496		)
Payments	(1,074		)	—		(1,074		)
Balance at December 31, 2018	$	1,522		—		$	1,522

2016 Restructuring Program

On February 1, 2016, in connection with the acquisition of KUPI, the Company announced a plan related to the future integration of KUPI and the Company’s ~~operations.~~operations (the “2016 Restructuring Program”). The 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 $20.0 million in restructuring charges for actions that have been announced or communicated since the 2016 Restructuring Program began. Of this amount, approximately $11.0 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 2016 Restructuring Program is expected to be completed by the end of Fiscal 2019.

The expenses associated with the restructuring program included in restructuring expenses during the three and six months ended December 31, ~~2017~~2018 and ~~2016~~2017 were as follows:

For the Three Months Ended
December 31,

For the Six Months Ended
December 31,

(In thousands)

2017

2016

2017

2016

Employee separation costs (credits)

$
210

$
1,004

$
(380
)
$
2,161

Facility closure costs

825

708

1,942

1,603

Total

$
1,035

$
1,712

$
1,562

$
3,764

In the first quarter of Fiscal 2018, the Company decided to retain certain employees who were previously included in the 2016 Restructuring Program. As a result, the Company reversed all previous charges incurred related to these employees.

	Three Months Ended December 31,				Six Months Ended December 31,
(In thousands)	2018		2017		2018		2017
Employee separation costs (credits)	$	293	$	210	$	707	$	(380	)
Facility closure costs	560		825		1,024		1,942
Total	$	853	$	1,035	$	1,731	$	1,562

A reconciliation of the changes in restructuring liabilities associated with the 2016 Restructuring Program from June 30, ~~2017~~2018 through December 31, ~~2017~~2018 is set forth in the following table:

(In thousands)

Employee
Separation Costs

Contract
Termination
Costs

Facility Closure
Costs

Total

Balance at June 30, 2017

$
5,431

$
—

$
—

$
5,431

Restructuring Charges (Credits)

(380
)
—

1,942

1,562

Payments

(470
)
—

(1,942
)
(2,412
)
Balance at December 31, 2017

$
4,581

$
—

$
—

$
4,581

(In thousands)	Employee Separation Costs			Facility Closure Costs			Total
Balance at June 30, 2018	$	3,614		$	—		$	3,614
Restructuring Charges	707			1,024			1,731
Payments	(150		)	(1,024		)	(1,174		)
Balance at December 31, 2018	$	4,171		$	—		$	4,171

Note 5. Accounts Receivable

Accounts receivable consisted of the following components at December 31, ~~2017~~2018 and June 30, ~~2017:~~2018:

(In thousands)	December 31, 2017			June 30, 2017			December 31, 2018			June 30, 2018
Gross accounts receivable	$	414,584		$	380,653		$	515,266		$	503,175
Less Chargebacks reserve	(54,460		)	(79,537		)	(128,102		)	(153,034		)
Less Rebates reserve	(38,239		)	(43,023		)	(34,673		)	(33,102		)
Less Returns reserve	(44,795		)	(42,135		)	(49,508		)	(43,059		)
Less Other deductions	(18,006		)	(11,096		)	(26,263		)	(20,021		)
Less Allowance for doubtful accounts	(2,356		)	(796		)	(1,356		)	(1,308		)
Accounts receivable, net	$	256,728		$	204,066		$	275,364		$	252,651

For the three months ended December 31, 2018, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $334.6 million, $78.8 million, $11.3 million, and $20.7 million, respectively. For the three months ended December 31, 2017, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $220.2 million, $77.6 million, $4.1 million, and $16.3 million, respectively.

For the ~~three~~six months ended December 31, ~~2016,~~2018, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of ~~$217.7~~$612.6 million, ~~$73.5~~$143.6 million, ~~$7.9~~$18.7 million, and ~~$13.9~~$34.6 million, respectively.

For the six months ended December 31, 2017, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $474.9 million, $156.1 million, $14.5 million, and $28.6 million, respectively. ~~For~~

The following table identifies the activity and ending balances of each major category of revenue-related reserve for the six months ended December 31, ~~2016,~~2018 and 2017:

Reserve Category (In thousands)	Chargebacks			Rebates			Returns			Other			Total
Balance at June 30, 2018	$	153,034		$	82,502		$	43,059		$	20,021		$	298,616
Adjustment related to adoption of ASC 606	—			—			—			3,536			3,536
Current period provision	612,560			143,578			18,662			34,574			809,374
Credits issued during the period	(637,492		)	(147,023		)	(12,213		)	(31,868		)	(828,596		)
Balance at December 31, 2018	$	128,102		$	79,057		$	49,508		$	26,263		$	282,930

Reserve Category (In thousands)	Chargebacks			Rebates			Returns			Other			Total
Balance at June 30, 2017	$	79,537		$	87,616		$	42,135		$	11,096		$	220,384
Current period provision	474,882			156,073			14,541			28,623			674,119
Credits issued during the period	(499,959		)	(157,071		)	(11,881		)	(21,713		)	(690,624		)
Balance at December 31, 2017	$	54,460		$	86,618		$	44,795		$	18,006		$	203,879

For the ~~Company recorded~~three months ending December 31, 2018 and 2017, as a percentage of gross sales the provision for chargebacks was 53.0% and 44.4%, the provision for rebates ~~(including~~was 12.5% and 15.7%, the provision for returns was 1.8% and 0.8% and the provision for other adjustments was 3.3% and 3.3%, respectively.

For the six months ending December 31, 2018 and 2017, as a percentage of gross sales the provision for chargebacks was 53.5% and 47.3%, the provision for rebates ~~presented~~was 12.5% and 15.6%, the provision for returns was 1.6% and 1.4%, and the provision for other adjustments was 3.0% and 2.9%, respectively.

On July 1, 2018, the Company adopted ASC 606 which resulted in a $3.2 million pre-tax adjustment to opening retained earnings and accounts receivable, of which $3.5 million related to “failure-to-supply” reserves offset by $0.3 million related to the timing of recognition of certain contract manufacturing arrangements.

The decrease in the chargebacks reserve from June 30, 2018 to December 31, 2018 was primarily the result of increased customer orders in June 2018 in advance of a mid-week holiday as ~~rebates payable)~~well as a related maintenance shutdown of the Company’s Seymour, Indiana manufacturing facility in the first week of July 2018. The Amneal Distribution and Transition Support Agreement (the “Amneal Agreement”), ~~returns,~~which shifted the Company’s sales of Levothyroxine Sodium Tablets directly to Amneal, also contributed to the decrease in the chargebacks reserve. The activity in the “Other” category for the six months ended December 31, 2018 and 2017 includes, shelf-stock, shipping and other ~~deductions~~sales adjustments including prompt payment discounts and “failure-to-supply” adjustments. Historically, we have not recorded any material amounts in the current period related to reversals or additions of ~~$416.2 million, $143.0 million, $14.7 million, and $29.3 million, respectively.~~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.

Note 6. Inventories

Inventories at December 31, ~~2017~~2018 and June 30, ~~2017~~2018 consisted of the following:

(In thousands)	December 31, 2017		June 30, 2017		December 31, 2018		June 30, 2018
Raw materials	$	64,057	$	57,442	$	57,780	$	64,647
Work-in-process	20,285		15,676		30,726		19,983
Finished goods	51,249		49,486		47,622		57,005
Total	$	135,591	$	122,604	$	136,128	$	141,635

~~Inventories~~Inventory balances were ~~reduced~~written-down by ~~$5.0~~$20.7 million and ~~$4.5~~$11.9 million at December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, respectively for excess and obsolete inventory amounts. During the three months ended December 31, ~~2017~~2018 and ~~2016,~~2017, the Company recorded ~~provisions~~write-downs to net realizable value for excess and obsolete inventory of ~~$2.2~~$8.9 million and ~~$2.1~~$2.2 million, respectively. During the six months ended December 31, ~~2017~~2018 and ~~2016,~~2017, the Company recorded ~~provisions~~write-downs to net realizable value for excess and obsolete inventory of $12.8 million and $4.4 million, respectively.

In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business. As such, all assets, including inventory totaling $3.4 million, and ~~$5.4 million, respectively.~~liabilities associated with the Cody API business are recorded in the assets and liabilities held for sale captions in the Consolidated Balance Sheet as of December 31, 2018. See Note 22 “Assets Held for Sale” for more information.

Note 7. Property, Plant and Equipment

Property, plant and equipment, net at December 31, ~~2017~~2018 and June 30, ~~2017~~2018 consisted of the following:

(In thousands)	Useful Lives	December 31, 2017			June 30, 2017			Useful Lives	December 31, 2018			June 30, 2018
Land	—	$	6,191		$	6,191		—	$	2,283		$	2,900
Building and improvements	10 - 39 years	108,740			108,730			10 - 39 years	85,958			105,041
Machinery and equipment	5 - 10 years	142,040			142,086			5 - 10 years	156,903			173,988
Furniture and fixtures	5 - 7 years	3,942			2,953			5 - 7 years	3,224			4,099
Less: accumulated depreciation		(82,016		)	(71,461		)		(79,991		)	(89,996		)
		178,897			188,499				168,377			196,032
Construction in progress		79,309			54,649				27,230			37,215
Property, plant and equipment, net		$	258,206		$	243,148			$	195,607		$	233,247

Depreciation expense for the three months ended December 31, 2018 and 2017 ~~and 2016~~ was ~~$5.4~~$5.7 million and ~~$5.5~~$5.4 million, respectively. Depreciation expense for the six months ended December 31, 2018 and 2017 was $12.2 million and ~~2016 was~~ $11.1 million, respectively.

In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business. As such, all assets, including property, plant and ~~$10.6~~equipment totaling $36.6 million, ~~respectively.~~and liabilities associated with the Cody API business are recorded in the assets and liabilities held for sale captions in the Consolidated Balance Sheet as of December 31, 2018. In addition, as part of the held for sale classification, the Company is required to record the assets of the Cody API business at fair value less costs to sell. The Company performed a fair value analysis which resulted in a $29.9 million impairment of the Cody API property, plant and equipment assets. See Note 22 “Assets Held for Sale” for more information. During the three months ended December 31, 2018, the Company had no impairment charges related to property, plant and equipment.

Property, plant and equipment, net included amounts held in foreign countries in the amount of ~~$1.0~~$1.7 million and $1.1 million at December 31, ~~2017~~2018 and June 30, ~~2017.~~2018, respectively.

Note 8. 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 Value Measurements and Disclosures.” Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s financial assets and liabilities measured at fair value are entirely within Level 1 of the hierarchy as defined below:

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

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

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

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

Financial Instruments Disclosed, But Not Reported, at Fair Value

The ~~Company’s financial assets and liabilities measured at~~ fair value atof our long-term debt was approximately $727 million and $893 million as of December 31, ~~2017~~2018 and June 30, ~~2017, were as follows:~~2018, respectively. We estimate the fair value of our debt utilizing market quotations for debt that have quoted prices in active markets. Since our debt does not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2).

December 31, 2017

(In thousands)

Level 1

Level 2

Level 3

Total

Assets

Investment securities

$
27,842

$
—

$
—

$
27,842

Total Assets

$
27,842

$
—

$
—

$
27,842

June 30, 2017

(In thousands)

Level 1

Level 2

Level 3

Total

Assets

Investment securities

$
27,091

$
—

$
—

$
27,091

Total Assets

$
27,091

$
—

$
—

$
27,091

Note 9. Investment Securities

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

In May 2018, the Company liquidated the remainder of the investment securities portfolio. As of December 31, 2018 and June 30, 2018, the Company does not own investment securities.

The Company had a net gain on investment securities of $2.0 million during the three months ended December 31, 2017, which included an unrealized gain related to securities still held at December 31, 2017 of $1.2 million. ~~The Company had a net gain on investment securities of $888 thousand during the three months ended December 31, 2016, which primarily consisted of realized gains.~~

The Company had a net gain on investment securities of $2.8 million during the six months ended December 31, 2017, which included an unrealized gain related to securities still held at December 31, 2017 of $1.1 million.

Note 10. Goodwill and Intangible Assets

The ~~Company had a net gain on investment securities~~changes in the carrying amount of ~~$1.7 million during~~goodwill for the six months ended December 31, ~~2016, which included an unrealized gain related to securities still held at December 31, 2016 of $557 thousand.~~2018 are as follows:

~~Note 10. Intangible Assets~~

(In thousands)	Generic Pharmaceuticals
Balance at June 30, 2018	$	339,566
Goodwill acquired	—
Impairment	(339,566		)
Balance at December 31, 2018	$	—

On August 17, 2018, JSP notified the Company that it will not extend or renew the JSP Distribution Agreement when the current term expires on March 23, 2019. The Company determined that JSP’s decision represented a triggering event under U.S. GAAP to perform an analysis to determine the potential for impairment of goodwill. On October 4, 2018, the Company completed the analysis based on market data and concluded a full impairment of goodwill was required.

Intangible assets, net as of December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, consisted of the following:

Weighted

Gross Carrying Amount

Accumulated Amortization

Intangible Assets, Net

(In thousands)

Avg. Life
(Yrs.)

