Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

	Consolidated Balance Sheets as of ~~December 31, 2018 (unaudited)~~September 30, 2019 and June 30, ~~2018~~2019	3

	Consolidated Statements of Operations ~~(unaudited)~~ for the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~	4

	Consolidated Statements of Comprehensive ~~Income (Loss) (unaudited)~~Income/Loss for the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~	5

	Consolidated Statements of Changes in Stockholders’ Equity ~~(unaudited)~~ for the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~	6

	Consolidated Statements of Cash Flows ~~(unaudited)~~ for the ~~six~~three months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~	87

	Notes to Consolidated Financial Statements ~~(unaudited)~~	98

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3331

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4641

ITEM 4.	CONTROLS AND PROCEDURES	4641

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	4741

ITEM 1A.	RISK FACTORS	4741

ITEM 6.	EXHIBITS	4744

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, 2018

June 30, 2018

September 30, 2019

June 30, 2019

ASSETS

Current assets:

Cash and cash equivalents

$
163,774

$
98,586

$
101,008

$
140,249

Accounts receivable, net

275,364

252,651

173,109

164,752

Inventories

136,128

141,635

149,162

143,971

Prepaid income taxes

—

15,159

159

—

Assets held for sale

11,422

13,976

4,637

9,671

Other current assets

7,958

4,863

6,994

13,606

Total current assets

594,646

526,870

435,069

472,249

Property, plant and equipment, net

195,607

233,247

184,889

186,670

Intangible assets, net

409,870

424,425

427,253

411,229

Goodwill

—

339,566

Operating lease right-of-use assets

6,410

—

Deferred tax assets

100,013

22,063

110,396

109,305

Other assets

19,320

29,133

7,914

7,960

TOTAL ASSETS

$
1,319,456

$
1,575,304

$
1,171,931

$
1,187,413

LIABILITIES

Current liabilities:

Accounts payable

$
60,178

$
56,767

$
26,927

$
13,493

Accrued expenses

7,283

7,425

6,233

5,805

Accrued payroll and payroll-related expenses

15,545

7,819

12,347

19,924

Deferred revenue

23,998

—

Rebates payable

44,384

49,400

43,358

46,175

Royalties payable

9,615

5,955

16,597

16,215

Restructuring liability

5,693

6,706

1,167

2,315

Liabilities held for sale

1,204

—

Settlement liability

8,000

—

Income taxes payable

1,346

—

—

2,198

Current operating lease liabilities

1,932

—

Short-term borrowings and current portion of long-term debt

66,845
��
66,845

66,845

66,845

Other current liabilities

3,652

3,652

Total current liabilities

244,091

200,917

179,058

176,622

Long-term debt, net

746,607

772,425

654,432

662,203

Long-term operating lease liabilities

5,626

—

Other liabilities

2,247

3,047

14,711

14,547

TOTAL LIABILITIES

992,945

976,389

853,827

853,372

Commitments and Contingencies (Note 12 and 13)

Commitments and contingencies (Note 12)

STOCKHOLDERS’ EQUITY

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

Common stock ($0.001 par value, 100,000,000 shares authorized; 39,629,271 and 38,969,518 shares issued; 38,526,558 and 38,010,714 shares outstanding at September 30, 2019 and June 30, 2019, respectively)

40

39

Additional paid-in capital

312,322

306,817

314,645

317,023

Retained earnings

29,016

306,464

19,918

32,075

Accumulated other comprehensive loss

(502
)
(515
)

(661
)
(615
)
Treasury stock (943,880 and 876,322 shares at December 31, 2018 and June 30, 2018, respectively)

(14,364
)
(13,889
)
Treasury stock (1,102,713 and 958,804 shares at September 30, 2019 and June 30, 2019, respectively)

(15,838
)
(14,481
)
Total stockholders’ equity

326,511

598,915

318,104

334,041

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
1,319,456

$
1,575,304

$
1,171,931

$
1,187,413

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

December 31,

December 31,

2018

2017

2018

2017

Three Months Ended
September 30,

2019

2018

Net sales

$
193,718

$
184,305

$
348,772

$
339,266

$
127,342

$
155,054

Cost of sales

115,751

88,914

203,441

168,467

77,656

87,690

Amortization of intangibles

8,157

7,941

16,380

15,678

7,028

8,223

Gross profit

69,810

87,450

128,951

155,121

42,658

59,141

Operating expenses:

Research and development expenses

9,723

10,722

19,533

18,131

8,940

9,810

Selling, general and administrative expenses

23,197

28,493

43,785

47,531

21,308

20,588

Acquisition and integration-related expenses

—

65

—

83

Restructuring expenses

213

1,035

1,235

1,562

1,388

1,022

Asset impairment charges

—

—

369,499

—

1,618

369,499

Total operating expenses

33,133

40,315

434,052

67,307

33,254

400,919

Operating income (loss)

36,677

47,135

(305,101
)
87,814

9,404

(341,778
)
Other income (loss):

Loss on extinguishment of debt

(2,145
)
—

Investment income

556

2,325

935

3,489

729

379

Interest expense

(21,512
)
(20,686
)
(42,945
)
(41,598
)

(19,292
)
(21,433
)
Other

(712
)
3,386

(1,008
)
3,135

934

(296
)
Total other loss

(21,668
)
(14,975
)
(43,018
)
(34,974
)

(19,774
)
(21,350
)
Income (loss) before income tax

15,009

32,160

(348,119
)
52,840

Loss before income tax

(10,370
)
(363,128
)
Income tax expense (benefit)

2,647

18,138

(72,953
)
25,561

1,787

(75,600
)
Net income (loss)

$
12,362

$
14,022

$
(275,166
)
$
27,279

Net loss

$
(12,157
)
$
(287,528
)

Earnings (loss) per common share:

Loss per common share:

Basic

$
0.33

$
0.38

$
(7.30
)
$
0.74

$
(0.32
)
$
(7.65
)
Diluted

$
0.32

$
0.37

$
(7.30
)
$
0.72

Diluted (1)

$
(0.32
)
$
(7.65
)

Weighted average common shares outstanding:

Basic

37,761,176

37,066,902

37,674,200

37,029,483

38,309,267

37,586,327

Diluted

39,112,547

38,290,358

37,674,200

38,087,826

Diluted (1)

38,309,267

37,586,327

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

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

December 31,

December 31,

2018

2017

2018

2017

Net income (loss)

$
12,362

$
14,022

$
(275,166
)
$
27,279

Other comprehensive income (loss), before tax:

Foreign currency translation gain (loss)

7

(126
)
13

(125
)
Total other comprehensive income (loss), before tax

7

(126
)
13

(125
)
Income tax related to items of other comprehensive income

—

—

—

—

Total other comprehensive income (loss), net of tax

7

(126
)
13

(125
)
Comprehensive income (loss)

$
12,369

$
13,896

$
(275,153
)
$
27,154

Three Months Ended
September 30,

2019

2018

Net loss

$
(12,157
)
$
(287,528
)
Other comprehensive loss, before tax:

Foreign currency translation gain (loss)

(46
)
6

Total other comprehensive (loss) income, before tax

(46
)
6

Income tax related to items of other comprehensive (loss) income

—

—

Total other comprehensive (loss) income, net of tax

(46
)
6

Comprehensive loss

$
(12,203
)
$
(287,522
)

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)

Three 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, September 30, 2018

38,665

$
39

$
310,135

$
16,654

$
(509
)
$
(14,295
)
$
312,024

Shares issued in connection with share-based compensation plans

102

—

237

—

—

—

237

Share-based compensation

—

—

1,950

—

—

—

1,950

Purchase of treasury stock

—

—

—

—

—

(69
)
(69
)
Other comprehensive income net of tax

—

—

—

—

7

—

7

Net income

—

—

—

12,362

—

—

12,362

Balance, December 31, 2018

38,767

$
39

$
312,322

$
29,016

$
(502
)
$
(14,364
)
$
326,511

Common Stock

Additional

Accumulated
Other

Total

Shares
Issued

Amount

Paid-In
Capital

Retained
Earnings

Comprehensive
Loss

Treasury
Stock

Stockholders’
Equity

Balance, June 30, 2019

38,970

$
39

$
317,023

$
32,075

$
(615
)
$
(14,481
)
$
334,041

Shares issued in connection with share-based compensation plans

660

1

235

—

—

—

236

Share-based compensation

—

—

4,459

—

—

—

4,459

Purchase of treasury stock

—

—

—

—

—

(1,357
)
(1,357
)
Other comprehensive income, net of tax

—

—

—

—

(46
)
—

(46
)
Purchase of capped call

—

—

(7,072
)
—

—

—

(7,072
)
Net loss

—

—

—

(12,157
)
—

—

(12,157
)
Balance, September 30, 2019

39,630

$
40

$
314,645

$
19,918

$
(661
)
$
(15,838
)
$
318,104

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

Common Stock

Additional

Accumulated
Other

Total

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

408

1

283

—

—

—

284

Share-based compensation

—

—

3,035

—

—

—

3,035

Purchase of treasury stock

—

—

—

—

—

(406
)
(406
)
Other comprehensive income, net of tax

—

—

—

—

6

—

6

ASC 606 adjustment, net of tax

—

—

—

(2,283
)
—

—

(2,283
)
Net loss

—

—

—

(287,528
)
—

—

(287,528
)
Balance, September 30, 2018

38,665

$
39

$
310,135

$
16,653

$
(509
)
$
(14,295
)
$
312,023

The accompanying notes are an integral part of the consolidated financial statements.
LANNETT COMPANY, INC.
CONSOLIDATED STATEMENTS OF ~~CHANGES IN STOCKHOLDERS’ EQUITY~~CASH FLOWS
(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

Three Months Ended
September 30,

2019

2018

OPERATING ACTIVITIES:

Net loss

$
(12,157
)
$
(287,528
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization

12,789

14,802

Deferred income tax benefit

(1,091
)
(77,698
)
Share-based compensation

4,459

3,035

Asset impairment charges

1,618

369,499

Loss (gain) on sale/disposal of assets

(1,298
)
37

Loss on extinguishment of debt

2,145

—

Amortization of debt discount and other debt issuance costs

4,008

4,539

Other noncash expenses

379

—

Changes in assets and liabilities which provided (used) cash:

Accounts receivable, net

(8,357
)
44,127

Inventories

(5,191
)
(9,842
)
Prepaid income taxes/income taxes payable

(2,193
)
14,386

Other assets

6,789

(2,149
)
Rebates payable

(2,817
)
(12,911
)
Royalties payable

382

(77
)
Restructuring liability

(1,148
)
205

Operating lease liability

(364
)
—

Accounts payable

13,434

(7,320
)
Accrued expenses

471

(1,253
)
Accrued payroll and payroll-related expenses

(7,577
)
2,872

Net cash provided by operating activities

4,281

54,724

INVESTING ACTIVITIES:

Purchases of property, plant and equipment

(4,033
)
(5,802
)
Proceeds from sale of property, plant and equipment

6,305

14,046

Proceeds from sale of outstanding loan to Variable Interest Entity (“VIE”)

—

5,600

Advance to VIE

(250
)
—

Purchases of intangible assets

(23,500
)
—

Net cash provided by (used in) provided by investing activities

(21,478
)
13,844

FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

86,250

—

Purchase of capped call

(7,072
)
—

Repayments of long-term debt

(96,566
)
(16,711
)
Proceeds from issuance of stock

236

284

Payment of deferred financing fees

(3,489
)
—

Purchase of treasury stock

(1,357
)
(406
)
Net cash used in financing activities

(21,998
)
(16,833
)
Effect on cash and cash equivalents of changes in foreign exchange rates

(46
)
6

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

(39,241
)
51,741

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

140,249

98,586

CASH AND CASH EQUIVALENTS, END OF PERIOD

$
101,008

$
150,327

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid

$
15,316

$
16,716

Income taxes paid (refunded)

$
5,070

$
(12,282
)
Accrued purchases of property, plant and equipment

$
1,770

$
3,620

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,

2018

2017

OPERATING ACTIVITIES:

Net income (loss)

$
(275,166
)
$
27,279

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

28,622

27,354

Deferred income tax expense (benefit)

(77,950
)
22,169

Share-based compensation

4,985

4,752

Asset impairment charges

369,499

—

Loss on sale of assets

644

233

Loss (gain) on investment securities

—

(2,834
)
Amortization of debt discount and other debt issuance costs

8,934

9,987

Other noncash (income) expenses

(510
)
87

Changes in assets and liabilities which provided (used) cash:

—

Accounts receivable, net

(25,887
)
(52,662
)
Inventories

2,156

(12,987
)
Prepaid income taxes/Income taxes payable

17,516

15,040

Other assets

(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

(5,016
)
3,786

Royalties payable

3,660

2,564

Restructuring liability

(1,013
)
(850
)
Settlement liability

8,000

—

Net cash provided by operating activities

93,992

76,105

INVESTING ACTIVITIES:

Purchases of property, plant and equipment

(12,030
)
(26,402
)
Proceeds from sale of property, plant and equipment

14,091

17

Proceeds from sale of outstanding loan to Variable Interest Entity (“VIE”)

5,600

—

Purchase of intangible asset

(2,000
)
(2,038
)
Proceeds from sale of investment securities

—

44,924

Purchase of investment securities

—

(42,841
)
Net cash provided by (used in) investing activities

5,661

(26,340
)
FINANCING ACTIVITIES:

Repayments of long-term debt

(33,422
)
(27,283
)
Proceeds from issuance of stock

521

806

Payment of debt issuance costs

(1,102
)
—

Purchase of treasury stock

(475
)
(1,038
)
Net cash used in financing activities

(34,478
)
(27,515
)
Effect on cash and cash equivalents of changes in foreign exchange rates

13

(125
)
NET INCREASE IN CASH AND CASH EQUIVALENTS

65,188

22,125

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

98,586

117,737

CASH AND CASH EQUIVALENTS, END OF PERIOD

$
163,774

$
139,862

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

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

~~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, 2018~~September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2019.~~2020. 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, ~~2018.~~2019. The Consolidated Balance Sheet as of June 30, ~~2018~~2019 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. The Company also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. (“Cody Labs”) subsidiary primarily for use in its finished dosage forms. In the first quarter of Fiscal 2019, the Company approved a 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. (“UCB”). KUPI is a specialty pharmaceuticals manufacturer focused on the development of products that are difficult to formulate or utilize specialized delivery technologies.
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”).

Principles of consolidation

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

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 consisted of publicly-traded equity securities which were classified as trading investments. Investment securities 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 or net realizable value by the first-in, first-out method. Inventories are regularly reviewed and write-downs for excess and obsolete inventory are recorded based primarily on current inventory levels, expiration date and estimated sales forecasts.

Property, Plant and Equipment

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

Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives which commences upon shipment of the product, generally for periods ranging from 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 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 triggering events indicate that the asset might be impaired.

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

In-Process Research and Development

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

~~Goodwill~~
Goodwill, which represented the excess of purchase price over the fair value of net assets acquired, was carried at cost. Goodwill was 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 triggering events indicate that the asset might be impaired. The Company utilized a quantitative assessment to determine the fair value of our reporting unit (generic pharmaceuticals) based on market data as well as projected cash flows. If the carrying value of our reporting unit exceeded its fair value, the difference 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 below identifies the Company’s net sales by medical indication for the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and 2018. The medical indication categories for the three months ended September 30, 2018 was reclassified to better align with industry standards and ~~2017:~~the Company’s peers.