December 31,
2017

June 30,
2017

December 31,
2017

June 30,
2017

December 31,
2017

June 30,
2017

Definite-lived:

Cody Labs import license

15

$
582

$
582

$
(366
)
$
(347
)
$
216

$
235

KUPI product rights

15

434,000

434,000

(57,753
)
(43,286
)
376,247

390,714

KUPI trade name

2

2,920

2,920

(2,920
)
(2,338
)
—

582

KUPI other intangible assets

15

19,000

19,000

(2,662
)
(2,028
)
16,338

16,972

Silarx product rights

15

10,000

10,000

(1,722
)
(1,389
)
8,278

8,611

Other product rights

4

2,691

653

(580
)
(355
)
2,111

298

Total definite-lived

$
469,193

$
467,155

$
(66,003
)
$
(49,743
)
$
403,190

$
417,412

Indefinite-lived:

KUPI in-process research and development

—

$
18,000

$
18,000

$
—

$
—

$
18,000

$
18,000

Silarx in-process research and development

—

18,000

18,000

—

—

18,000

18,000

Other product rights

—

449

449

—

—

449

449

Total indefinite-lived

36,449

36,449

—

—

36,449

36,449

Total intangible assets, net

$
505,642

$
503,604

$
(66,003
)
$
(49,743
)
$
439,639

$
453,861

	Weighted	Gross Carrying Amount				Accumulated Amortization						Intangible Assets, Net
(In thousands)	Avg. Life (Yrs.)	December 31, 2018		June 30, 2018		December 31, 2018			June 30, 2018			December 31, 2018		June 30, 2018

Definite-lived:
Cody Labs import license	15	$	—	$	581	$	—		$	(386	)	$	—	$	195
KUPI product rights	15	416,154		416,154		(83,712		)	(69,840		)	332,442		346,314
KUPI trade name	2	2,920		2,920		(2,920		)	(2,920		)	—		—
KUPI other intangible assets	15	19,000		19,000		(3,928		)	(3,295		)	15,072		15,705
Silarx product rights	15	10,000		10,000		(2,389		)	(2,056		)	7,611		7,944
Other product rights	13	21,692		19,693		(3,396		)	(1,875		)	18,296		17,818
Total definite-lived		$	469,766	$	468,348	$	(96,345	)	$	(80,372	)	$	373,421	$	387,976

Indefinite-lived:
KUPI in-process research and development	—	$	18,000	$	18,000	$	—		$	—		$	18,000	$	18,000
Silarx in-process research and development	—	18,000		18,000		—			—			18,000		18,000
Other product rights	—	449		449		—			—			449		449
Total indefinite-lived		36,449		36,449		—			—			36,449		36,449
Total intangible assets, net		$	506,215	$	504,797	$	(96,345	)	$	(80,372	)	$	409,870	$	424,425

For the three months ended December 31, ~~2017~~2018 and ~~2016,~~2017, the Company recorded amortization expense of $8.2 ~~million and $8.1 million, respectively.~~million. For the six months ended December 31, ~~2017~~2018 and ~~2016,~~2017, the Company recorded amortization expense of ~~$16.3~~$16.4 million and ~~$17.4~~$16.3 million, respectively.

Future annual amortization expense consisted of the following as of December 31, ~~2017:~~2018:

(In thousands) Fiscal Year Ending June 30,	Annual Amortization Expense		Annual Amortization Expense
2018	$	16,493
2019	31,761		$	15,224
2020	30,938		30,443
2021	30,938		30,443
2022	30,938		30,443
2023			30,443
Thereafter	262,122		236,425
	$	403,190	$	373,421

Note 11. Long-Term Debt

Long-term debt, net consisted of the following:

	December 31,			June 30,			December 31,			June 30,
(In thousands)	2017			2017			2018			2018
Term Loan A due 2020	$	247,500		$	254,375
Term Loan A due 2020; 7.52% as of December 31, 2018							$	213,526		$	227,276
Unamortized discount and other debt issuance costs	(13,398		)	(16,238		)	(8,843		)	(10,178		)
Term Loan A, net	234,102			238,137			204,683			217,098
Term Loan B due 2022	708,209			727,881
Term Loan B due 2022; 7.90% as of December 31, 2018							650,338			670,011
Unamortized discount and other debt issuance costs	(56,246		)	(63,106		)	(41,569		)	(47,839		)
Term Loan B, net	651,963			664,775			608,769			622,172
Revolving Credit Facility due 2020	—			—			—			—
Other	—			735
Total debt, net	886,065			903,647			813,452			839,270
Less short-term borrowings and current portion of long-term debt	(66,845		)	(60,117		)	(66,845		)	(66,845		)
Total long-term debt, net	$	819,220		$	843,530		$	746,607		$	772,425

On December 10, 2018, the Company entered into an amendment to the Senior Secured Credit Facility and the Credit and Guaranty Agreement. Pursuant to the amendment, the Secured Net Leverage Ratio applicable to the financial leverage ratio covenant was increased from 3:25:1.00 to 4.25:1.00 as of December 31, 2019 and prior to September 30, 2020, and then to 4:00:1:00 as of September 30, 2020. In exchange, the Company agreed to include a minimum liquidity covenant of $75 million, a 25-basis point

increase to the interest rate margin paid on the Term A Loans and pay a consent fee equal to 50 basis points, paid only to consenting lenders.

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

	Amounts Payable		Amounts Payable
(In thousands)	to Institutions		to Institutions
2018	$	66,845
2019	66,845		$	66,845
2020	231,845		225,371
2021	39,345		39,345
2022	550,829		532,303
Total	$	955,709	$	863,864

Note 12. Legal, Regulatory Matters and Contingencies

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 the pricing of digoxin. According to the subpoena, the Connecticut Attorney General is investigating whether anyone engaged in any activities that resulted in (a) fixing, maintaining or controlling prices of digoxin or (b) allocating and dividing customers or territories relating to the sale of digoxin in violation of Connecticut antitrust law. In June 2016, the Connecticut Attorney General issued interrogatories and a subpoena to an employee of the Company in order to gain access to documents and responses previously supplied to the Department of Justice. In December 2016, the Connecticut Attorney General, joined by numerous other State Attorneys General, filed a civil complaint alleging that six pharmaceutical companies engaged in anti-competitive behavior related to ~~Doxycycline Hyclate~~doxycycline hyclate and ~~Gliburide.~~gliburide. The Company was not named in the action and does not compete

on the products that formed the basis of the complaint. The complaint was later transferred for pretrial purposes to the United States District Court for the Eastern District of Pennsylvania as part of a multidistrict litigation captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation. On October 31, 2017, the state Attorneys General filed a motion in the District Court for leave to amend their complaint to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs. The claim ~~amended in October 2017~~ relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, but ~~did~~does not involve the pricing for digoxin. The state Attorneys General also allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. The Court granted that motion on June 5, 2018. The state Attorneys General filed their amended complaint on June 15, 2018. None of the defendants, including the Company, has responded yet to the ~~motion of the state Attorneys General.~~amended complaint.

The Company maintains that it acted in compliance with all applicable laws and regulations and continues to cooperate with the Connecticut Attorney General investigation.

Federal Investigation into the Generic Pharmaceutical Industry

~~In fiscal years 2015 and 2016, the~~The Company and certain affiliated individuals ~~each were~~and customers have been served with a grand jury ~~subpoena~~subpoenas relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The subpoenas request corporate documents of the Company relating to corporate, financial and employee information, communications or correspondence with competitors regarding the sale of generic prescription medications and the marketing, sale, or pricing of certain products, generally for the period of 2005 through the dates of the subpoenas.

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

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

Texas Medicaid Investigation

In August 2015, KUPI received a letter from the Texas Office of the Attorney General alleging that it 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 between the Company and UCB (“Stock Purchase Agreement”) dated September 2, 2015, the Company is fully

indemnified for any pre-acquisition amounts. ~~The Company~~In December 2018, KUPI and the State of Texas settled the allegations for the sum of $8.0 million, which is ~~currently unable~~fully indemnified by UCB. UCB forwarded the $8.0 million to ~~estimate~~KUPI in December 2018 and, following its receipt of the ~~timing or~~fully executed settlement agreement, KUPI forwarded the ~~outcome~~settlement funds to the State of ~~this matter.~~Texas in January 2019.

Government Pricing

During the quarter ended December 31, 2016, the Company completed a contract compliance review, for the period January 1, 2012 through June 30, 2016, for one of KUPI’s government-entity customers. As a result of the review, the Company identified certain commercial customer prices and other terms that were not properly disclosed to the government-entity resulting in potential overcharges. As of December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, the Company’s best estimate of the liability for potential overcharges was approximately $9.3 million. For the period January 1, 2012 through November 24, 2015 (“the pre-acquisition period”), the Company is fully indemnified per the Stock Purchase Agreement. Accordingly, the Company has recorded an indemnification asset and related liability of $8.3 million related to the pre-acquisition period. The Company does not believe that the ultimate resolution of this matter will have a significant impact on our financial position, results of operations or cash flows.

~~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 the bulk of prescription drugs manufactured by the Company was sold under private label. The first lawsuit, filed in the United States District Court for the Eastern of Pennsylvania, was dismissed on September 25, 2017 (the “Federal Action”). The second lawsuit, pending in the Philadelphia (Pennsylvania) County Court of Common Pleas, was stayed pending the final resolution of the Federal Action. The Company disputes these allegations and 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.

EPA Violation Notice

On July 13, 2017, the United States Department of Environmental Protection Agency (“EPA”) sent a Finding of Violation to KUPI alleging several violations of national emissions standards for hazardous air pollutants at KUPI’s Seymour, Indiana facility. The EPA ~~is giving~~and KUPI have entered into an agreed Administrative Consent Order and Consent Assessment and Final Order to resolve the ~~company the opportunity to discuss the matter with the agency before filing~~alleged violations, whereby KUPI made a ~~formal complaint or assessing fines with respect~~payment of $60,000 to the ~~alleged violations.~~EPA and escrowed the sum of $225,000 to be used to fund an environmental project. The ~~Company is conducting an investigation into the matter and cannot reasonably predict the outcome of any potential EPA action at this time.~~Orders were fully executed on December 31, 2018.

Private Antitrust and Consumer Protection Litigation

The Company and certain competitors have been named as defendants in a number of lawsuits filed in 2016 and 2017 alleging that the Company and certain generic pharmaceutical manufacturers have conspired to fix prices of generic digoxin, levothyroxine, ursodiol and baclofen. These cases are part of a larger group of more than 100 lawsuits generally alleging that over 30 generic pharmaceutical manufacturers and distributors conspired to fix prices for at least 18 different generic drugs in violation of the federal Sherman Act, various state antitrust laws, and various state consumer protection statutes. The United States also has been granted leave to intervene in the cases. On April 6, 2017, the Judicial Panel on Multidistrict Litigation (the “JPML”) ordered that all of the cases alleging price-fixing for generic drugs be consolidated for pretrial proceedings in the United States District Court for the Eastern District of Pennsylvania under the caption In re: Generic Pharmaceuticals Pricing Antitrust ~~Litigation~~.Litigation. The various plaintiffs are grouped into three categories — Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers — and filed Consolidated Amended Complaints (“CACs”) against the Company and the other defendants on August 15, 2017.

The CACs naming the Company as a defendant involve generic digoxin, levothyroxine, ursodiol and baclofen. Pursuant to a court-ordered schedule grouping the 18 different drug cases into three separate tranches, the Company and other generic pharmaceutical manufacturer defendants on October 6, 2017 filed joint and individual motions to dismiss the CACs involving the six drugs in the first tranche, including digoxin. ~~Those~~On October 16, 2018, the Court (with one exception) denied defendants’ motions ~~are~~to dismiss plaintiffs’ Sherman Act claims with respect to the drugs in the first tranche. Defendants’ motions to dismiss plaintiffs’ state law claims with respect to those drugs remain pending.

On January 22, 2018, three opt-out direct purchasers filed a complaint alleging an overarching conspiracy and individual conspiracies on behalf of the Company and numerous other defendants to fix the prices of and allocate markets for at least 30 different drugs, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen. On August 3, 2018, another opt-out direct purchaser filed a complaint alleging an overarching conspiracy and individual conspiracies on behalf of the Company and numerous other defendants to fix the prices of and allocate markets for 16 different drugs, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen. On January 16, 2019, another opt-out direct purchaser filed a complaint alleging an overarching conspiracy and individual conspiracies on behalf of the Company and numerous other defendants to fix the prices of and allocate markets for the 30 different drugs, including digoxin, doxycycline, levothyroxine, ursodiol, baclofen and acetazolamide. None of the defendants, including the Company, has responded yet to the ~~complaint.~~opt-out complaints.

In addition to the lawsuits brought by private plaintiffs, the Attorneys General of 4548 states, the District of Columbia and Puerto Rico have filed parens patriae lawsuits alleging price-fixing conspiracies by various generic pharmaceutical ~~manufacturers, but not involving the Company.~~manufacturers. The JPML has consolidated the suits by the state Attorneys General in the Eastern District of Pennsylvania as part of the multidistrict litigation. The original lawsuits did not name the Company, but the state Attorneys General filed an amended complaint on ~~October 31, 2017 filed a motion with the District Court for leave to amend their complaint~~June 5, 2018 to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs. The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, although the state Attorneys General allege that all defendants

were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. ~~All~~None of the ~~existing and proposed~~ defendants, including the Company, ~~have opposed~~has responded yet to the ~~motion~~amended complaint.

Following the lead of the state Attorneys ~~General.~~General, the Direct Purchaser Plaintiffs, End Payer Plaintiffs and Indirect Reseller Plaintiffs have filed their own complaints also alleging an overarching conspiracy, making similar allegations to those contained in the state Attorneys General complaint, relating to 14 generic drugs in the End Payer complaint and 15 generic drugs in the Indirect Reseller complaint. The ~~motion is pending.~~End Payer Plaintiffs filed their complaint on June 7, 2018, the Indirect Reseller Plaintiffs filed their complaint on June 18, 2018, and the Direct Purchaser Plaintiffs filed their complaint on June 22, 2018. Although the complaints allege an overarching conspiracy with respect to all of the drugs identified, the specific allegations related to drugs Lannett makes involve acetazolamide and doxycycline monohydrate. None of the defendants, including the Company, has responded yet to these complaints.

On September 25, 2018, two other alleged direct purchasers filed a purported class action complaint alleging an overreaching, industry-wide horizontal and vertical conspiracy involving the company, other generic pharmaceutical manufacturers, and various pharmaceutical distributors to allocate markets and fix prices generally for a variety of generic drugs. The case has been added to the multidistrict litigation. On December 21, 2018, the plaintiffs filed an amended complaint. None of the defendants, including the Company, has responded yet to the amended complaint.

The Company believes that it acted in compliance with all applicable laws and regulations. Accordingly, the Company disputes the allegations set forth in these class actions.