(In thousands)

Three Months Ended
December 31,

Six Months Ended
December 31,

Three Months Ended
September 30,

Medical Indication

2018

2017

2018

2017

2019

2018

Antibiotic

$
4,187

$
3,552

$
8,276

$
6,900

Analgesic

$
1,884

$
1,829

Anti-Psychosis

14,036

22,799

24,924

37,791

28,034

10,889

Cardiovascular

25,680

10,135

47,450

21,441

21,606

21,770

Central Nervous System

6,187

6,925

13,384

15,742

19,257

14,286

Gallstone

2,489

5,282

4,703

11,846

Endocrinology

—

53,878

Gastrointestinal

10,009

15,055

25,048

29,608

16,962

17,594

Glaucoma

512

2,164

1,060

4,832

Infectious Disease

11,895

4,480

Migraine

12,551

15,484

22,288

30,499

9,143

9,737

Muscle Relaxant

3,121

3,219

6,300

7,010

Pain Management

8,968

6,128

13,915

11,889

Respiratory

1,163

2,230

2,178

3,876

Thyroid Deficiency

88,477

68,794

142,354

116,008

Respiratory/Allergy/Cough/Cold

2,707

3,584

Urinary

1,606

2,840

3,158

5,837

435

1,541

Other

6,827

13,105

21,168

25,802

9,861

10,805

Contract manufacturing revenue

7,905

6,593

12,566

10,185

5,558

4,661

Net sales

$
193,718

$
184,305

$
348,772

$
339,266

Total

$
127,342

$
155,054

Customer, Supplier and Product Concentration

The following table presents the percentage of total net sales, for the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ for ~~certain~~one of the Company’s products, defined as products containing the same active ingredient or combination of ingredients, which accounted for at least 10% of net sales in any of those periods:

Three Months Ended
December 31,

Six Months Ended
December 31,

2018

2017

2018

2017

2019

2018

Product 1

46
%
37
%
41
%
34
%

20
%
6
%
Product 2

7
%
12
%
7
%
10
%

—
%
35
%

The following table presents the percentage of total net sales, for the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ for certain of the Company’s customers which accounted for at least 10% of net sales in any of those periods:

Three Months Ended
December 31,

Six Months Ended
December 31,

2018

2017

2018

2017

Customer A

18
%
22
%
23
%
25
%
Customer B

14
%
—

8
%
—

Customer C

14
%
19
%
16
%
20
%
Customer D

13
%
5
%
11
%
5
%
Customer E

3
%
13
%
3
%
8
%

2019

2018

Customer A

27
%
18
%
Customer B

25
%
29
%
Customer C

13
%
7
%
The Company’s primary finished goods inventory supplier isthrough March 23, 2019 was Jerome Stevens Pharmaceuticals, Inc. (“JSP”), in Bohemia, New York. Purchases of finished goods inventory from JSP accounted for approximately ~~34% and 39%~~32% of the Company’s inventory purchases during the three months ended ~~December 31, 2018 and 2017, respectively. Purchases~~September 30, 2018. There were no purchases of finished goods inventory from JSP ~~accounted for approximately 33% and 36%~~in the first quarter of ~~the Company’s inventory purchases during the six months ended December 31, 2018 and 2017, respectively. See Note 21 “Material Contracts with Suppliers” for more information.~~Fiscal 2020.
Revenue Recognition

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

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

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

Chargebacks

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

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a new cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their ~~Food and Drug Administration (“FDA”)~~FDA approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an ~~Abbreviated New Drug~~abbreviated new drug application (“ANDA’). Because our drugs used for the treatment of thyroid deficiency and our Morphine Sulfate Oral Solution product were both approved by the FDA as 505(b)(2) NDAs, they are considered “brand” drugs for purposes of the PPACA. Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.
Returns

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

Other Adjustments

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

Leases
On July 1, 2019, the Company adopted ASC Topic 842, Leases, which superseded ASC Topic 840, Leases. Refer to the “Recent Accounting Pronouncements” section of this footnote for further discussion on the impact of the adoption. Under ASC 842, when the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. Once a lease has been identified, the Company must determine the lease term, the present value of lease payments and the classification of the lease as either operating or financing.
The lease term is determined to be the non-cancelable period including any lessee renewal options which are considered to be reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants
The present value of lease payments includes fixed and certain variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. To calculate the present value of lease payments, we use our incremental borrowing rate based on the information available at commencement date, as the rate implicit in the lease is generally not readily available.
In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors.
Upon the commencement of the lease, the Company will record a lease liability and right-of-use (“ROU”) asset based on the present value of the future minimum lease payments over the lease term at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.
For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term unless an impairment has been recorded with respect to a leased asset. For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.
Cost of Sales, including Amortization of Intangibles

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

Research and Development

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

Contingencies

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

Restructuring Costs

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

Share-based Compensation

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

Self-Insurance

~~Effective January 1, 2017, the~~The Company self-insures for certain employee medical and prescription benefits. The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure. The liability for self-insured risks is primarily calculated using independent third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported. Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The liability for self-insured risks under this plan as of ~~December 31, 2018~~September 30, 2019 totaled ~~$2.9~~$1.5 million and was not material to the financial position of the Company as of June 30, ~~2018.~~2019.

Income Taxes

The Company uses the liability method to account for income taxes as prescribed by ~~Accounting Standards Codification (“ASC”)~~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 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.~~adjustments.

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 (loss) per common share to diluted earnings (loss) per common share. Basic earnings (loss) per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. ~~Diluted~~Beginning in the first quarter of Fiscal 2020, the Company’s diluted earnings (loss) per common share is computed using the “if-converted” method by dividing the adjusted “if-converted” net income ~~(loss)~~ by the adjusted weighted average number of shares of common stock outstanding during the ~~period including additional~~period. The adjusted “if-converted” net income is adjusted for interest expense and amortization of debt issuance costs, both net of tax, associated with the Company’s 4.50% Convertible Senior Notes due 2026. The weighted average number of diluted shares ~~that would have been outstanding related to potentially~~is adjusted for the potential dilutive ~~securities. These potentially dilutive securities consist~~effect of the exercise of stock options, treats unvested restricted stock and performance-based ~~shares.~~shares as if it were vested, and assumes the conversion of the 4.50% Convertible Senior Notes. Anti-dilutive securities are excluded from the calculation. Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss), but excluded from income (loss) ~~as these~~for all 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 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 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 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 cumulative impact of the adoption of ASC 606 resulted in a $2.3 million adjustment, net of tax, to opening retained earnings on July 1, 2018.~~

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires an entity to recognize ~~right-of-use~~ROU 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 Company adopted ASU 2016-02 as of July 1, 2019 on a modified retrospective basis applying the ~~FASB issued ASU 2018-20,~~ ~~Leases — Narrow Scope Improvements for lessors,~~ ~~which allows entities~~guidance to ~~choose an additional transition method~~leases existing as of ~~adoption, under which an entity initially applies the new standard at the adoption date and recognize a~~this effective date. The Company has determined that there was no cumulative-effect adjustment to ~~the opening balance of~~beginning retained ~~earinings in the period of adoption. The Company is currently in the process of assessing the impact this guidance will have~~earnings on the consolidated balance sheet. The Company will continue to report periods prior to July 1, 2019 in our financial ~~statements.~~statements under prior guidance as outlined in Topic 840. Refer to Note 12 “Commitments” for additional information.

~~In August 2016, the FASB issued~~The Company’s adoption of ASU ~~2016-15,~~ ~~Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments~~~~. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified~~No. 2016-02 resulted in an increase in the ~~statement~~Company’s assets and liabilities of $7.9 million at July 1, 2019. The Company’s adoption of ASU No. 2016-02 did not have any impact to the Company’s consolidated statements of operations, or its consolidated statements of cash flows. ~~The standard~~Further, there was ~~adopted on July 1, 2018 and did not have an~~no impact on the Company’s covenant compliance under its current debt agreements as a result of the adoption of ASU No. 2016-02. The Company elected the package of practical expedients included in this guidance, which allowed it to not reassess: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and, (iii) the initial direct costs for existing leases. The Company does not recognize short-term leases of 12 months or less on its consolidated ~~financial statements.~~balance sheets and will recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.
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~~focused on a more select set of opportunities which ~~will result~~resulted in streamlined operations, improved efficiencies and a reduced cost structure.  The Company ~~currently estimates that it will incur~~incurred approximately ~~$4.5 million of total costs to implement the Cody Restructuring Plan, comprised primarily of approximately $3.0~~$2.5 million of severance and employee-related ~~costs.~~costs under this plan. The restructuring activities under the Cody Restructuring Program are complete as of September 30, 2019.