Shareholder Litigation

In November 2016, a putative class action lawsuit was filed against the Company and two of its officers claiming that the Company damaged the purported class by including in its securities filings false and misleading statements regarding the Company’s drug pricing methodologies and internal controls. ~~A first~~An amended complaint was filed in May 2017, and the Company filed a motion to dismiss the amended complaint in September 2017. In December 2017, counsel for the putative class filed a second amended complaint, and the Court denied as moot the Company’s motion to dismiss the first amended complaint. The Company ~~expects to file~~filed a motion to dismiss the second amended complaint in February 2018. In July 2018, the ~~coming months.~~court granted the Company’s motion to dismiss the second amended complaint. In September 2018, counsel for the putative class filed a third amended complaint. The Company filed a motion to dismiss the third amended complaint in November 2018. The Company cannot reasonably predict the outcome of the suit at this time.

In July 2018, a shareholder derivative complaint was filed against the Company and certain of its current and former directors and executives in the United States District Court for the Eastern District of Pennsylvania. The derivative complaint alleges that the Company engaged in an illegal conspiracy to fix generic drug prices and that the Company’s directors and executives violated their fiduciary duties by allowing the Company to violate the applicable laws and regulations and failing to take any action to curtail management’s deliberate price-fixing scheme. The derivative complaint includes causes of action for violation of Section 10(b) of the Exchange Act, violation of Section 14(a) of the Exchange Act, violation of Section 29(a) of the Exchange Act, and for breach of fiduciary duty. In October 2018, the Court issued an order stating the derivative suit for all purposes for a period of 180 days or until the Court issues an order on the motion to dismiss the third amended complaint filed in the matter of Utesch v. Lannett Co., Inc., et al., No. 2:16cv-05932, whichever is later. The Company cannot reasonably predict the outcome of the suit at this time.

In October 2018, a putative class action lawsuit was filed against the Company and two of its officers in the federal court for the Eastern District of Pennsylvania, alleging that the Company, its Chief Executive Officer and its Chief Financial Officer damaged the purported class by making false and misleading statements in connection with the possible renewal of the JSP Distribution Agreement. The Company and the corporate executives named in the complaint deny that they made any false or misleading statements. In December 2018, counsel for the putative class filed an amended complaint. The Company moved to dismiss the amended complaint in January 2019. The Company cannot reasonably predict the outcome of this suit at this time.

In December 2018, the Chairman of the Company’s Board of Directors received a letter sent on behalf of two purported shareholders demanding that the Company’s Board of Directors investigate and commence legal proceedings against certain former and/or current directors, officers, and agents of the Company relating to alleged breaches of fiduciary duties, corporate waste, and unjust enrichment. The Company and the Company’s Board of Directors responded to the demand letter by requesting that the purported shareholders provide proof of their status and shareholders of the Company. The Company and the Company’s Board of Directors recently received a reply to the letter sent in response to the demand letter and are reviewing the information provided. At this time the Company cannot reasonably predict what outcome, if any, will follow from the Company and the Company’s Board of Director’s receipt of the demand letter.

Genus Life Sciences

In December 2018, Genus Lifesciences, Inc. (“Genus”) sued the Company, Cody Labs, and others in California federal court, alleging violations of the Lanham Act, Sherman Act, and California false advertising law. Genus received FDA approval for a cocaine hydrochloride product in December 2018, and its claims are premised in part on allegations that the Company falsely advertises its unapproved cocaine hydrochloride product, C-Topical. The Company denies that it is falsely advertising its C-Topical product and continues to market its unapproved product relying on the Guidance for FDA Staff and Industry, Marketed Unapproved Drugs — Compliance Policy Guide, pending approval of its 505(b)(2) application. The Company cannot reasonably predict the outcome of this suit at this time.

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~~FDA an 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.

In July 2015, the Company filed with the United States Patent and Trademark Office (“USPTO”) a Petition for Inter Partes Review of 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.

A trial was conducted in September 2016. The Court issued its decision on March 29, 2017, finding that Lannett did not prove that the patents at issue are invalid. The Company has appealed the decision. All briefing to the appellate court has been submitted, and ~~the parties are waiting for the appellate court to set a date for~~ oral argument before the ~~court. A final~~appellate court was conducted on April 5, 2018. The appellate court issued an opinion on June 28, 2018, upholding the decision of the District Court. The Company requested a rehearing by the appellate court ~~is expected in early to mid-2018.~~

~~Thalomid®~~

on August 13, 2018. The ~~Company filed with~~appellate court denied the ~~Food~~request on September 14, 2018, and ~~Drug Administration an ANDA No. 206601, along with a paragraph IV certification, alleging that~~issued its mandate terminating 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 filed an answer and affirmative defenses, and an amended answer to the complaint.

A settlement agreement was reached and the Court dismissed the lawsuit in October 2017. Pursuant to the settlement agreement, the Company entered into a license agreement that permits Lannett to manufacture and market in the U.S. its generic thalidomide product as of August 1, 2019 or earlier under certain circumstances.

~~SUPREP®~~

The Company filed ANDA No. 209941 with the Food and Drug Administration seeking approval to sell a bowel preparation oral solution (the “Company’s Oral Solution”), along with a paragraph IV certification, alleging that US Patent 6,946,149 associated with the Suprep® bowel preparation kit would not be infringed by the Company’s Oral Solution and/or that the patent is invalid.

In March 2017, Braintree Laboratories, Inc. (“Braintree”) filed a patent infringement lawsuit in the United States District Court for the District of Delaware (C.A. No. 1:17-cv-00293-GMS), alleging that the Company’s filing of ANDA No. 209941 constitutes an act of patent infringement and seeking a declaration that the patent at issue was infringed by the submission of ANDA No. 209941. The Company answered the complaint denying infringement and raising invalidity as a defense, and has filed counterclaims seeking a declaration of non-infringement and invalidity. On July 28, 2017, the Company filed a motion for judgmentappeal on the pleadings, seeking a ruling that its ANDA product does not infringe the Braintree patent and seeking judgment as a matter of law. Braintree opposed the motion and has alternatively requested that the Court delay its decision on the motion until discovery is taken. The Company opposed Braintree’s request to delay the decision. While the motions were pending, the parties agreed to resolve this dispute. The parties signed a confidential settlement agreement and filed a Stipulation of Dismissal Without Prejudice on December 13, 2017. On December 17, 2017, the Court granted the parties’ Stipulation of Dismissal Without Prejudice. In connection with the settlement agreement, the Company received $3.5 million, which is included in Other Income within the Consolidated Statements of Operations.

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.September 21, 2018.

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

Note 13. Commitments

Leases

The Company leases certain manufacturing and office equipment, in the ordinary course of business. These leases 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 ~~2018~~2019 and the ~~twelve month~~twelve-month periods ending June 30 thereafter are as follows:

(In thousands)	Amounts Due		Amounts Due
Remainder of 2018	$	864
2019	1,835
Remainder of 2019			$	922
2020	1,855		1,855
2021	1,406		1,406
2022	1,080		1,080
2023			1,080
Thereafter	5,238		4,158
Total	$	12,278	$	10,501

Other Commitment

During the third quarter of Fiscal 2017, the Company signed an agreement with a company operating in the pharmaceutical business, under which the Company agreed to provide up to $15.0 million in revolving loans, which expires in seven years and bears interest at 2.0%, for the purpose of expansion and other business needs. The decision to provide any portion of the revolving loan is at the Company’s sole discretion. ~~At any time after~~Prior to the ~~outstanding revolving loan balance is equal to or greater than $7.5 million,~~first quarter of Fiscal 2019, the Company ~~has~~had the option to convert the first $7.5 million into a 50% ownership interest in the entity. ~~As of December 31, 2017, $6.6 million was outstanding under the revolving loan.~~ The board of the entity is comprised of five members, ~~two~~one of which ~~are employees~~is an employee of the Company.

In the first quarter of Fiscal 2019, the Company sold 50% of the outstanding loan to a third party for $5.6 million and, in addition to assigning 50% of all right, title and interest in the loan and loan documents, the Company relinquished its right to convert a portion of the outstanding loan balance to an equity interest in the entity. As of December 31, 2018, $5.8 million was outstanding under the revolving loan and is included in other assets. In addition to the loan repayment, the agreement was amended to eliminate the Company’s ability to convert the outstanding loan balance into an ownership interest. Based on the guidance set forth in ASC 810-10 Consolidation, the Company has concluded that it has a variable interest in the entity. However, the Company is not the primary beneficiary to the entity and as such, is not required to consolidate the entity’s results of operations.

Note 14. Accumulated Other Comprehensive Loss

The Company’s Accumulated Other Comprehensive Loss was comprised of the following components as of December 31, ~~2017~~2018 and ~~2016:~~2017:

(In thousands)

December 31,
2017

December 31,
2016

Foreign Currency Translation

Beginning Balance, June 30

$
(222
)
$
(295
)
Net gain (loss) on foreign currency translation (net of tax of $0 and $0)

(125
)
38

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

—

—

Other comprehensive income (loss), net of tax

(125
)
38

Ending Balance, December 31

(347
)
(257
)
Total Accumulated Other Comprehensive Loss

$
(347
)
$
(257
)

(In thousands)	December 31, 2018			December 31, 2017
Foreign Currency Translation
Beginning Balance, June 30	$	(515	)	$	(222	)
Net gain (loss) on foreign currency translation (net of tax of $0 and $0)	13			(125		)
Reclassifications to net income (net of tax of $0 and $0)	—			—
Other comprehensive income (loss), net of tax	13			(125		)
Ending Balance, December 31	(502		)	(347		)
Total Accumulated Other Comprehensive Loss	$	(502	)	$	(347	)

Note 15. Earnings (Loss) Per Common Share

A dual presentation of basic and diluted earnings (loss) per common share is required on the face of the Company’s Consolidated 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 (loss) 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 (loss) per common share is computed using the treasury stock method and includes the effect of potential dilution from the exercise of outstanding stock options ~~a warrant~~ and treats unvested restricted stock and performance-based shares as if itthey 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 (loss) per common share was as follows:

Three Months Ended
December 31,

(In thousands, except share and per share data)

2017

2016

Net income attributable to Lannett Company, Inc.

$
14,022

$
8,172

Basic weighted average common shares outstanding

37,066,902

36,810,388

Effect of potentially dilutive stock options, warrants and restricted stock awards

1,223,456

865,982

Diluted weighted average common shares outstanding

38,290,358

37,676,370

Earnings per common share attributable to Lannett Company, Inc.:

Basic

$
0.38

$
0.22

Diluted

$
0.37

$
0.22

	Six Months Ended December 31,					Three Months Ended December 31,
(In thousands, except share and per share data)	2017		2016			2018		2017

Net income (loss) attributable to Lannett Company, Inc.	$	27,279	$	(21,236	)
Net income						$	12,362	$	14,022

Basic weighted average common shares outstanding	37,029,483		36,754,828			37,761,176		37,066,902
Effect of potentially dilutive stock options, warrants and restricted stock awards	1,058,343		—
Effect of potentially dilutive stock options and restricted stock awards						1,351,371		1,223,456
Diluted weighted average common shares outstanding	38,087,826		36,754,828			39,112,547		38,290,358

Earnings (loss) per common share attributable to Lannett Company, Inc.:
Earnings per common share:
Basic	$	0.74	$	(0.58	)	$	0.33	$	0.38
Diluted	$	0.72	$	(0.58	)	$	0.32	$	0.37

	Six Months Ended December 31,
(In thousands, except share and per share data)	2018			2017

Net income (loss)	$	(275,166	)	$	27,279

Basic weighted average common shares outstanding	37,674,200			37,029,483
Effect of potentially dilutive stock options and restricted stock awards	—			1,058,343
Diluted weighted average common shares outstanding	37,674,200			38,087,826

Earnings (loss) per common share:
Basic	$	(7.30	)	$	0.74
Diluted	$	(7.30	)	$	0.72

The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the three months ended December 31, 2018 and 2017 were 540 thousand and ~~2016 were~~ 3.0 ~~million.~~million, respectively. The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the six months ended December 31, 2018 and 2017 ~~and 2016~~ were ~~3.0~~2.2 million and ~~4.4~~3.0 million, respectively.

Note 16. Warrant

In connection with the KUPI acquisition on November 25, 2015, 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~~had a term of three years (expiring November 25, 2018) and an exercise price of $48.90 per share, subject to customary adjustments, including for stock splits, dividends and combinations. The Warrant also ~~has~~contained a “weighted average” anti-dilution adjustment provision. The 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~~was classified as an equity instrument. On November 25, 2018, the Warrant expired and was not exercised.

Note 17. Share-Based Compensation

At December 31, ~~2017,~~2018, the Company had two share-based employee compensation plans (the 2011 Long-Term Incentive Plan “LTIP” and the 2014 “LTIP”). Together these plans authorized an aggregate total of 4.5 million shares to be issued. The plans have a total of ~~1.6 million~~615 thousand shares available for future issuances. On January 23, 2019, the shareholders of the Company approved an Amendment to and Restatement of the 2014 LTIP to increase the amount of shares authorized to be issued by 2.0 million shares.

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 December 31, ~~2017,~~2018, there was ~~$10.2~~$14.4 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 ~~2.3~~2.2 years.

Stock Options

The Company measures share-based compensation cost for options using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used to estimate fair values of the stock options granted during the six months ended December 31, ~~2017~~2018 and ~~2016:~~2017:

	Six Months Ended						Six Months Ended
	December 31, 2017			December 31, 2016			December 31, 2018			December 31, 2017
Risk-free interest rate	1.9		%	1.1		%	2.9		%	1.9		%
Expected volatility	57.4		%	55.6		%	58.4		%	57.4		%
Expected dividend yield	—		%	—		%	—		%	—		%
Forfeiture rate	6.5		%	6.5		%	6.5		%	6.5		%
Expected term (in years)	5.4 years			5.2 years			5.3 years			5.4 years
Weighted average fair value	$	9.06		$	15.33		$	6.52		$	9.06

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 December 31, ~~2017~~2018 and changes during the six 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.)