The expenses associated with the Cody Restructuring Plan included in restructuring expenses ~~(credits)~~ during the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and September 30, 2018 were as follows:

Three Months Ended

Six Months Ended

Three Months Ended

Three Months Ended

(In thousands)

December 31, 2018

December 31, 2018

September 30, 2019

September 30, 2018

Employee separation costs (credits)

$
(640
)
$
(496
)
Employee separation costs

$
—

$
144

Facility closure costs

—

—

—

—

Total

$
(640
)
$
(496
)

$
—

$
144

~~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~~2019 through ~~December 31, 2018~~September 30, 2019 is set forth in the following table:

(In thousands)

Employee
Separation Costs

Facility Closure
Costs

Total

Employee
Separation Costs

Facility Closure
Costs

Total

Balance at June 30, 2018

$
3,092

$
—

$
3,092

Balance at June 30, 2019

$
108

$
—

$
108

Restructuring Charges

(496
)
—

(496
)

—

—

—

Payments

(1,074
)
—

(1,074
)

(108
)
—

(108
)
Balance at December 31, 2018

$
1,522

—

$
1,522

Balance at September 30, 2019

$
—

—

$
—

Cody API Restructuring Plan
In September 2018, the Company approved a plan to sell the active pharmaceutical ingredient manufacturing distribution business of Cody Labs (the “Cody API business”). The Company was unable to sell the Cody API business as an ongoing operation and intended to sell the equipment and real estate utilized by the Cody API business upon receiving approval of the Company’s cocaine hydrochloride solution Section 505(b)(2) NDA application and to have Cody Labs cease all operations. In June 2019, the Company approved the Cody API Restructuring Plan. In connection with the Cody API Restructuring Plan, there has been a reduction of almost 70 positions at Cody Labs. The restructuring activities under the Cody API Restructuring Plan are substantially complete as of September 30, 2019. In the first quarter of Fiscal 2020, the Company completed the sale of a portion of the equipment associated with the Cody API business for $2.0 million.
The costs to implement the Cody API Restructuring Plan total approximately $6.0 million, including approximately $3.5 million of severance and employee-related costs and approximately $2.0 million of contract termination costs, as well as approximately $0.5 million of costs to be incurred in connection with moving equipment and other property to other Company-owned facilities that were originally anticipated to be incurred in connection with the Cody Restructuring Plan announced in June 2018.
The expenses associated with the Cody API Restructuring Plan included in restructuring expenses during the three months ended September 30, 2019 were as follows:
(In thousands)

Three Months Ended
September 30, 2019

Employee separation costs

$
892

Facility closure costs

496

Total

$
1,388

A reconciliation of the changes in restructuring liabilities associated with the Cody API Restructuring Plan from June 30, 2019 through September 30, 2019 is set forth in the following table:
(In thousands)

Employee
Separation Costs

Contract
Termination
Costs

Facility Closure
Costs

Total

Balance at June 30, 2019

$
2,207

$
—

$
—

$
2,207

Restructuring Charges

892

—

496

1,388

Payments

(1,932
)
—

(496
)
(2,428
)
Balance at September 30, 2019

$
1,167

$
—

—

$
1,167

2016 Restructuring Program

On February 1, 2016, in connection with the acquisition of ~~KUPI,~~Kremers Urban Pharmaceuticals Inc.( “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~~focused on the closure of KUPI’s corporate functions and the consolidation of manufacturing, sales, research and development and distribution functions. The restructuring activities under the 2016 Restructuring Program were completed as of March 31, 2019. The Company ~~estimates that it will incur~~incurred an aggregate of ~~up to~~ approximately ~~$20.0~~$21.0 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~~related to employee separation costs, approximately $1.0 million relates to contract termination costs and approximately ~~$8.0~~$9.0 million ~~relates~~related 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,~~September 30, 2018 ~~and 2017~~ were as follows:

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, 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

$
3,614

$
—

$
3,614

Restructuring Charges

707

1,024

1,731

Payments

(150
)
(1,024
)
(1,174
)
Balance at December 31, 2018

$
4,171

$
—

$
4,171

Three

Months Ended

(In thousands)

September 30, 2018

Employee separation costs

$
414

Facility closure costs

464

Total

$
878

Note 5. Accounts Receivable

Accounts receivable consisted of the following components at ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018:~~2019:

(In thousands)

December 31,
2018

June 30,
2018

Gross accounts receivable

$
515,266

$
503,175

Less Chargebacks reserve

(128,102
)
(153,034
)
Less Rebates reserve

(34,673
)
(33,102
)
Less Returns reserve

(49,508
)
(43,059
)
Less Other deductions

(26,263
)
(20,021
)
Less Allowance for doubtful accounts

(1,356
)
(1,308
)
Accounts receivable, net

$
275,364

$
252,651

(In thousands)

September 30,
2019

June 30,
2019

Gross accounts receivable

$
362,309

$
361,323

Less: Chargebacks reserve

(83,483
)
(89,567
)
Less: Rebates reserve

(31,473
)
(32,099
)
Less: Returns reserve

(53,992
)
(55,554
)
Less: Other deductions

(19,109
)
(18,128
)
Less: Allowance for doubtful accounts

(1,143
)
(1,223
)
Accounts receivable, net

$
173,109

$
164,752

For the three months ended ~~December 31,~~September 30, 2019, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $207.9 million, $58.5 million, $3.7 million and $12.7 million, respectively. For the three months ended September 30, 2018, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of ~~$334.6~~$277.9 million, ~~$78.8~~$64.7 million, ~~$11.3~~$7.3 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$13.9 million, respectively.
For the six months ended December 31, 2018, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $612.6 million, $143.6 million, $18.7 million, and $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.
The following table identifies the activity and ending balances of each major category of revenue-related reserve for the ~~six~~three months ended ~~December 31, 2018~~September 30, 2019 and ~~2017:~~2018:

Reserve Category
(In thousands)

Chargebacks

Rebates

Returns

Other

Total

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

Balance at June 30, 2019

$
89,567

$
78,274

$
55,554

$
18,128

$
241,523

Current period provision

612,560

143,578

18,662

34,574

809,374

207,933

58,509

3,694

12,705

282,841

Credits issued during the period

(637,492
)
(147,023
)
(12,213
)
(31,868
)
(828,596
)

(214,017
)
(61,952
)
(5,256
)
(11,724
)
(292,949
)
Balance at December 31, 2018

$
128,102

$
79,057

$
49,508

$
26,263

$
282,930

Balance at September 30, 2019

$
83,483

$
74,831

$
53,992

$
19,109

$
231,415

Reserve Category
(In thousands)

Chargebacks

Rebates

Returns

Other

Total

Chargebacks

Rebates

Returns

Other

Total

Balance at June 30, 2017

$
79,537

$
87,616

$
42,135

$
11,096

$
220,384

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

474,882

156,073

14,541

28,623

674,119

277,949

64,749

7,347

13,889

363,934

Credits issued during the period

(499,959
)
(157,071
)
(11,881
)
(21,713
)
(690,624
)