Outstanding at June 30, 2017

1,475

$
18.02

$
12,212

5.7

Granted

18

$
17.40

Exercised

(42
)
$
8.14

$
596

Forfeited, expired or repurchased

(12
)
$
30.77

Outstanding at December 31, 2017

1,439

$
18.20

$
14,479

5.2

Vested and expected to vest at December 31, 2017

1,436

$
18.18

$
14,467

5.2

Exercisable at December 31, 2017

1,402

$
17.76

$
14,376

5.2

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

Outstanding at June 30, 2018	1,057		$	22.46	$	2,584	5.4
Granted	73		$	12.20
Exercised	(32	)	$	4.39	$	141
Forfeited, expired or repurchased	(336	)	$	34.95
Outstanding at December 31, 2018	762		$	16.71	$	170	5.2

Vested and expected to vest at December 31, 2018	752		$	16.74	$	170	5.1
Exercisable at December 31, 2018	648		$	16.84	$	170	4.4

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 six months ended December 31, ~~2017~~2018 and ~~2016.~~2017.

A summary of restricted stock awards as of December 31, ~~2017~~2018 and changes during the six months then ended, is presented below:

(In thousands, except for weighted average price and life data)

Awards

Weighted
Average Grant -
date Fair Value

Aggregate
Intrinsic Value

Non-vested at June 30, 2017

334

$
30.71

Granted

470

$
17.29

Vested

(162
)
$
31.15

$
3,598

Forfeited

(35
)
$
22.05

Non-vested at December 31, 2017

607

$
20.67

(In thousands, except for weighted average price and life data)	Awards		Weighted Average Grant - date Fair Value		Aggregate Intrinsic Value

Non-vested at June 30, 2018	704		$	20.06
Granted	1,170		$	9.91
Vested	(383	)	$	20.12	$	3,732
Forfeited	(94	)	$	14.33
Non-vested at December 31, 2018	1,397		$	11.93

Performance-Based Shares

On September 22, 2017 and July 30, 2018, the Company approved and granted performance-based awards to certain key executives. The stock-settled awards will vest based on relative Total Shareholder Return (“TSR”) over a three-year period. The Company measures share-based compensation cost for TSR awards using a Monte-Carlo simulation model. ~~The impact~~

A summary of ~~the grant was not material to the consolidated financial statements~~performance-based share awards as of December 31, 2018 and changes during the ~~six months ended December 31, 2017.~~current fiscal year, is presented below:

(In thousands, except for weighted average price and life data)	Awards	Weighted Average Grant - date Fair Value		Aggregate Intrinsic Value

Non-vested at June 30, 2018	20	$	25.58
Granted	52	$	17.69
Vested	—	$	—	$	—
Forfeited	—	$	—
Non-vested at December 31, 2018	72	$	19.92

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 six months ended December 31, 2018 and 2017, ~~and 2016, 28~~95 thousand shares and 2728 thousand shares were issued under the ESPP, respectively. As of December 31, ~~2017, 571~~2018, 702 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				Six Months Ended				Three Months Ended				Six Months Ended
	December 31,				December 31,				December 31,				December 31,
(In thousands)	2017		2016		2017		2016		2018		2017		2018		2017
Selling, general and administrative expenses	$	1,926	$	1,251	$	3,713	$	3,223	$	1,095	$	1,926	$	3,309	$	3,713
Research and development expenses	176		152		327		325		199		176		400		327
Cost of sales	461		314		712		625		655		461		1,276		712
Total	$	2,563	$	1,717	$	4,752	$	4,173	$	1,949	$	2,563	$	4,985	$	4,752

Tax benefit at statutory rate	$	756	$	627	$	1,402	$	1,523	$	439	$	756	$	1,122	$	1,402

Note 18. Employee Benefit Plan

The Company has a 401k defined contribution plan (the “Plan”) covering substantially all employees. Pursuant to the Plan provisions, the Company is required to make matching contributions equal to 50% of each 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 December 31, 2018 and 2017 ~~and 2016~~ were ~~$458~~$445 thousand and ~~$492~~$458 thousand, respectively. Contributions to the Plan during the six months ended December 31, 2018 and 2017 ~~and 2016~~ were ~~$1.0~~$1.1 million and ~~$1.1~~$1.0 million, respectively.

Note 19. Income Taxes

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

The federal, state and local income tax expense for the three months ended December 31, ~~2017 and 2016~~2018 was $2.6 million compared to $18.1 million ~~and $3.5 million, respectively.~~for the three months ended December 31, 2017. The effective tax rates for the three months ended December 31, 2018 and 2017 were 17.6% and ~~2016 were~~ 56.4% ~~and 30.2%~~, respectively. The ~~federal, state and local income~~effective tax ~~expense~~rate for the ~~six~~three months ended December 31, 2018 was lower compared to the three months ended December 31, 2017 ~~was $25.6 million compared to income tax benefit of $9.3 million for the six months ended December 31, 2016. The effective tax rates were 48.4% and 30.6%, respectively.~~

~~The effective tax rates for the three and six months ended December 31, 2017 were higher compared to the same prior-year periods~~primarily due to the application of 2017 Tax Reform ~~which was signed into law on December 22, 2017. Among numerous provisions included~~ in the new law was the reduction of the statutory corporate federal income tax rate from 35% to 21%. In the second quarter of Fiscal 2018, the Company applied the newly enacted corporate federal income tax rate of 21% resultingprior-year period, which resulted in ~~an approximately $18.7 million~~a revaluation of the Company’s net long term deferred tax ~~assets which are expected to reverse in future periods. The increase in~~assets. In addition, the ~~effective~~federal statutory tax rate asfor the three months ended December 31, 2018 was 21% compared to a ~~result of the revaluation was partially offset by a lower~~ blended federal statutory tax rate of ~~approximately 28.0% as compared to 35.0%~~28% in the ~~same~~ prior-year period. ~~This resulted in an approximately $2.3 million~~

The federal, state and ~~$3.8 million~~local income tax benefit for the ~~three~~six months ended December 31, 2018 was $73.0 million compared to income tax expense of $25.6 million for the six months ended December 31, 2017. The effective tax rates for the six months ended December 31, 2018 and 2017 were 21.0% and 48.4%, respectively. The effective tax rate for the six months ended December 31, 2018 was lower compared to the six months ended December 31, 2017 ~~respectively. Overall,~~primarily due to the ~~Company anticipates the decrease in the~~

~~U.S. federal statutory rate resulting from the enactment of the 2017 Tax Reform will have a favorable impact on future U.S. tax expense and operating cash flows. The Company recorded the impact~~application of 2017 Tax Reform in the ~~three~~prior-year period, which resulted in a revaluation of the Company’s net long term deferred tax assets. In addition, the federal statutory tax rate for the six months ended December 31, ~~2017, inclusive~~2018 was 21% compared to a blended federal statutory tax rate of ~~provisional amounts based on reasonable estimates. However,~~28% in the final impact of 2017 Tax Reform may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions the Company may take as a result of 2017 Tax Reform. Adjustments, if any, will be made in accordance with SAB 118.prior-year period.

As of December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, the Company has total unrecognized tax benefits of ~~$2.0~~$2.2 million and ~~$5.9~~2.5 million, respectively,~~. The decrease was~~ which would impact the ~~result of an expiration in the statute of limitations related to several state-related unrecognized~~Company’s effective tax ~~benefits.~~rate if recognized. As a result of the positions taken during the period, the Company has not recorded any interest and penalties for the period ended December 31, ~~2017~~2018 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s statement of financial position as of December 31, ~~2017~~2018 and June 30, ~~2017.~~2018. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.

As of December 31, 2018 and June 30, 2018, the Company had net long term deferred tax assets of $100.0 million and $22.1 million, respectively. The significant increase was primarily a result of the goodwill impairment charge recorded in the first quarter of Fiscal 2019, which negatively impacted book income, but is excluded from the calculation of taxable income.

The Company files income tax returns in the United States federal jurisdiction and various states. The Company’s tax returns for Fiscal Year ~~2013~~2014 and prior generally are no longer subject to review as such years generally are closed. The Company’s Fiscal Year 2016 federal return is currently under examination by the Internal Revenue ~~Service.~~Service (“IRS”). The Company cannot reasonably predict the outcome of the examination at this time. In July 2018, the Company was notified that the IRS will also expand their examination to include the Company’s Fiscal 2015 and Fiscal 2017 federal returns. In October 2018, the Company was notified that the State of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns.

Note 20. Related Party Transactions

The Company had sales of ~~$1.2~~$1.0 million and ~~$1.1~~$1.2 million during the three months ended December 31, ~~2017~~2018 and ~~2016,~~2017, respectively, to a generic distributor, Auburn Pharmaceutical Company (“Auburn”)., which is a member of the Premier Buying Group. Sales to Auburn for the six months ended December 31, 2018 and 2017 were $1.5 million and ~~2016 were~~ $2.0 million, ~~for both periods.~~respectively. Jeffrey Farber, ~~Chairman of the Board,~~a current board member, is the owner of Auburn. Accounts receivable includes amounts due from Auburn of ~~$1.0 million~~$849 thousand and ~~$751~~$585 thousand at December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, respectively.

The Company also had sales of ~~$516~~$920 thousand and ~~$262~~$516 thousand during the three months ended December 31, ~~2017~~2018 and ~~2016,~~2017, respectively, to a generic distributor, ~~KeySource.~~KeySource, which is a member of the OptiSource Buying Group. Sales to KeySource for the six months ended December 31, 2018 and 2017 were $1.5 million and ~~2016 were~~ $983 ~~thousand and $329~~ thousand, respectively. Albert Paonessa, a current board member, was appointed the CEO of KeySource in May 2017. Accounts receivable includes amounts due from KeySource of ~~$456~~$605 thousand and ~~$606~~$514 thousand as of December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, respectively.

~~In connection with~~The Company incurred expenses totaling $188 thousand and $369 thousand during the ~~termination~~three and six months ended December 31, 2018, respectively, for online medical benefit services provided by a subsidiary of a variable interest entity. See Note 13 “Commitments” for more information. Accounts payable includes amounts due to the ~~employment~~variable interest entity of ~~Arthur P. Bedrosian,~~$58 thousand as of June 30, 2018. There were no amounts due to the ~~Company’s former Chief Executive Officer, effective~~variable interest entity as of December 31, 2017, the Company entered into a separation agreement pursuant to which he will receive certain benefits including, among others, 36 months base salary, a pro-rated Fiscal 2018 cash bonus as well as accelerated vesting of his outstanding equity awards. The total benefits resulted in an approximately $3.4 million charge to the Company’s consolidated statements of operations in the second quarter of Fiscal 2018. On January 20, 2018, the Company also entered into a consulting agreement with Mr. Bedrosian to work on several important projects, primarily involving existing and new partnering efforts to expand and diversify opportunities, including but not limited to spearheading the effort to transition and strengthen the Company’s existing contractual relationships with its key partners.

Note 21. 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 34% and 39% of the Company’s inventory purchases in the three months ended December 31, 2018 and 2017, ~~and 2016.~~respectively. Purchases of finished goods inventory from JSP accounted for ~~36%~~approximately 33% and ~~38%~~36% of the Company’s inventory purchases in the six months ended December 31, ~~2017~~2018 and ~~2016,~~2017, respectively.

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,~~On August 20, 2018, 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~~announced that the JSP Distribution Agreement, ~~the Company is required to use commercially reasonable efforts to purchase minimum dollar quantities of JSP products. There is no guarantee that the Company~~which expires on March 23, 2019, will not be able to meet the minimum purchase requirement for Fiscal 2018 and in the future. If the Company does not meet the minimum purchase requirements, JSP’s sole remedy is to terminate the JSP Distribution Agreement.renewed or extended.

Note 22. ~~Subsequent Events~~Assets Held for Sale

In ~~February~~the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business, which includes the manufacturing and distribution of active pharmaceutical ingredients for use in finished goods production. As such, all assets and liabilities associated with the Cody API business are recorded in the assets and liabilities held for sale captions in the Consolidated Balance Sheet as of December 31, 2018. As part of the held for sale classification, the Company recorded the assets of the Cody API business at fair value less costs to sell. The Company performed a fair value analysis which resulted in a $29.9 million impairment of the Cody long-lived assets.

The following table summarizes the assets and liabilities of the Cody API business as of December 31, 2018:

(In thousands)	December 31, 2018
Assets
Inventories	$	3,351
Other current assets	355
Property, plant and equipment	6,736
Intangible assets, net	176
Other assets	804
Total assets held for sale	$	11,422
Liabilities
Accounts payable	$	291
Accrued expenses	138
Accrued payroll and payroll-related expenses	775
Total liabilities held for sale	$	1,204

The following table summarizes the financial results of the Cody API business for the three and six months ended December 31, 2018 and 2017:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
(In thousands)	2018			2017			2018			2017
Net sales	$	654		$	387		$	2,142		$	1,086
Pretax loss attributable to Cody API business	(4,314		)	(4,468		)	(39,335		)	(9,957		)

The loss attributable to the Cody API business during the six months ended December 31, 2018 includes the $29.9 million impairment charge to adjust the long-lived assets to its fair value less costs to sell.

Note 23. Amneal Distribution and Transition Support Agreement

On November 9, 2018, the Company ~~made a $25.0~~entered into the Amneal Agreement, pursuant to which Amneal will be the Company’s sole customer for Levothyroxine Sodium Tablets USP (the “Product”) from December 1, 2018 through March 23, 2019 and Amneal will re-sell the Product to its customers. Pursuant to the terms of the Agreement, the Company will receive an upfront payment of $50 million, ~~voluntary prepayment against~~which will guarantee the Company at least $50 million of gross profit on approximately $80 million of net sales of the Product during the term of the Agreement, subject to certain adjustments. The Company will continue to distribute Butalbital, Aspirin, Caffeine with Codeine Phosphate Capsules USP and Digoxin Tablets USP pursuant to its ~~outstanding debt balance.~~distribution agreement with JSP through March 23, 2019. Upon the effective date of the agreement on December 1, 2018, the Company received an upfront payment of $43.0 million, which was recorded as deferred revenue in the Consolidated Balance Sheet, with the remaining $7.0 million to be received on February 1, 2019. As of December 31, 2018, based on Product sold to Amneal under the agreement, the remaining deferred revenue balance is $24.0 million.