(305,407
)
(76,626
)
(6,045
)
(13,146
)
(401,224
)
Balance at December 31, 2017

$
54,460

$
86,618

$
44,795

$
18,006

$
203,879

Balance at September 30, 2018

$
125,576

$
70,625

$
44,361

$
24,300

$
264,862

For the three months ending ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ as a percentage of gross sales the provision for chargebacks was ~~53.0%~~51.4% and ~~44.4%~~54.0%, the provision for rebates was ~~12.5%~~14.5% and ~~15.7%~~12.6%, the provision for returns was ~~1.8%~~0.9% and ~~0.8%~~1.4% and the provision for other adjustments was ~~3.3%~~3.1% 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 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%2.7%, 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~~total reserves from June 30, ~~2018~~2019 to ~~December 31, 2018~~September 30, 2019 was ~~primarily the result of increased customer orders in June 2018 in advance of~~mainly attributable to a ~~mid-week holiday as 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”), which shifted the Company’s sales of Levothyroxine Sodium Tablets directly to Amneal, also contributed~~$9.4 million rebate payment to the ~~decrease in~~Department of Veteran’s Affairs related to pricing overcharges, of which $8.1 million was indemnified by UCB, the ~~chargebacks reserve. The activity in the “Other” category~~former parent company of KUPI. See Note 11 “Legal, Regulatory Matters and Contingencies” for ~~the six months ended December 31, 2018 and 2017 includes, shelf-stock, shipping and other sales adjustments including prompt payment discounts and “failure-to-supply” adjustments.~~more information. Historically, we have not recorded any material amounts in the current period related to reversals or additions of prior period reserves. If the Company were to record a material reversal or addition of any prior period reserve amount, it would be separately disclosed.

Note 6. Inventories

Inventories at ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018~~2019 consisted of the following:

(In thousands)

December 31,
2018

June 30,
2018

Raw materials

$
57,780

$
64,647

Work-in-process

30,726

19,983

Finished goods

47,622

57,005

Total

$
136,128

$
141,635

(In thousands)

September 30,
2019

June 30,
2019

Raw Materials

$
59,115

$
56,740

Work-in-process

14,359

18,988

Finished Goods

75,688

68,243

Total

$
149,162

$
143,971

~~Inventory balances were written-down by $20.7 million and $11.9 million at December 31, 2018 and June 30, 2018, respectively for excess and obsolete inventory amounts.~~
During the three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ the Company recorded write-downs to net realizable value for excess and obsolete inventory of ~~$8.9~~$3.5 million and ~~$2.2~~$3.4 million, respectively. ~~During the six months ended December 31, 2018 and 2017, the Company recorded 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 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, 2018~~September 30, 2019 and June 30, ~~2018~~2019 consisted of the following:

(In thousands)

Useful Lives

December 31,
2018

June 30,
2018

Land

—

$
2,283

$
2,900

Building and improvements

10 - 39 years

85,958

105,041

Machinery and equipment

5 - 10 years

156,903

173,988

Furniture and fixtures

5 - 7 years

3,224

4,099

Less: accumulated depreciation

(79,991
)
(89,996
)

168,377

196,032

Construction in progress

27,230

37,215

Property, plant and equipment, net

$
195,607

$
233,247

(In thousands)

Useful Lives

September 30,
2019

June 30,
2019

Land

—

$
1,783

$
1,783

Building and improvements

10 – 39 years

89,901

87,609

Machinery and equipment

5 – 10 years

158,555

156,166

Furniture and fixtures

5 – 7 years

3,110

3,105

Less accumulated depreciation

(89,182
)
(83,424
)

164,167

165,239

Construction in progress

20,722

21,431

Property, plant and equipment, net

$
184,889

$
186,670

Depreciation expense for the three months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~ was ~~$5.7~~$5.8 million and ~~$5.4 million, respectively. Depreciation expense for the six months ended December 31, 2018 and 2017 was $12.2 million and $11.1~~$6.6 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~~business and equipment totaling $36.6 million, 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. The Company was unable to sell the Cody API business as an ongoing operation and intended to sell the equipment and real estate utilized by the Cody API business and to have Cody Labs cease all operations. As such, Cody Labs’ property, plant and equipment totaling $6.7 million, were recorded in the assets held for sale caption in the Consolidated Balance Sheet as of June 30, 2019. As of September 30, 2019, the Company has a remaining balance of $4.6 million recorded in the assets held for sale caption in the Consolidated Balance Sheet. See Note 2219 “Assets Held for Sale” for more information. ~~During~~
In the ~~three months ended December 31, 2018,~~second quarter of Fiscal 2019, the Company ~~had no impairment charges related~~ceased manufacturing functions at the Townsend Road facility and decided to ~~property, plant and equipment.~~sell the property. The sale was finalized in the first quarter of Fiscal 2020 for total proceeds of $4.3 million.

Property, plant and equipment, net included amounts held in foreign countries in the amount of ~~$1.7 million and $1.1~~$1.0 million at ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018, respectively.~~2019.

Note 8. Fair Value Measurements

The Company’s financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt obligations. 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 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 fair value of our long-term debt was approximately $727 million and $893 million as of December 31, 2018 and June 30, 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).
~~Note 9. Investment Securities~~
The ~~Company uses the specific identification method to determine the cost~~estimated fair value of ~~securities sold, which consisted entirely~~our term loan debt was approximately $656 million and $724 million as of ~~equity securities classified as trading.~~
~~In May 2018, the Company liquidated the remainder of the investment securities portfolio. As of December 31, 2018~~September 30, 2019 and June 30, ~~2018,~~2019, respectively. The estimated fair value of our 4.5% Convertible Senior Notes was approximately $87 million as of September 30, 2019. The difference between the ~~Company does not own investment securities.~~
~~The Company had a net gain on investment securities~~principal amount 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 $2.8 million during~~4.5% Convertible Senior Notes and its’ estimated fair value represents 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.~~equity conversion value premium.
Note ~~10.~~9. Goodwill and Intangible Assets
~~The changes in the carrying amount of goodwill for the six months ended December 31, 2018 are as follows:~~
(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~~would not extend or renew the JSP Distribution Agreement when the current term ~~expires~~expired 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, totaling $339.6 million, was required.
Intangible assets, net as of ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018,~~2019, consisted of the following:

Weighted

Gross Carrying Amount

Accumulated Amortization

Intangible Assets, Net

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

Avg. Life
(Yrs.)

September 30,
2019

June 30,
2019

September 30,
2019

June 30,
2019

September 30,
2019

June 30,
2019

Definite-lived:

Cody Labs import license

15

$
—

$
581

$
—

$
(386
)
$
—

$
195

15

$
581

$
581

$
(434
)
$
(424
)
$
147

$
157

KUPI product rights

15

416,154

416,154

(83,712
)
(69,840
)
332,442

346,314

15

416,154

416,154

(104,519
)
(97,583
)
311,635

318,571

KUPI trade name

2

2,920

2,920

(2,920
)
(2,920
)
—

—

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

15

19,000

19,000

(4,878
)
(4,562
)
14,122

14,438

Silarx product rights

15

10,000

10,000

(2,389
)
(2,056
)
7,611

7,944

15

10,000

10,000

(2,889
)
(2,722
)
7,111

7,278

Other product rights

13

21,692

19,693

(3,396
)
(1,875
)
18,296

17,818

13

30,192

26,579

(3,954
)
(4,243
)
26,238

22,336

Total definite-lived

$
469,766

$
468,348

$
(96,345
)
$
(80,372
)
$
373,421

$
387,976

$
478,847

$
475,234

$
(119,594
)
$
(112,454
)
$
359,253

$
362,780

Indefinite-lived:

KUPI in-process research and development

—

$
18,000

$
18,000

$
—

$
—

$
18,000

$
18,000

—

$
18,000

$
18,000

$
—

$
—

$
18,000

$
18,000

Silarx in-process research and development

—

18,000

18,000

—

—

18,000

18,000

—

18,000

18,000

—

—

18,000

18,000

Other product rights

—

449

449

—

—

449

449

—

32,000

12,449

—

—

32,000

12,449

Total indefinite-lived

36,449

36,449

—

—

36,449

36,449

68,000

48,449

—

—

68,000

48,449

Total intangible assets, net

$
506,215

$
504,797

$
(96,345
)
$
(80,372
)
$
409,870

$
424,425

$
546,847

$
523,683

$
(119,594
)
$
(112,454
)
$
427,253

$
411,229

For the three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ the Company recorded amortization expense of $7.0 million and $8.2 ~~million. For the six months ended December 31, 2018 and 2017,~~million, respectively.
In July 2019, the Company ~~recorded amortization expense~~entered into a distribution and supply agreement with Cediprof, Inc. The Company made an upfront payment of ~~$16.4~~$20.0 million to distribute Levothyroxine Sodium Tablets USP, commencing no later than August 1, 2022, which is included within the “Other product rights” category of indefinite-lived intangible assets. In August 2019, the Company entered into a distribution and ~~$16.3~~supply agreement with Sinotherapeutics Inc. to distribute Posaconazole Delayed-Release Tablets 100mg. The Company paid $2.0 million ~~respectively.~~upon FDA approval of the product and $1.5 million upon the first commercial sale of the product, which is included within the “Other product rights” category of definite-lived intangible assets.

Future annual amortization expense consisted of the following as of ~~December 31, 2018:~~September 30, 2019:

(In thousands)
Fiscal Year Ending June 30,

Annual Amortization Expense

2019

$
15,224

2020

30,443

2021

30,443

2022

30,443

2023

30,443

Thereafter

236,425

$
373,421

(In thousands)
Fiscal Year Ending June 30,

Amortization Expense

2020

$
24,228

2021

32,304

2022

32,304

2023

32,304

2024

31,967

Thereafter

206,146

$
359,253

Note ~~11.~~10. Long-Term Debt

Long-term debt, net consisted of the following:

December 31,

June 30,

September 30,

June 30,

(In thousands)

2018

2018

2019

2019

Term Loan A due 2020; 7.52% as of December 31, 2018

$
213,526

$
227,276

Term Loan A due 2020; 7.04% as of September 30, 2019

$
69,469

$
153,933

Unamortized discount and other debt issuance costs

(8,843
)
(10,178
)

(1,713
)
(4,722
)
Term Loan A, net

204,683

217,098

67,756

149,211

Term Loan B due 2022; 7.90% as of December 31, 2018

650,338

670,011

Term Loan B due 2022; 7.42% as of September 30, 2019

602,366

614,468

Unamortized discount and other debt issuance costs

(41,569
)
(47,839
)

(31,611
)
(34,631
)
Term Loan B, net

608,769

622,172

570,755

579,837

4.50% Convertible Senior Notes due 2026

86,250

—

Unamortized discount and other debt issuance costs

(3,484
)
—

4.50% Convertible Senior Notes, net

82,766

—

Revolving Credit Facility due 2020

—

—

—

—

Total debt, net

813,452

839,270

721,277

729,048

Less short-term borrowings and current portion of long-term debt

(66,845
)
(66,845
)

(66,845
)
(66,845
)
Total long-term debt, net

$
746,607

$
772,425

$
654,432

$
662,203

~~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 periods ending ~~December 31~~September 30 are as follows:

Amounts Payable

Amounts Payable

(In thousands)

to Institutions

to Institutions

2019

$
66,845

2020

225,371

$
66,845

2021

39,345

81,314

2022

532,303

39,345

2023

484,331

Thereafter

86,250

Total

$
863,864

$
758,085

On September 27, 2019, the Company issued $86,250,000 aggregate principal amount of its 4.50% convertible senior notes due 2026 (the “Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 4.50% payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2020. The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted in accordance with their terms. The Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 65.4022 shares per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $15.29 per share), subject to adjustments upon the occurrence of certain events (but will not be adjusted for any accrued and unpaid interest). The Company may redeem all or a part of the Notes on or after October 6, 2023 at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, subject to certain conditions relating to the Company’s stock price having been met. Following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or notice of redemption. The indenture covering the Notes contains certain other customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable.
In connection with the offering of the Notes, the Company also entered into privately negotiated “capped call” transactions with several counterparties. The capped call transaction will initially cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Notes. The capped call transactions are expected to generally reduce the potential dilutive effect on the Company’s common stock upon any conversion of the Notes with such reduction subject to a cap which is initially $19.46 per share. The capped call transactions are recorded in stockholders’ equity and are not accounted for as derivatives. The fees associated with the capped call transactions totaled $7.1 million, which was recorded as a reduction to additional paid-in capital on the Consolidated Balance Sheet. The form of capped call confirmations was filed as Exhibit 10.57 to the Form 8-K filed with the SEC on September 27, 2019.
A portion of the net proceeds received from the offering of the Notes was used to pay the cost of the capped call transactions. The remaining net proceeds, totaling $77.0 million, was used to repay a portion of the outstanding Term Loan A balance on September 27, 2019. As a result of the repayment, the Company recorded a loss on extinguishment of debt of $2.1 million in the Consolidated Statement of Operations.
The outstanding Term Loan A, Term Loan B and Revolving Credit Facility amounts above are guaranteed by all of Lannett’s significant wholly-owned domestic subsidiaries and are collateralized by substantially all present and future assets of the Company.

Note ~~12.~~11. Legal, Regulatory Matters and Contingencies

~~Connecticut Attorney~~State Attorneys General Inquiry into the Generic Pharmaceutical Industry

In July 2014, the Company received interrogatories and a subpoena from the State of Connecticut Office of the Attorney General concerning its investigation into the pricing of digoxin. According to the subpoena, the Connecticut Attorney General is investigating whether anyone engaged in any activities that resulted in (a) fixing, maintaining or controlling prices of digoxin or (b) allocating and dividing customers or territories relating to the sale of digoxin in violation of Connecticut antitrust law. In June 2016, the Connecticut Attorney General issued interrogatories and a subpoena to an employee of the Company in order to gain access to documents and responses previously supplied to the Department of ~~Justice.~~Justice pursuant to the federal investigation described below. 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 and gliburide.~~behavior. The Company was not named in the action and does not compete on the products that formed the basis of the complaint. The complaint was later transferred for pretrial purposes to the United States District Court for the Eastern District of Pennsylvania as part of a multidistrict litigation captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation. On October 31, 2017, the ~~state~~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 Court granted that motion on June 5, 2018. The State Attorneys General filed their amended complaint on June 18, 2018. The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, but does not involve the pricing for digoxin. The ~~state~~State Attorneys General also allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. ~~The~~On August 15, 2019, the Court ~~granted that~~denied the defendants’ joint motion ~~on June 5, 2018. The state~~to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overreaching conspiracy claims as to it.
On May 10, 2019, the State Attorneys General filed a new lawsuit naming the Company and one of its employees as defendants, along with 33 other corporations and individuals. The new complaint again alleges an overarching conspiracy and contains claims for price fixing and market allocation under the Sherman Act and related state laws. The complaint focuses on the conduct of another generic pharmaceutical company, and the relationships that company had with other generic companies and their ~~amended~~employees. The specific allegations in the new complaint ~~on June 15, 2018. None~~against Lannett relate to the Company’s sales of baclofen and levothyroxine. The new complaint also names another current employee as a defendant, however the allegations pertain to conduct that occurred prior to their employment by Lannett. The Company has not responded to the new complaint as of the ~~defendants, including~~date of this report.
Based on internal investigations performed to date, the Company ~~has responded yet to the amended complaint.~~
~~The Company maintains~~currently believes that it has acted in compliance with all applicable laws and ~~regulations and continues to cooperate with the Connecticut Attorney General investigation.~~regulations.