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

Cautionary Statement About Forward-Looking Statements

This Report on Form 10-Q and certain information incorporated herein by reference contains forward-looking statements which are not historical facts made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not promises or guarantees and investors are cautioned that all forward-looking statements involve risks and uncertainties, including but not limited to the impact of competitive products and pricing, product demand and market acceptance, new product development, acquisition-related challenges, the regulatory environment, interest rate fluctuations, reliance on key strategic alliances, availability of raw materials, fluctuations in operating results and other risks detailed from time to time in our filings with the Securities and Exchange Commission (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, ~~2017.~~2018. All references to “Fiscal 2019” or “Fiscal Year 2019” shall mean the fiscal year ending June 30, 2019 and all references to “Fiscal 2018” or “Fiscal Year 2018” shall mean the fiscal year ~~ending June 30, 2018 and all references to “Fiscal 2017” or “Fiscal Year 2017” shall mean the fiscal year~~ ended June 30, ~~2017.~~2018.

Company Overview

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company”, “Lannett”, “we” or “us”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, liquids, nasal and oral solution finished dosage forms of drugs, generic forms of both small molecule and biologic medications, that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the Company. ~~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, suspensions, soft gel, injectable and oral dosages.

On November 25, 2015, the Company completed the acquisition of Kremers Urban Pharmaceutical, Inc. (“KUPI”), the former 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 Seymour, Indiana. The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations. In the second quarter of Fiscal 2019, the Company ceased manufacturing functions at its State Road facility in Philadelphia, Pennsylvania. The Company discontinued distribution from its Townsend Road facility in Philadelphia, Pennsylvania as of January 31, 2019. The Company intends to sell its Townsend Road facility by the end of Fiscal 2019.

JSP Distribution Agreement

On March 23, 2004, the Company entered into an agreement with JSP (the “JSP Distribution Agreement”) for the exclusive distribution rights in the United States to four different JSP products, in exchange for 4.0 million shares of the Company’s common stock. On August 19, 2013, the Company entered into an agreement with JSP to extend the JSP Distribution Agreement 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 JSP Distribution Agreement extended the term of the initial contract, which was due to expire on March 22, 2014, for five years through March 23, 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.

Net sales of JSP products totaled $253.1 million and $144.9 million in Fiscal Year 2018 and the first six months of Fiscal Year 2019, respectively. Of that amount, Levothyroxine Sodium Tablets USP net sales totaled $245.9 million and $142.4 million in Fiscal Year 2018 and the first six months of Fiscal Year 2019, respectively. Gross margins were approximately 60% in both periods.

After the close of business on August 17, 2018, JSP notified the Company that it will not extend or renew the JSP Distribution Agreement when the current term expires on March 23, 2019.

Because products covered by the JSP Distribution Agreement generate a significant portion of our revenues and gross profits, JSP’s decision not to renew or extend its distribution agreement with us will materially adversely affect our future operating results and cash flows beginning in the fourth quarter of Fiscal 2019. When announced on August 20, 2018, this resulted in a significant decline in the Company’s market capitalization.

As noted above, JSP’s decision not to renew or extend its distribution agreement with us will materially adversely affect our future operating results, liquidity and cash flows, which could impact our ability to comply with the financial and other covenants in our Amended Senior Secured Credit Facility. As of December 31, 2018, the Company was in compliance with its financial covenants. As of December 31, 2018, cash and cash equivalents totaled $163.8 million in addition to availability under our undrawn Revolver totaling $125.0 million.

Based on its projections over the next twelve months, the Company expects to have sufficient liquidity and cashflows to meet its operating and debt service requirements for at least the next twelve months from the issuance of the December 31, 2018 consolidated financial statements. The Company also expects to be in compliance with its financial covenants during the same period.

Although management cannot predict with certainty the precise impact its plans will have on offsetting the loss of the JSP Distribution Agreement, management is continuing to finalize plans to offset the impact of the loss on a short- and long-term basis. These plans currently include, among other things, an emphasis on reducing cost of sales, research and development (“R&D”) and selling, general and administrative (“SG&A”) expenses; continuing to accelerate new product launches; increasing the level of strategic partnerships; and reducing capital expenditures. To that end, the Company has already launched more than 15 new products since January 2018, which are expected to generate annualized net sales of over $80 million, and expects to maintain this pace with approximately 10 additional launches in the first half of calendar year 2019, two of which have already launched in January 2019. The Company has also signed several distribution and in-licensing agreements during this fiscal year that will provide immediate contribution margins in the near future. Additionally, the Company continues to supplement existing in-process cost reduction plans with additional cost savings initiatives, which is expected to generate annualized cost savings of approximately $66.0 million by the end of Fiscal 2020 when compared to the Fiscal 2018 expenses, of which approximately half will be reinvested into other business growth opportunities. Management will also continue its emphasis on accelerating ANDA filings, as evidenced by the five ANDAs filed with the FDA in the first half of Fiscal 2019. Management also plans to attempt, at the appropriate time, to refinance a significant portion of its outstanding long-term debt to reduce principal repayment requirements and eliminate existing financial covenants, which we expect will increase related interest expense, but will positively impact short-term cash flows.

Amneal Distribution and Transition Support Agreement

On November 9, 2018, the Company entered into a Distribution and Transition Support Agreement (the “Amneal Agreement”) with Amneal Pharmaceuticals, Inc. (“Amneal”) and JSP, pursuant to which Amneal will be the Company’s sole customer for Levothyroxine Sodium Tablets USP (the “Product”) from December 1, 2018 through March 23, 2019 and Amneal will re-sell the Product to its customers. Pursuant to the terms of the Agreement, the Company will receive an upfront payment of $50 million, which will guarantee the Company at least $50 million of gross profit on approximately $80 million of net sales of the Product during the term of the Agreement, subject to certain adjustments. The Company will continue to distribute Butalbital, Aspirin, Caffeine with Codeine Phosphate Capsules USP and Digoxin Tablets USP pursuant to its distribution agreement with JSP through March 23, 2019.

Sale of Cody API Business

The Company is analyzing and exploring various financing and operational courses to improve the Company’s base business, including a focus on nearer term opportunities and an overall strategic shift toward the Company’s core competencies and optimization of its cost structure. In connection therewith, the Company approved a plan in September 2018 to sell the active pharmaceutical ingredient manufacturing and distribution business of its Cody Laboratories subsidiary (the “Cody API business”). As part of its decision, the Company considered (i) the Cody API business’s timeline to profitability, (ii) continuing investment needed to be competitive and (iii) the reduction to the Company’s operating expenses, estimated to be approximately $18 million on an annualized basis, that would result from a sale of the Cody API business. Excluded from the sale will be the manufacturing of the finished dosage form of the Company’s Cocaine Hydrochloride product line.

As a result of the decision to sell the Cody API business, all of the assets, excluding the Cocaine Hydrochloride product line mentioned above, and all of the liabilities associated with the Cody API business, are classified as assets and liabilities held for sale on the Company’s Consolidated Balance Sheet as of December 31, 2018, with such assets and liabilities recorded at fair value less costs to sell. As a result of a fair value analysis of the Cody API business, the Company recorded an impairment charge of $29.9 million in the first quarter of Fiscal 2019.

Cody Restructuring Plan

On June 29, 2018, the Company announced a restructuring plan related to the future of Cody Laboratories, Inc. and the Company’s operations (the “Cody Restructuring Plan”). The plan focuses on a more select set of opportunities which will result in streamlined operations, improved efficiencies and a reduced cost structure. The Company currently estimates that it will incur approximately $4.5 million of total costs to implement the Cody Restructuring Plan, comprised primarily of approximately $3.0 million of severance and employee-related costs. 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.

2016 Restructuring Plan

On February 1, 2016, in connection with the acquisition of KUPI, the Company announced a plan related to the future integration of KUPI and the Company’s operations (the “2016 Restructuring Program”). The 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 $20.0 million in restructuring charges for actions that have been announced or communicated since the 2016 Restructuring Program began. Of this amount, approximately $11.0 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.

In the second quarter of Fiscal 2019, the Company ceased manufacturing functions at its State Road facility in Philadelphia, Pennsylvania. The ~~plan is currently estimated~~Company discontinued distribution from its Townsend Road facility in Philadelphia, Pennsylvania as of January 31, 2019. The Company intends to ~~generate annualized synergies of approximately $50.0 million~~sell its Townsend Road facility by the end of Fiscal ~~2018 and is expected to achieve an ultimate annual run rate of synergies totaling approximately $65.0 million by the end of Fiscal 2020.~~2019.

These amounts are 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 second quarter of Fiscal Year ~~2018,~~2019, net sales increased to ~~$184.3~~$193.7 million compared to ~~$170.9~~$184.3 million in the same prior-year period. Gross profit decreased to ~~$87.5~~$69.8 million compared to ~~$88.1~~$87.5 million in the prior-year period and gross profit percentage decreased to ~~47%~~36% compared to ~~52%~~47% in the prior-year period. R&D expenses ~~increased 8%~~decreased 9% to ~~$10.7~~$9.7 million compared to ~~$9.9~~$10.7 million in the second quarter of Fiscal Year ~~2017~~2018 while SG&A expenses ~~increased 58%~~decreased 19% to ~~$28.5~~$23.2 million from ~~$18.1 million in the prior-year period. Acquisition and integration-related expenses decreased to $65 thousand from $1.0~~$28.5 million in the prior-year period. Restructuring expenses decreased to ~~$1.0 million~~$213 thousand from ~~$1.7~~$1.0 million in the prior-year period. Operating income for the second quarter of Fiscal Year ~~2018~~2019 was ~~$47.1~~$36.7 million compared to ~~$34.3~~$47.1 million in the second quarter of Fiscal Year ~~2017,~~ ~~which included a $23.0 million intangible asset impairment charge.~~2018. Net income ~~attributable to the Company~~ for the second quarter of Fiscal Year ~~2018~~2019 was ~~$14.0~~$12.4 million, or ~~$0.37~~$0.32 per diluted share compared to ~~$8.2~~$14.0 million, or ~~$0.22~~$0.37 per diluted share in the second quarter of Fiscal Year ~~2017.~~2018.

For the first six months of Fiscal ~~2018,~~2019, net sales increased to ~~$339.3~~$348.8 million compared to ~~$332.5~~$339.3 million in the same prior-year period. Gross profit decreased ~~$14.8 million~~ to ~~$155.1~~$129.0 million compared to ~~$169.9~~$155.1 million in the prior-year period. Gross profit percentage decreased to ~~46%~~37% compared to ~~51%~~46% in the prior-year period. R&D expenses ~~decreased 19%~~increased 8% to ~~$18.1~~$19.5 million compared to ~~$22.3~~$18.1 million in the first six months of Fiscal ~~2017~~2018 while SG&A expenses ~~increased 21%~~decreased 8% to ~~$47.5~~$43.8 million from ~~$39.3 million in the prior-year period. Acquisition and integration-related expenses decreased to $83 thousand from $2.4~~$47.5 million in the prior-year period. Restructuring expenses decreased to ~~$1.6~~$1.2 million from ~~$3.8~~$1.6 million in the prior-year period. Operating ~~income~~loss for the first six months of Fiscal ~~2018,~~2019, which included asset impairment charges totaling $369.5 million was ~~$87.8~~$305.1 million compared to ~~$14.0~~operating income of $87.8 million in the prior-year ~~period,~~ ~~which included an $88.1 million intangible asset impairment charge.~~period. Net ~~income attributable to the Company~~loss for the first six months of Fiscal ~~2018~~2019 was $275.2 million, or $7.30 per diluted share compared to net income of $27.3 million, or $0.72 per diluted share ~~compared to net loss attributable to the Company of $21.2 million, or $0.58 per diluted share~~ in the prior-year period.

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

Results of Operations - Three months ended December 31, ~~2017~~2018 compared with the three months ended December 31, ~~2016~~2017

Net sales increased 8%5% to ~~$184.3~~$193.7 million for the three months ended December 31, ~~2017.~~2018. The following table identifies the Company’s net product sales by medical indication for the three months ended December 31, ~~2017~~2018 and ~~2016:~~2017:

(In thousands)	Three Months Ended December 31,				Three Months Ended December 31,
Medical Indication	2017		2016		2018		2017
Antibiotic	$	3,552	$	4,792	$	4,187	$	3,552
Anti-Psychosis	22,799		15,365		14,036		22,799
Cardiovascular	10,135		11,975		25,680		10,135
Central Nervous System	6,925		10,555		6,187		6,925
Gallstone	5,282		13,425		2,489		5,282
Gastrointestinal	15,055		18,977		10,009		15,055
Glaucoma	2,164		5,311		512		2,164
Migraine	15,484		7,863		12,551		15,484
Muscle Relaxant	3,219		3,004		3,121		3,219
Pain Management	6,128		7,439		8,968		6,128
Respiratory	2,230		2,957		1,163		2,230
Thyroid Deficiency	68,794		45,431		88,477		68,794
Urinary	2,840		4,693		1,606		2,840
Other	13,105		11,133		6,827		13,105
Contract manufacturing revenue	6,593		8,024		7,905		6,593
Net sales	$	184,305	$	170,944	$	193,718	$	184,305

The increase in net sales was driven by increased volumes of ~~$19.4~~$39.8 million, partially offset by decreased average selling price of products of ~~$6.0~~$30.4 million. Volumes were favorably impacted due to ~~a temporary disruption~~increased sales of ~~our competitor’s supplies~~Levothyroxine as customer demand increased in anticipation of the transition of the Product. Additional sales in the ~~Thyroid Deficiency~~Cardiovascular medical indication related to a distribution agreement entered into with Aralez in November 2017 also contributed to increased volumes. On August 10, 2018, Aralez filed a Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York and ~~Migraine medical indications.~~ continues to operate its business in the normal course. The Company does not believe this will materially affect our distribution agreement with Aralez. Average selling prices were negatively impacted by price protection and stock-shelf adjustments in the second quarter of Fiscal 2019 as a result of anticipated price increases and decreases, respectively, on certain products. Average selling prices were also impacted by product mix, changes within distribution channels and, to a lesser extent, competitive pricing pressures. Although the Company has benefited in the past from favorable pricing trends, these trends have reversed. ~~The level of competition in the marketplace is constantly changing and the Company cannot predict with certainty that these trends will continue.~~

In January 2017, a provision in the Bipartisan Budget Act of 2015 required drug manufacturers to pay additional rebates to state Medicaid programs if the prices of their generic drugs rise at a rate faster than inflation. The provision negatively impacted the Company’s net sales by $7.1 million during the three months ended December 31, 2018 and 2017, ~~which contributed to the overall decreased average selling price.~~respectively.

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

Medical indication

Sales volume
change %

Sales price
change %

Antibiotic

(12
)%
(14
)%
Anti-Psychosis

6
%
42
%
Cardiovascular

9
%
(24
)%
Central Nervous System

(28
)%
(6
)%
Gallstone

(25
)%
(36
)%
Gastrointestinal

6
%
(27
)%
Glaucoma

(6
)%
(53
)%
Migraine

104
%
(7
)%
Muscle Relaxant

61
%
(54
)%
Pain Management

(16
)%
(2
)%
Respiratory

3
%
(28
)%
Thyroid Deficiency

34
%
17
%
Urinary

(18
)%
(21
)%

Medical indication	Sales volume change %		Sales price change %
Antibiotic	30	%	(12	)%
Anti-Psychosis	(15	)%	(23	)%
Cardiovascular	133	%	20	%
Central Nervous System	(3	)%	(8	)%
Gallstone	8	%	(61	)%
Gastrointestinal	(3	)%	(31	)%
Glaucoma	(58	)%	(18	)%
Migraine	(7	)%	(12	)%
Muscle Relaxant	13	%	(16	)%
Pain Management	62	%	(16	)%
Respiratory	(47	)%	(1	)%
Thyroid Deficiency	34	%	(5	)%
Urinary	(17	)%	(26	)%

Central Nervous System. Methylphenidate Hydrochloride Extended Release Tablets (“Methylphenidate ER”)

~~During~~Per a teleconference in November 2014, the 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 Methylphenidate ER product from “AB” (therapeutically equivalent) to “BX.” A BX-rated drug is a product for which data ~~are~~is 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.

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 that 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 met with the FDA to discuss the results in July 2015.

On October 18, 2016, the Company received notice from the FDA that it will seek to withdraw approval of the Company’s ANDA for Methylphenidate ER. The FDA’s notice includes an opportunity for the Company to request a hearing on this matter. Following the Company’s request under the Freedom of Information Act (“FOIA”) for documents to support its request for a hearing, the FDA granted an extension to submit all data, information and analyses upon which the request for a hearing relies.

In response to the Company’s FOIA requests, the FDA provided four sets of documents between April 4, 2017 and October 25, 2017 and, on December 4, 2017, the Company submitted extensive information, data, analyses, and expert reports to the FDA that demonstrate the existence of genuine and substantial issues of fact that necessitate a hearing to prove the therapeutic equivalence of its product. On December 8, 2017, the documents were posted on the public docket. The FDA has not yet made a decision as to whether to grant a hearing to the Company.

The Company intends to continue working with the FDA to regain the “AB” rating, and in the meantime, maintain the drug on the U.S. market with a BX rating. However, there can be no assurance as to when or if the Company will regain the “AB” rating or be permitted to remain on the market. If the Company ~~were~~was 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. Such potential contingent payments are set to expire after December 31, 2020.

In August 2018, the Company entered into an exclusive perpetual licensing agreement with Andor Pharmaceuticals, LLC (“Andor”) for Methylphenidate ER tablets USP (CII) in 18 mg, 27 mg, 36 mg and 54 mg strengths. Andor’s pending ANDA of Methylphenidate included all bioequivalence metrics recommended by the FDA and is expected to be approved as an AB-rated generic equivalent to the brand Concerta®.

Under the licensing agreement with Andor, Lannett will primarily provide sales, marketing and distribution support of Andor’s Methylphenidate ER product, for which it will receive a percentage of the net profits.

Pain Management. Cocaine Topical Solution (“C-Topical”)

In December 2017, a competitor received approval from the FDA to market and sell a Cocaine Hydrochloride topical product. This approval ~~effects~~affects the Company’s right to market and sell its unapproved ~~Grandfathered~~ C-Topical product. According to FDA guidance, the FDA typically allows the marketing of unapproved products for up to one year following the approval of an NDA for the product. Subsequently, the Company would not be permitted to market and sell its unapproved C-Topical product. ~~For~~During the ~~three and~~ six ~~month periods~~months ended December 31, 2018 and 2017, the Company’s net sales of C-Topical were ~~$5.1~~$7.0 million and $9.7 million, respectively.

The competitor’s Cocaine Hydrochloride topical product first appeared in FDA’s Orange Book in January 2018, and the Orange Book listing was updated in February 2018 to include New Chemical Entity (“NCE”) exclusivity. Under the Federal Food Drug and Cosmetic Act, the grant of NCE exclusivity provides that additional applications for approval of the same product under Section 505(b)(2) may not be submitted to the FDA for approval before the expiration of five years from the date of the approval of the first application. Because the Company submitted its application for approval prior to the date of approval of the competitor’s Cocaine Hydrochloride topical application, the Company does not believe the NCE exclusivity will apply to the Company’s application. The FDA continues to review the Company’s application, and in July 2018 issued a Complete Response Letter which required an additional study and other information. The Company is in the process of addressing the Complete Response Letter and cannot say for certain when or if the application will be approved.

The competitor filed a citizen petition with the FDA in February 2019, claiming that the grant of the NCE exclusivity blocks the approval of the Company’s application for five years and requesting that the FDA refuse to accept any further submissions in furtherance of the Company’s Section 505(b)(2) application, treat as withdrawn any submissions made by the Company after December 2017 and withdraw the Company’s Section 505(b)(2) application. The Company intends to file an opposition to the citizen petition.

At this time, the Company cannot predict the ultimate impact that these developments will have on its business and financial performance, including but not limited to any possible price reductions ~~should~~based on the competitor ~~commence marketing and selling its C-Topical~~ product, ~~in the future,~~ for how long the Company will continue to be permitted to market and sell C-Topical, or the possible effect on the Company’s pending NDA application.

Gastrointestinal. Polyethylene Glycol (PEG)3350 (“Glycolax”)

On April 2, 2018, the FDA issued a Federal Register notice (Docket No. FDA-2008-N-0549) indicating that it was affirming a preliminary summary judgment decision that the FDA issued in 2014, denying a hearing, and withdrawing all ANDAs for prescription PEG 3350 products, including the Company’s Glycolax product. The FDA’s decision is based on the FDA finding that there are no meaningful differences between Rx PEG 3350 products and OTC PEG 3350 products and, therefore, that the Rx products are misbranded. The FDA ordered the Company’s ANDA withdrawn effective May 2, 2018, after which the Company would no longer be permitted to market or sell its Glycolax product. The Company disputes the FDA’s finding that there are no meaningful differences and disputes that summary judgment was appropriate in light of the factual issues raised by the ANDA holders. On April 9, 2018, the Company, along with three other PEG 3350 ANDA holders, filed a request for a stay of the FDA order pending appeal of the decision to the District of Columbia Circuit Court of Appeals. On April 16, 2018, the FDA granted a stay of its order withdrawing the Company’s ANDA through November 2, 2018, after which the Company will no longer be permitted to market or sell its Glycolax product. The Company filed an appeal of the FDA withdrawal order to the United States Court of Appeals for the District of Columbia. In July 2018, the Company filed a brief in support of the appeal. All briefing was completed by September 15, 2018 and an argument hearing was held on October 12, 2018. The Company is unable to say whether the Court will decide the appeal prior to the November 2, 2018 withdrawal date. During the six months ended December 31, 2018 and 2017, the Company’s net sales of Glycolax were $6.0 million and $8.3 million, respectively, although gross profit percentages for this product were in the single-digits in each of these periods. At this time, the Court has not yet issued a ruling and the Company is unable to determine the outcome of this matter nor can it predict when or if the Company’s product will be removed from the market.

Thalomid®

The Company filed with the FDA an ANDA No. 206601, along with a paragraph IV certification, alleging that the fifteen patents associated with the Thalomid drug product are invalid, unenforceable and/or not infringed. On January 30, 2015, Celgene Corporation and Children’s Medical Center Corporation filed a patent infringement lawsuit in the United States District Court for the District of New Jersey, alleging that the Company’s filing of ANDA No. 206601 constitutes an act of patent infringement and seeking a declaration that the patents at issue are valid and infringed. A settlement agreement was reached and the Court dismissed the lawsuit in October 2017. Pursuant to the settlement agreement, the Company entered into a license agreement that permits Lannett to manufacture and market in the U.S. its generic thalidomide product as of August 1, 2019 or earlier under certain circumstances. In the second quarter of Fiscal 2019, the Company received a major complete response letter that may delay the Company’s ability to market this product.

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 December 31:

(In thousands) Customer Distribution Channel	December 31, 2017		December 31, 2016		December 31, 2018		December 31, 2017
Wholesaler/Distributor	$	126,765	$	129,585	$	153,641	$	126,765
Retail Chain	40,233		19,457		24,627		40,233
Mail-Order Pharmacy	10,714		13,878		7,545		10,714
Contract manufacturing revenue	6,593		8,024		7,905		6,593
Net sales	$	184,305	$	170,944	$	193,718	$	184,305

Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the second quarter of Fiscal ~~2018~~2019 increased ~~17%~~28% to ~~$96.9~~$123.9 million from ~~$82.9~~$96.9 million in the same prior-year period. The increase was primarily attributable to ~~higher sales as well as changes in our product sales mix~~increased volumes of products sold, and to a lesser extent, increased product royalties. Product royalties expense included in cost of sales totaled $10.8 million for the second quarter of Fiscal Year 2019 and $7.2 million for the second quarter of Fiscal Year ~~2018 and $5.1 million for the second quarter of Fiscal Year 2017.~~2018. Amortization expense included in cost of sales totaled $8.2 million for the second quarter of Fiscal 2019 compared to $7.9 million for the second quarter of Fiscal ~~Year 2018 compared to $7.7 million for the second quarter of Fiscal Year 2017.~~2018.

Gross Profit. Gross profit for the second quarter of Fiscal ~~2018~~2019 decreased 1%20% to ~~$87.5~~$69.8 million or ~~47%~~36% of net sales. In comparison, gross profit for the second quarter of Fiscal ~~2017~~2018 was ~~$88.1~~$87.5 million or ~~52%~~47% of net sales. The decrease in gross profit percentage was primarily attributable to price protection and stock-shelf adjustments in the second quarter of Fiscal 2019 as well as lower average

selling ~~prices~~price of certain key products ~~as well as additional~~and increased product ~~royalties.~~royalties related to a distribution agreement entered into with Aralez in November 2017.

Research and Development Expenses. Research and development expenses for the second quarter ~~increased 8%~~decreased 9% to $9.7 million in Fiscal 2019 from $10.7 million in Fiscal ~~2018 from $9.9 million in Fiscal 2017.~~2018. The ~~increase~~decrease was primarily due to ~~the higher~~lower incentive compensation-related ~~costs, partially offset by lower product development~~ expenses.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ~~increased 58%~~decreased 19% to ~~$28.5~~$23.2 million in the second quarter of Fiscal ~~2018~~2019 compared with ~~$18.1~~$28.5 million in Fiscal ~~2017.~~2018. The ~~increase~~decrease was primarily ~~driven by higher incentive compensation-related costs as well as approximately $3.4 million~~due to lower incentive-based compensation and a reduction of selling and marketing expenses related to ~~separation benefits for the former chief executive officer.~~product salesforce, partially offset by depreciation related to software integration costs.

The Company is focused on controlling operating expenses and has implemented its 2016 Restructuring Plan and Cody Restructuring Plan as noted above, however increases in personnel and other costs to facilitate enhancements in the Company’s infrastructure and expansion may continue to impact operating expenses in future periods.

~~Acquisition and Integration-related~~Restructuring Expenses. ~~Acquisition and integration-related~~Restructuring expenses decreased ~~$962~~$822 thousand to ~~$65~~$213 thousand for the second quarter of Fiscal Year ~~2018 as compared to the prior-year period. The decrease was due to the timing of the acquisition of KUPI.~~

~~Restructuring Expenses.~~ ~~Restructuring expenses decreased $677 thousand to $1.0 million for the second quarter of Fiscal Year 2018~~2019 compared to the prior-year period primarily due to ~~higher~~a reversal of employee separation costs ~~incurred in connection with~~related to the ~~2016~~Cody Restructuring ~~Program during the three months ended December 31, 2016.~~Program. See Note 4 “Restructuring Charges” for more information.

Other Income (Loss). Interest expense for the three months ended December 31, ~~2017~~2018 totaled ~~$20.7~~$21.5 million compared to ~~$23.3~~$20.7 million for the three months ended December 31, ~~2016.~~2017. The weighted average interest rate for the second quarter of Fiscal 2019 and 2018 was 9.6% and ~~2017 was~~ 8.3% ~~and 8.0%~~, respectively. Investment income totaled $556 thousand in the second quarter of Fiscal 2019 compared with $2.3 million in the second quarter of Fiscal 2018 compared with $1.0 million in the second quarter of Fiscal 2017. In December 2017, the Company received $3.5 million as part of the settlement of the Braintree patent litigation. See Note 12. “Legal, Regulatory Matters and Contingencies” for further details.2018.

Income Tax. The Company recorded income tax expense in the second quarter of Fiscal ~~2018~~2019 of ~~$18.1~~$2.6 million compared to ~~$3.5~~$18.1 million in the second quarter of Fiscal 2018. The effective tax rate for the three months ended December 31, 2018 was 17.6%, compared to 56.4% for the three months ended December 31, 2017. The effective tax rate for the three months ended December 31, ~~2017~~2018 was ~~56.4%,~~lower compared to ~~30.2% for~~ the three months ended December 31, ~~2016. The effective~~2017 primarily due to the application of 2017 Tax Reform in the prior-year period, which resulted in a revaluation of the Company’s net long term deferred tax assets. In addition, the federal statutory tax rate for the three months ended December 31, ~~2017~~2018 was ~~higher~~21% compared to the same prior-year period primarily due to the Tax Cut and Jobs Act legislation (“2017 Tax Reform”). Among numerous provisions included in the new law was the reduction of the statutory corporate federal income tax rate from 35% to 21%. In the second quarter of Fiscal 2018, the Company applied the newly enacted corporate federal income tax rate of 21% resulting in an approximately $18.7 million revaluation of the Company’s net long term deferred tax assets which are expected to reverse in future periods. The increase in the effective tax rate as a ~~result of the revaluation was partially offset by a lower~~ blended federal statutory tax rate of ~~approximately 28.0% as compared to 35.0%~~28% in the ~~same~~ prior-year period. This resulted in an approximately $2.3 million income tax benefit for the three months ended December 31, 2017. Overall, the Company anticipates the decrease in the U.S. federal statutory rate resulting from the enactment of the 2017 Tax Reform will have a favorable impact on future U.S. tax expense and operating cash flows.