Federal Investigation into the Generic Pharmaceutical Industry

~~The~~In November and December 2014, the Company and certain affiliated individuals and customers ~~have been~~were served with grand jury subpoenas relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The subpoenas 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~~internal investigations 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 fullyregulations.
indemnified for any pre-acquisition amounts. In December 2018, KUPI and the State of Texas settled the allegations for the sum of $8.0 million, which is fully indemnified by UCB. UCB forwarded the $8.0 million to KUPI in December 2018 and, following its receipt of the fully executed settlement agreement, KUPI forwarded the settlement funds to the State of 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, 2018 and June 30, 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,~~On May 22, 2019, 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.
~~EPA Violation Notice~~
~~On July 13, 2017, the United States~~ Department of ~~Environmental Protection Agency~~Veterans Affairs (“~~EPA”~~VA”) ~~sent~~issued a ~~Finding of Violation to KUPI alleging several violations of national emissions standards~~Contracting Officer’s Final Decision and Demand for hazardous air pollutants at KUPI’s Seymour, Indiana facility. The EPA and KUPI have entered into an agreed Administrative Consent Order and Consent Assessment and Final Order to resolve the alleged violations, whereby KUPI made a payment of $60,000 to the EPA and escrowedPayment, assessing the sum of ~~$225,000~~$9.4 million for overpayments by the Veteran’s Administration for the period of January 1, 2012 through June 30, 2016. In August 2019, the Company remitted payment to ~~be used to fund an environmental project. The Orders were fully executed on December 31, 2018.~~the VA and received reimbursement from UCB for the indemnified portion of the payment in the amount of $8.1 million.

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. 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. On October 16, 2018, the Court (with one exception) denied defendants’ motions to dismiss plaintiffs’ Sherman Act claims with respect to the drugs in the first tranche. ~~Defendants’~~On March 15, 2019, the Company and other defendants filed answers to the Sherman Act claims. In addition, on February 15, 2019, the Court granted defendants’ motions to dismiss certain of the plaintiffs’ state law claims brought under the laws of Illinois, Rhode Island, Georgia, South Carolina, Montana, West Virginia, Alabama, New Jersey, Michigan and Nevada, but denied the remainder of defendants’ motions to dismiss. The Court set a deadline of April 1, 2019 for certain plaintiffs to amend their existing complaints to reflect the rulings set forth in the Court’s February 15, 2019 ruling on the state law motions to dismiss. Those plaintiffs amended their complaints, but further motions to dismiss the state-law claims have been deferred until the Court decides pending motions to dismiss with respect to ~~those drugs remain pending.~~the plaintiffs’ various overarching-conspiracy claims.

On January 22, 2018, three opt-out direct purchasers filed a complaint alleging an overarching conspiracy and individual conspiracies ~~on behalf of~~against 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~~against 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 February 21, 2019, the Company and the other defendants filed motions to dismiss the overarching conspiracy claims. On August 15, 2019, the Court denied the defendants’ joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it. On 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 this particular complaint. On July 29, 2019, a group of insurance company opt-out plaintiffs commenced an action against the Company and numerous other defendants by filing a writ of summons in the Court of Common Pleas of Philadelphia County, Pennsylvania, but have yet to file a complaint. The parties have since entered into a stipulation to defer any action in the state court case indefinitely pending further developments in the federal multidistrict litigation. On October 11, 2019, one of the opt-out direct purchasers filed another complaint in federal court in Minnesota alleging an overarching conspiracy and individual conspiracies on behalf of the Company to fix the prices of and allocate markets for dozens of different drugs, including baclofen. That complaint has since been added to the multidistrict litigation in Pennsylvania. On October 18, 2019, another of the opt-out direct purchasers filed another complaint alleging an overarching conspiracy and individual conspiracies on behalf of the Company to fix the prices of and allocate markets for over 100 drugs, including glyburide. None of the defendants, including the Company, has responded yet to these opt-out complaints.

In addition to the lawsuits brought by private plaintiffs, the Attorneys General of 48 states, the District of Columbia and Puerto Rico have filed parens patriae lawsuits alleging price-fixing conspiracies by various generic pharmaceutical 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 June 5,18, 2018 to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs. The claim relating to ~~Lannett~~the Company 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. On February 21, 2019,
the Company and the other defendants filed motions to dismiss the overarching conspiracy claims. On August 15, 2019, the Court denied the defendants’ joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it. Additionally, on May 5, 2019, the state Attorneys General filed a new complaint in Connecticut alleging price-fixing conspiracies by the Company and various generic pharmaceutical manufacturers and individuals relating to more than 40 additional drugs. The complaint has since been added to the multidistrict litigation in the Eastern District of Pennsylvania. The additional claims relating to the Company involve baclofen and levothyroxine, although the state Attorneys General allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. None of the defendants, including the Company, has responded yet to ~~the amended~~this particular complaint.

Following the lead of the state Attorneys 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 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~~manufactures involve acetazolamide and doxycycline monohydrate. ~~None of the defendants, including~~On February 21, 2019, the Company and the other defendants filed motions to dismiss the overarching conspiracy claims. On August 15, 2019, the Court denied the defendants’ joint motion to dismiss the overarching conspiracy claims, but has ~~responded~~ yet to ~~these complaints.~~decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it.

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, numerous 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~~On February 21, 2019, the Company and the other defendants filed motions to dismiss the overarching conspiracy claims. On August 15, 2019, the Court denied the defendants’ joint motion to dismiss the overarching conspiracy claims, but has ~~responded~~ yet to decide an individual motion filed by the ~~amended complaint.~~Company to dismiss the overarching conspiracy claims as to it.

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.~~actions and plans to vigorously defend itself from these claims.

Shareholder Litigation

In November 2016, a putative class action lawsuit was filed against the Company and two of its officers ~~claiming~~in the federal court for the Eastern District of Pennsylvania, alleging 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. 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 filed a motion to dismiss the second amended complaint in February 2018. In July 2018, the court granted the Company’s motion to dismiss the second amended complaint. In September 2018, counsel for the putative class filed a third amended complaint. The Company filed a motion to dismiss the third amended complaint in November 2018. In May 2019, the court denied the Company’s motion to dismiss the third amended complaint. In July 2019, the Company filed an answer to the third amended complaint. The Company believes it acted in compliance with all applicable laws and plans to vigorously defend itself from these claims. The Company cannot reasonably predict the outcome of the suit at this time.
In 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 former 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. In March 2019, the Court granted in part and denied in part the Company’s motion to dismiss. In May 2019, the Company filed an answer to the amended complaint. During May and June 2019, the parties negotiated a proposed settlement and agreed to settle the litigation, by which the Company agreed to pay the sum of $300,000 without an admission of liability and subject to the negotiation of the terms of a stipulation of settlement and approval by the Court. In July 2019, counsel for the putative class filed a motion for preliminary approval of the proposed settlement and on July 31, 2019, the Court issued an Order granting the motion and scheduling a hearing for final approval of the settlement for February 7, 2020.
In May 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers and certain of the current and former members of the Company’s Board of Directors in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, that certain of the defendants caused the Company to issue false and misleading proxy statements in violation of Section 14(a) of the Securities Exchange Act of 1934, that the defendants were unjustly enriched at the expense of the Company, and that the defendants wasted corporate assets belonging to the Company. The Company cannot reasonably predict the outcome of ~~this~~the suit at this time.