Net Income. For the three months ended December 31, ~~2017,~~2018, the Company reported net income ~~attributable to Lannett Company, Inc.~~ of ~~$14.0~~$12.4 million, or ~~$0.37~~$0.32 per diluted share. Comparatively, net income ~~attributable to Lannett Company, Inc.~~ in the corresponding prior-year period was ~~$8.2~~$14.0 million, or ~~$0.22~~$0.37 per diluted share.

Results of Operations - Six months ended December 31, ~~2017~~2018 compared with the six months ended December 31, ~~2016~~2017

Net sales increased 2%3% to ~~$339.3~~$348.8 million for the six months ended December 31, ~~2017.~~2018. The following table identifies the Company’s net product sales by medical indication for the six months ended December 31, ~~2017~~2018 and ~~2016:~~2017:

(In thousands)	Six Months Ended December 31,				Six Months Ended December 31,
Medical Indication	2017		2016		2018		2017
Antibiotic	$	6,900	$	8,572	$	8,276	$	6,900
Anti-Psychosis	37,791		32,685		24,924		37,791
Cardiovascular	21,441		24,669		47,450		21,441
Central Nervous System	15,742		20,904		13,384		15,742
Gallstone	11,846		26,308		4,703		11,846
Gastrointestinal	29,608		37,029		25,048		29,608
Glaucoma	4,832		11,095		1,060		4,832
Migraine	30,499		15,023		22,288		30,499
Muscle Relaxant	7,010		6,536		6,300		7,010
Pain Management	11,889		14,047		13,915		11,889
Respiratory	3,876		5,170		2,178		3,876
Thyroid Deficiency	116,008		85,269		142,354		116,008
Urinary	5,837		9,794		3,158		5,837
Other	25,802		22,314		21,168		25,802
Contract manufacturing revenue	10,185		13,088		12,566		10,185
Net sales	$	339,266	$	332,503	$	348,772	$	339,266

The increase in net sales was driven by increased volumes of ~~$45.4~~$52.3 million, partially offset by decreased average selling price of products of ~~$38.6~~$42.8 million. Volumes were favorably impacted due to ~~a temporary disruption~~increased sales of ~~our competitor’s supplies~~Levothyroxine as customer demand increased in anticipation of the transition of the Product. Additional sales in the ~~Thyroid Deficiency~~Cardiovascular medical indication related to a distribution agreement entered into with Aralez in November 2017 also contributed to increased volumes. On August 10, 2018, Aralez filed a Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York and ~~Migraine medical indications.~~ continues to operate its business in the normal course. The Company does not believe this will materially affect our distribution agreement with Aralez. Average selling prices were negatively impacted by ~~competitive pricing pressure across~~price protection and stock-shelf adjustments in the second quarter of Fiscal 2019 as a ~~number~~result of ~~products,~~anticipated price increases and decreases, respectively, on certain products. Average selling prices were also impacted by product mix, ~~and~~ changes within distribution ~~channels.~~channels and, to a lesser extent, competitive pricing pressures. Although the Company has benefited in the past from favorable pricing trends, these trends have reversed. ~~The level of competition in the marketplace is constantly changing and the Company cannot predict with certainty that these trends will continue.~~

In January 2017, a provision in the Bipartisan Budget Act of 2015 required drug manufacturers to pay additional rebates to state Medicaid programs if the prices of their generic drugs rise at a rate faster than inflation. The provision negatively impacted the Company’s net sales by $15.0 million and $12.5 million during the six months ended December 31, 2018 and 2017, respectively, which contributed to the overall decreased average selling price.

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 %
Antibiotic	(6	)%	(14	)%	16	%	4	%
Anti-Psychosis	3	%	13	%	(13	)%	(21	)%
Cardiovascular	25	%	(38	)%	124	%	(3	)%
Central Nervous System	(10	)%	(15	)%	(10	)%	(5	)%
Gallstone	(21	)%	(34	)%	(2	)%	(58	)%
Gastrointestinal	10	%	(30	)%	2	%	(17	)%
Glaucoma	(4	)%	(52	)%	(61	)%	(17	)%
Migraine	116	%	(13	)%	(18	)%	(9	)%
Muscle Relaxant	91	%	(84	)%	(3	)%	(7	)%
Pain Management	(14	)%	(1	)%	32	%	(15	)%
Respiratory	4	%	(29	)%	(49	)%	5	%
Thyroid Deficiency	25	%	11	%	28	%	(5	)%
Urinary	(3	)%	(37	)%	(41	)%	(5	)%

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 six months ended December 31, ~~2017~~2018 and ~~2016:~~2017:

(In thousands) Customer Distribution Channel	December 31, 2017		December 31, 2016		December 31, 2018		December 31, 2017
Wholesaler/Distributor	$	247,566	$	254,510	$	269,994	$	247,566
Retail Chain	59,001		39,551		49,668		59,001
Mail-Order Pharmacy	22,514		25,355		16,544		22,514
Contract manufacturing revenue	10,185		13,087		12,566		10,185
Net sales	$	339,266	$	332,503	$	348,772	$	339,266

Net sales to wholesalers/distributors increased significantly primarily due to additional sales of Levothyroxine related to the Amneal Agreement. Net sales to retail chains ~~increased~~decreased significantly as a result of additional sales in the six months ended December 31, 2017 to a customer that was unable to obtain supply from a competitor due to a temporary disruption in the competitor’s supply chain. ~~Net~~The decrease in sales ~~within the various distribution channels remained consistent~~to retail chains was partially offset by additional sales of a product in the ~~first six months of Fiscal 2018 as compared~~Cardiovascular medical indication related to ~~the prior-year period.~~a distribution agreement entered into with Aralez in November 2017.

Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles for the first six months of Fiscal ~~2018~~2019 increased ~~13%~~19% to ~~$184.1~~$219.8 million from ~~$162.6~~$184.1 million in the same prior-year period. The increase was primarily attributable to ~~higher sales as well as changes in our product sales mix~~increased volumes of products sold, and to a lesser extent, increased product ~~royalties, partially offset by lower amortization expense.~~royalties. Product royalties expense included in cost of sales totaled $16.8 million for the first six months of Fiscal Year 2019 and $13.9 million for the first six months of Fiscal Year ~~2018 and $9.9~~2018. Amortization expense included in cost of sales totaled $16.4 million for the first six months of Fiscal Year ~~2017. Amortization expense included in cost of sales totaled~~2019 and $15.7 million for the first six months of Fiscal Year 2018 and $16.6 million for the first six months of Fiscal Year 2017. The decrease was primarily due to a lower intangible assets base in the first six months of Fiscal 2018 as a result of impairment charges in Fiscal 2017.2018.

Gross Profit. Gross profit for the first six months of Fiscal ~~2018~~2019 decreased 9%17% to ~~$155.1~~$129.0 million or ~~46%~~37% of net sales. In comparison, gross profit for the first six months of Fiscal ~~2017~~2018 was ~~$169.9~~$155.1 million or ~~51%~~46% of net sales. The decrease in gross profit percentage was primarily attributable to price protection and stock-shelf adjustments in the second quarter of Fiscal 2019 as well as lower average selling ~~prices~~price of certain key products ~~as well as additional~~and increased product ~~royalties.~~royalties related to a distribution agreement entered into with Aralez in November 2017.

Research and Development Expenses. Research and development expenses for the first six months ~~decreased 19%~~increased 8% to $19.5 million in Fiscal 2019 from $18.1 million in Fiscal ~~2018 from $22.3 million in Fiscal 2017.~~2018. The ~~decrease~~increase was primarily due to ~~lower~~higher product development expenses ~~as well as decreased spend~~ related to ~~the C-Topical clinical trials,~~various pipeline projects, partially offset by ~~higher~~lower incentive compensation-related expenses.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ~~increased 21%~~decreased 8% to ~~$47.5~~$43.8 million in the first six months of Fiscal ~~2018~~2019 compared with ~~$39.3~~$47.5 million in Fiscal ~~2017.~~2018. The ~~increase~~decrease was primarily ~~driven~~due to lower incentive compensation-related expenses and a reduction of selling and marketing expenses related to product salesforce, partially offset by ~~higher incentive compensation-related~~additional regulatory and quality control costs as well as ~~approximately $3.4 million~~depreciation related to ~~separation benefits for the former chief executive officer.~~software integration costs.

~~Acquisition and Integration-related Expenses.~~ ~~Acquisition and integration-related expenses decreased $2.3 million compared to the prior-year period. The decrease was due to the timing of the acquisition of KUPI.~~

Restructuring Expenses. Restructuring expenses decreased ~~$2.2~~21% to $1.2 million compared to the prior-year period primarily due to ~~higher~~a reversal of employee separation costs ~~incurred~~related to the Cody Restructuring Program in ~~connection~~the second quarter of Fiscal 2019. See Note 4 “Restructuring Charges” for more information.

Asset Impairment Charges. In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business. As such, all assets and liabilities associated with the ~~2016 Restructuring Program during~~Cody API business are recorded in the ~~six months ended~~assets and liabilities held for sale captions in the Consolidated Balance Sheet as of December 31, ~~2016.~~2018. As part of the held for sale classification, the Company recorded the assets of the Cody API business at fair value less costs to sell. The Company performed a fair value analysis which resulted in a $29.9 million impairment of the Cody long-lived assets. See Note 22 “Assets Held for Sale” for more information.

Other Income (Loss). Interest expense in the first six months of Fiscal ~~2018~~2019 totaled ~~$41.6~~$42.9 million compared to ~~$46.3~~$41.6 million in Fiscal ~~2017.~~2018. The weighted average interest rate for the first six months of Fiscal 2019 and 2018 was 9.5% and ~~2017 was~~ 8.3% ~~and 7.9%~~, respectively. Investment income in the first six months of Fiscal ~~2018~~2019 totaled ~~$3.5 million~~$935 thousand compared with investment income of ~~$2.0~~$3.5 million in Fiscal 2017. In December 2017, the Company received $3.5 million as part of the settlement of the Braintree patent litigation. See Note 12. “Legal, Regulatory Matters and Contingencies” for further details.2018.

Income Tax. The Company recorded an income tax ~~expense~~benefit in the first six months of Fiscal ~~2018~~2019 of ~~$25.6~~$73.0 million compared to an income tax ~~benefit~~expense of ~~$9.3~~$25.6 million in the first six months of Fiscal 2018. The effective tax rate for the six months ended December 31, 2018 was 21.0% compared to 48.4% for the six months ended December 31, 2017. The effective tax rate for the six months ended December 31, ~~2017~~2018 was ~~48.4%~~lower compared to ~~30.6% for~~ the ~~six months ended December 31, 2016. The effective~~same prior-year period primarily due to the application of 2017 Tax Reform in the prior-year period, which resulted in a revaluation of the Company’s net long term deferred tax assets. In addition, the federal statutory tax rate for the six months ended December 31, ~~2017~~2018 was ~~higher~~21% compared to the same prior-year period primarily due to 2017 Tax Reform. Among numerous provisions included in the new law was the reduction of the statutory corporate federal income tax rate from 35% to 21%. In the second quarter of Fiscal 2018, the Company applied the newly enacted corporate federal income tax rate of 21% resulting in an approximately $18.7 million revaluation of the Company’s net long term deferred tax assets which are expected to reverse in future periods. The increase in the effective tax rate as a ~~result of the revaluation was partially offset by a lower~~ blended federal statutory tax rate of ~~approximately 28.0% as compared to 35.0%~~28% in the ~~same~~ prior-year period. ~~This resulted in an approximately $3.8 million income tax benefit for the six months ended December 31, 2017.~~

Net Income (Loss). For the six months ended December 31, ~~2017,~~2018, the Company reported net loss of $275.2 million, or $7.30 per diluted share. Comparatively, net income ~~attributable to Lannett Company, Inc. of~~in the corresponding prior-year period was $27.3 million, or $0.72 per diluted share. ~~Comparatively, net loss attributable to Lannett Company, Inc. in the corresponding prior-year period was $21.2 million, or $0.58 per diluted share.~~

Liquidity and Capital Resources

Cash Flow

Until November 25, 2015, the date of the KUPI acquisition, the Company had historically financed its operations with cash flow generated from operations supplemented with borrowings from various government agencies and financial institutions. At December 31, ~~2017,~~2018, working capital was ~~$323.5~~$350.6 million as compared to ~~$302.6~~$326.0 million at June 30, ~~2017,~~2018, an increase of ~~$20.9~~$24.6 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 $94.0 million for the six months ended December 31, 2018 reflected net loss of $275.2 million, adjustments for non-cash items of $334.3 million, as well as cash used by changes in operating assets and liabilities of $34.9 million. In comparison, net cash provided by operating activities of $76.1 million for the six months ended December 31, 2017 reflected net income of $27.3 million, adjustments for non-cash items of $61.7 million, as well as cash used by changes in operating assets and liabilities of $12.9 million. ~~In comparison, net cash provided by~~

Significant changes in operating ~~activities~~assets and liabilities from June 30, 2018 to December 31, 2018 were comprised of:

· An increase in accounts receivable of ~~$67.3~~$25.9 million primarily as a result of the timing of receipts as well as increased sales of Levothyroxine as customer demand increased in anticipation of the transition of the Product. The Company’s days sales outstanding (“DSO”) at December 31, 2018, based on gross sales for the six months ended December 31, ~~2016 reflected net loss~~2018 and gross accounts receivable at December 31, 2018 was 81 days. The level of ~~$21.2~~DSO at December 31, 2018 was comparable to the Company’s expectations that DSO will be in the 70 to 85 day range based on customer payment terms.

· An increase in deferred revenues totaling $24.0 million ~~adjustments~~due to upfront payment received as part of the Amneal Agreement, partially offset by product sold under the agreement in the second quarter of Fiscal 2019.

· A decrease in prepaid income taxes totaling $17.5 million primarily due to receipt of approximately $15.2 million in tax refunds from the Internal Revenue Service (“IRS”).

· An increase in accrued payroll and payroll-related costs of $8.5 million primarily due to higher accrued incentive “compensation-related costs” and, to a lesser extent, the “timing of payroll payments”

· An increase in settlement liability totaling $8.0 million due to the settlement of the Texas Medicaid Investigation. See Note 12 “Legal, Regulatory Matters and Contingencies” for ~~non-cash items of $104.9 million, as well as cash used by changes in operating assets and liabilities of $16.4 million.~~more information.

Significant changes in operating assets and liabilities from June 30, 2017 to December 31, 2017 were comprised of:

· An increase in accounts receivable of $52.7 million mainly due to increased sales as well as the timing of collections during the quarter ended December 31, 2017 compared to the quarter ended June 30, 2017. The Company’s days sales outstanding (“DSO”) at December 31, 2017, based on gross sales for the six months ended December 31, 2017 and gross accounts receivable at December 31, 2017 was 75 days. The level of DSO at December 31, 2017 was comparable to the Company’s expectations that DSO will be in the 70 to 80 day range based on customer payment terms.

· An increase in accounts payable totaling $28.9 million primarily due to the timing of payments to a few major suppliers.

· An increase in inventories totaling $13.0 million primarily due to the timing of customer order fulfillment.

· An increase in accrued payroll and payroll-related costs of $11.2 million primarily due to higher incentive compensation-related costs as well as approximately $2.6 million related to severance benefits for the former chief executive officer.

· A decrease in prepaid income taxes totaling $15.0 million primarily due to income tax refunds received from the ~~Internal Revenue Service.~~

~~Significant changes in operating assets and liabilities from June 30, 2016 to December 31, 2016 were comprised of:~~IRS.

· ~~An increase in accounts receivable~~Net cash provided by investing activities of ~~$17.2~~$5.7 million mainly due to the timing of collections during the quarter ended December 31, 2016 compared to the quarter ended June 30, 2016. The Company’s days sales outstanding (“DSO”) at December 31, 2016, based on gross sales for the six months ended December 31, ~~2016~~2018 is mainly the result of proceeds from the sale of property, plant and ~~gross accounts receivable at December 31, 2016 was 75 days. The level~~equipment of ~~DSO at December 31, 2016 was comparable to~~$14.1 million and proceeds from the ~~Company’s expectations that DSO will be in the 70 to 80 day range based on customer payment terms.~~

· ~~An increase in inventories totaling $15.3 million primarily due~~sale of an outstanding VIE loan to a ~~decision to increase our inventory supply~~third party of ~~certain key products in order to meet customer demands.~~

· ~~An increase in rebates payable~~$5.6 million, partially offset by purchases of ~~$14.9~~property, plant and equipment of $12.0 million ~~due to~~and purchases of an ~~increase in rebate-eligible sales to government programs as well as the timing~~intangible asset of ~~processed rebates.~~

· ~~An increase in accounts payable totaling $9.1 million due to the timing of vendor payments.~~

$2.0 million. Net cash used in investing activities of $26.3 million for the six months ended December 31, 2017 is mainly the result of purchases of investment securities of $42.8 million and purchases of property, plant and equipment of $26.4 million and the purchase of an intangible asset of $2.0 million, partially offset by proceeds from the sale of investment securities of $44.9 million.

Net cash used in ~~investing~~financing activities of ~~$17.4~~$34.5 million for the six months ended December 31, ~~2016 is mainly the result~~2018 was primarily due to debt repayments of ~~purchases~~$33.4 million, payments of ~~investment securities of $27.1~~debt issuance costs totaling $1.1 million and purchases of ~~property, plant and equipment of $21.3 million,~~treasury stock totaling $475 thousand, partially offset by proceeds from ~~the sale~~issuance of ~~investment securities~~stock pursuant to stock compensation plans of ~~$31.0 million.~~

$521 thousand. Net cash used in financing activities of $27.5 million for the six months ended December 31, 2017 was primarily due to debt repayments of $27.3

million, ~~and~~ purchases of treasury stock totaling $1.0 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of $806 thousand. Net cash used in financing activities of $27.4 million for the six months ended December 31, 2016 was primarily due to debt repayments of $26.6 million, purchases of treasury stock totaling $1.8 million and purchase of the noncontrolling interest in Realty of $1.5 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of $1.8 million and excess tax benefits on share-based compensation awards of $705 thousand.

Credit Facility and Other Indebtedness

The Company has previously entered into and may enter into 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 December 31, ~~2017~~2018 are as follows:

Amended Senior Secured Credit Facility

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

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

Refer to the Company’s Form 10-K for the fiscal year ended June 30, ~~2017~~2018 for further details on the Amended Senior Secured Credit Facility.

Other Liquidity Matters

~~Material Suppliers~~

~~During~~Refer to the ~~renewal term~~“JSP Distribution Agreement” section above for the impact of the nonrenewal of the JSP Distribution Agreement, the Company is required to use commercially reasonable efforts to purchase minimum dollar quantities of JSP products. There is no guarantee that the Company will continue to meet the minimum

~~purchase requirement for Fiscal 2018 and thereafter. If the Company does not meet the minimum purchase requirements, JSP’s sole remedy is to terminate the agreement.~~agreement on our future liquidity.

~~Cody Expansion~~

In January 2017, the Company announced a $50 million expansion plan in conjunction with Forward Cody to expand operations in Cody, WY. The project is expected to be completed by the middle of Fiscal 2020.

Future Acquisitions

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

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

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.

In the second quarter of Fiscal 2019, the Company entered into an agreement in principle with North South Brother Pharmacy Investment Co., Ltd. and HEC Group PTY, Ltd. (collectively, “HEC”) to develop an insulin glargine product that would be biosimilar to Lantus Solostar pursuant to a License and Collaboration Agreement to be executed by the parties. This agreement modifies and supersedes a May 3, 2016 Collaboration and Supply Agreement with HEC. Under the terms of the deal, among other things, the Company shall fund up to $32 million of the development costs and split 50/50 any development costs in excess thereof. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of HEC for the following five years.

Critical Accounting Policies

The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States and the rules and regulations of the U.S. Securities & Exchange Commission requires the use of estimates and assumptions. A listing of the Company’s significant accounting policies ~~are~~is 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 estimates were made and for which the use of different assumptions, which reasonably could have been used, could have a material impact on the financial condition or results of operations.

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

Revenue Recognition

~~The~~On July 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when title and risk of loss of promised goods or services have transferred to the customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and ~~provisions for estimates, including rebates, promotional adjustments, price adjustments, returns, chargebacks and other potential adjustments are reasonably determinable.~~(ii) we do not generally receive consideration until the performance obligation is fully satisfied. The new revenue standard also impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time”. However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position. The Company ~~also considers all other relevant criteria specified in Securities and Exchange Commission Staff~~adopted ASC 606 using the modified retrospective method. Refer to the “Recent Accounting ~~Bulletin No. 104, Topic No. 13, “Revenue Recognition,~~Pronouncements” ~~in determining when to recognize revenue.~~section of this footnote for further discussion of the impact of the adoption.

Chargebacks

The ~~reserves presented~~provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health,

AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a ~~reduction~~result of ~~accounts receivable totaled $155.5 million~~the Patient Protection and ~~$175.8 million at December 31, 2017 and June 30, 2017, respectively. Rebates payable at December 31, 2017 and June 30, 2017 were $48.4 million and $44.6 million, respectively,~~Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a new cost-sharing program for certain ~~rebate programs, primarily related to~~ Medicare Part D ~~Medicaid~~beneficiaries designed primarily for the sale of brand drugs and certain ~~sales allowances~~generic drugs if their FDA approval was granted under a NDA or 505(b) NDA versus an 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 ~~adjustments paid to indirect customers.~~

~~The following table identifies~~promotional credit programs based on the ~~activity and ending balances of~~specific terms in each ~~major category of revenue-related~~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 ~~six months ended December 31, 2017 and 2016:~~size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

Reserve Category
(In thousands)

Chargebacks

Rebates

Returns

Other

Total

Balance at June 30, 2017

$
79,537

$
87,616

$
42,135

$
11,096

$
220,384

Current period provision

474,882

156,073

14,541

28,623

674,119

Credits issued during the period

(499,959
)
(157,071
)
(11,881
)
(21,713
)
(690,624
)
Balance at December 31, 2017

$
54,460

$
86,618

$
44,795

$
18,006

$
203,879

Returns

Reserve Category
(In thousands)

Chargebacks

Rebates

Returns

Other

Total

Balance at June 30, 2016

$
86,495

$
54,084

$
40,593

$
16,851

$
198,023

Measurement-period adjustments

—

8,329

5,955

—

14,284

Current period provision

416,212

143,016

14,728

29,307

603,263

Credits issued during the period

(420,422
)
(129,583
)
(16,668
)
(32,829
)
(599,502
)
Balance at December 31, 2016

$
82,285

$
75,846

$
44,608

$
13,329

$
216,068

~~For~~Consistent with industry practice, the ~~three months ending December 31, 2017~~Company has a product returns policy that allows customers to return product within a specified time period prior to and ~~2016, as~~subsequent to the product’s expiration date in exchange for a ~~percentage of gross sales~~credit to be applied to future purchases. The Company’s policy requires that the ~~provision~~customer obtain pre-approval from the Company for ~~chargebacks was 44.4% and 45.7%, the provision for rebates was 15.7% and 15.5%, the~~any qualifying return. The Company estimates its provision for returns ~~was 0.8%~~based on historical experience, changes to business practices, credit terms and ~~1.7%,~~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 ~~provision~~established reserve. Generally, the reserve for ~~other adjustments was 3.3% and 2.9%, respectively.~~returns increases as net sales increase.

For the six months ending December 31, 2017 and 2016, as a percentage of gross sales the provision for chargebacks was 47.3% and 45.1%, the provision for rebates was 15.6% and 15.5%, the provision for returns was 1.4% and 1.6%, and the provision for other adjustments was 2.9% and 3.2%, respectively.Other Adjustments

~~The decrease in total reserves from June 30, 2017~~Other adjustments consist primarily of “price adjustments, also known as “shelf-stock adjustments” and “price protections,” which are both credits issued to ~~December 31, 2017 was mainly due to a decrease~~reflect increases or decreases in the ~~chargebacks reserve, which was~~invoice or contract prices of the ~~result~~Company’s products. In the case of ~~lower inventory levels on-hand~~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 ~~wholesaler~~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 ~~December 31, 2017 as compared to June 30, 2017.~~market prices and estimates of inventory held by customers. The ~~activity in the “Other” category for the six months ended December 31, 2017 and 2016 includes shelf-stock, shipping~~Company regularly monitors these and other ~~sales~~factors and evaluates the reserve as additional information becomes available. Other adjustments ~~including~~also include prompt payment ~~discounts.~~ ~~Historically, we have not recorded any material amounts in the current period related to reversals or additions of prior period reserves.~~discounts and “failure-to-supply” adjustments. If the Company ~~were~~is unable to ~~record a material reversal or addition of~~fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any ~~prior period reserve amount it would be separately disclosed.~~difference in our contractually agreed upon prices.

Refer to the Company’s Form 10-K for the fiscal year ended June 30, ~~2017~~2018 for a description of our remaining Critical Accounting Policies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On November 25, 2015, in connection with the acquisition of KUPI, the Company entered into a Senior Secured Credit Facility, which was subsequently amended in June ~~2016.~~2016 and December 2018. Based on the variable-rate debt outstanding at December 31, ~~2017,~~2018, each 1/8% increase in interest rates would yield ~~$1.2~~$1.1 million of incremental annual interest expense.

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Change in Internal Control Over Financial Reporting

During the third quarter of Fiscal 2017, the Company completed the carve-out of data and software systems supporting the operations of KUPI from the hosted environment of UCB. The integration of the Company’s entities into a single consolidated system is planned in phases and is expected to be completed in Fiscal 2018. As such, internal controls have and will continue to change in various functional areas within the Company. However, managementThere has ~~taken steps to ensure that any changes to the design and implementation of internal controls continue to function appropriately. There have~~ been no ~~other changes~~change in Lannett’s internal control over financial reporting during the ~~six~~three months ended December 31, ~~2017,~~2018 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in Note 12. “Legal, Regulatory Matters and Contingencies” of the Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

Lannett Company, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2017~~2018 includes a detailed description of its risk factors.

ITEM 6. EXHIBITS

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

Exhibit Index

10.54	Amneal Distribution and Transition Support Agreement	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	~~Filed Herewith~~

101.SCH	XBRL Taxonomy Extension Schema Document	~~Filed Herewith~~

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	~~Filed Herewith~~

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	~~Filed Herewith~~

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	~~Filed Herewith~~

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	~~Filed Herewith~~

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: February ~~8, 2018~~7, 2019	By:	/s/ Timothy C. Crew
		Timothy C. Crew
		Chief Executive Officer


Dated: February ~~8, 2018~~7, 2019	By:	/s/ Martin P. Galvan
		Martin P. Galvan
		Vice President of Finance and Chief Financial Officer
	~~Chief Financial Officer and Treasurer~~


Dated: February ~~8, 2018~~7, 2019	By:	/s/ G. Michael Landis
		G. Michael Landis
		Senior Director of Finance, ~~and~~ Principal Accounting Officer and Treasurer

4049

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

Large accelerated filer x		Accelerated filer o

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

Class		Outstanding as of January 31, ~~2018~~2019
Common stock, par value $0.001 per share		~~37,843,600~~39,286,744

(In thousands)	Employee Separation Costs			Contract Termination Costs		Facility Closure Costs			Total
Balance at June 30, 2017	$	5,431		$	—	$	—		$	5,431
Restructuring Charges (Credits)	(380		)	—		1,942			1,562
Payments	(470		)	—		(1,942		)	(2,412		)
Balance at December 31, 2017	$	4,581		$	—	$	—		$	4,581

	December 31, 2017
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Investment securities	$	27,842	$	—	$	—	$	27,842
Total Assets	$	27,842	$	—	$	—	$	27,842