In ~~December 2018, the Chairman~~July 2019, a shareholder derivative lawsuit was filed against certain of the Company’s ~~Board~~current and former officers and directors in the federal court for the Eastern District of ~~Directors received~~Pennsylvania. The Company was also named as a ~~letter sent on behalf of two purported shareholders demanding~~nominal defendant in the suit. The suit alleges that the ~~Company’s Board of Directors investigate and commence legal proceedings against certain former~~defendants breached their fiduciary duties as directors and/or ~~current directors,~~ officers ~~and agents~~ of the Company ~~relating~~and that certain of the defendants caused the Company to ~~alleged breaches~~violate Sections 10(b), 14(a), and 29(b) of ~~fiduciary duties, corporate waste, and unjust enrichment. The Company and~~ the ~~Company’s Board~~Securities Exchange Act of ~~Directors responded~~1934. In October 2019, this suit was transferred to the ~~demand letter by requesting~~federal court for the District of Delaware and is pending before the same judge presiding over the shareholder derivative suit that ~~the purported shareholders provide proof of their status and shareholders of the Company.~~was filed in May 2019. 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~~the outcome ~~if any, will follow from~~of the suit at this time.
In September 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers, directors and employees in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, alleges waste of corporate assets and ~~the Company’s Board of Director’s receipt~~gross mismanagement, and alleges that certain of the ~~demand letter.~~defendants caused the Company to violate Section 14(a) of the Securities and Exchange Act of 1934. The Company cannot reasonably predict the outcome of the suit at this time.
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.~~solution product. The Company denies that it is falsely advertising its ~~C-Topical~~cocaine hydrochloride solution product and continues to market its unapproved product relying on the Guidance for FDA Staff and Industry, Marketed Unapproved Drugs — Compliance Policy Guide, pending approval of its Section 505(b)(2) application. In January 2019, the Company filed a motion to dismiss the complaint. On May 3, 2019, the Court issued a written decision granting in part and denying in part the motion to dismiss. On June 6, 2019, Genus filed an Amended Complaint. On June 27, 2019, the Company filed a motion to dismiss the amended complaint. By Order dated September 3, 2019, the Court granted in part and denied in part the Company’s motion to dismiss. The Company believes it acted in compliance with all applicable laws and regulations and plans to vigorously defend itself from these claims. Discovery is ongoing and the Company cannot reasonably predict the outcome of this suit at this time.
~~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 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 oral argument before the 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 on August 13, 2018. The appellate court denied the request on September 14, 2018, and issued its mandate terminating the appeal on 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.~~12. Commitments

Leases

In the first quarter of Fiscal 2020, the Company recorded a ROU lease asset totaling $1.2 million related to an existing lease at Cody Labs upon adoption of ASU No. 2016-02. The Company ~~leases certain manufacturing~~subsequently recorded a full impairment of the asset as a result of the decision to cease operations at Cody Labs. At September 30, 2019, the Company has a ROU lease asset of $6.4 million and ~~office equipment, in~~a ROU liability of $7.5 million, of which $1.9 million and $5.6 million represent the ~~ordinary course of business. These leases are typically renewed annually. Rental~~current and ~~lease expense was not material for all periods presented.~~non-current balance, respectively.

~~Future~~Components of lease cost are as follows:

Three Months Ended

(In thousands)

September 30, 2019

Operating lease cost

$
481

Variable lease cost

28

Short-term lease cost (a)

156

Total

$
665

(a) Not recorded on the Consolidated Balance Sheet.
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

Three Months Ended

(In thousands)

September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$
481

Non-cash activity:

ROU assets obtained in exchange for new operating lease liabilities

$
—

Weighted-average remaining lease term and discount rate for our operating leases are as follows:
Three Months Ended
September 30, 2019
Weighted-average remaining lease term
9 years
Weighted-average discount rate
7.50%
Maturities of lease liabilities by fiscal year for our operating leases are as follows:
(In thousands)

Amounts Due

Remainder of 2020

$
1,460

2021

1,487

2022

1,169

2023

1,169

2024

1,169

Thereafter

3,929

Total lease payments

10,383

Less: Imputed interest

2,825

Present value of lease liabilities

$
7,558

As of June 30, 2019, future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) for the ~~remainder of Fiscal 2019 and the~~ twelve-month periods ending June 30 thereafter are as follows:

(In thousands)

Amounts Due

Amounts Due

Remainder of 2019

$
922

2020

1,855

$
1,898

2021

1,406

1,450

2022

1,080

1,123

2023

1,080

1,123

2024

1,123

Thereafter

4,158

3,839

Total

$
10,501

$
10,556

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. Prior to the first quarter of Fiscal 2019, the Company had the option to convert the first $7.5 million into a 50% ownership interest in the entity. The board of the entity is comprised of five members, one of which 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~~September 30, 2019, $6.1 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.~~13. Accumulated Other Comprehensive Loss

The Company’s Accumulated Other Comprehensive Loss was comprised of the following components as of ~~December 31, 2018~~September 30, 2019 and ~~2017:~~2018:

(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
)

September 30,

(In thousands)

2019

2018

Foreign Currency Translation

Beginning Balance, June 30

$
(615
)
$
(515
)
Net gain (loss) gain on foreign currency translation (net of tax of $0 and $0)

(46
)
6

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

—

—

Other comprehensive income (loss), net of tax

(46
)
6

Ending Balance, September 30

(661
)
(509
)
Total Accumulated Other Comprehensive Loss

$
(661
)
$
(509
)
Note ~~15. Earnings (Loss)~~14. 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) 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 and treats unvested restricted stock and performance-based shares as if they 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)~~loss per common share was as follows:

Three Months Ended
December 31,

(In thousands, except share and per share data)

2018

2017

Net income

$
12,362

$
14,022

Basic weighted average common shares outstanding

37,761,176

37,066,902

Effect of potentially dilutive stock options and restricted stock awards

1,351,371

1,223,456

Diluted weighted average common shares outstanding

39,112,547

38,290,358

Earnings per common share:

Basic

$
0.33

$
0.38

Diluted

$
0.32

$
0.37

Six Months Ended
December 31,

Three Months Ended
September 30,

(In thousands, except share and per share data)

2018

2017

2019

2018

Numerator:

Net loss

$
(12,157
)
$
(287,528
)
Interest expense applicable to the Notes, net of tax

—

—

Amortization of debt issuance costs applicable to the Notes, net of tax

—

—

Adjusted “if-converted” net loss

$
(12,157
)
$
(287,528
)

Net income (loss)

$
(275,166
)
$
27,279

Denominator:

Basic weighted average common shares outstanding

37,674,200

37,029,483

38,309,267

37,586,327

Effect of potentially dilutive stock options and restricted stock awards

—

1,058,343

Effect of potentially dilutive options and restricted stock awards

—

—

Effect of conversion of the Notes

—

—

Diluted weighted average common shares outstanding

37,674,200

38,087,826

38,309,267

37,586,327

Earnings (loss) per common share:

Loss per common share:

Basic

$
(7.30
)
$
0.74

$
(0.32
)
$
(7.65
)
Diluted

$
(7.30
)
$
0.72

$
(0.32
)
$
(7.65
)

The number of anti-dilutive shares that have been excluded in the computation of diluted ~~earnings~~loss per share for the three months ended ~~December 31,~~September 30, 2019 and 2018 was 2.9 million and ~~2017 were 540 thousand and 3.0~~4.6 million, respectively. The ~~number~~effect of ~~anti-dilutive~~potentially dilutive shares ~~that have been~~was excluded from the calculation of diluted loss per share in the ~~computation of diluted earnings per share for the six~~three months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017 were 2.2 million and 3.0 million, respectively.~~
~~Note 16. Warrant~~
~~In connection with~~because the ~~KUPI acquisition on November 25, 2015, Lannett issued to UCB Manufacturing a warrant to purchase up to a total~~effect of ~~2.5 million shares of Lannett’s common stock (the “Warrant”).~~
~~The Warrant 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 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 was classified as an equity instrument. On November 25, 2018, the Warrant expired and was not exercised.such securities would be anti-dilutive.
Note ~~17. Share-Based~~15. Share-based Compensation

At ~~December 31, 2018,~~September 30, 2019, 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~~6.5 million shares to be issued. ~~The~~As of September 30, 2019, the plans have a total of ~~615 thousand~~1.2 million shares available for future issuances. ~~On January 23, 2019, the shareholders of~~
Historically, 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. Beginning in Fiscal 2020, the Company extended the vesting period of new share-based compensation awards to 4 years. The Company issues new shares of stock when stock options are exercised. As of ~~December 31, 2018,~~September 30, 2019, there was ~~$14.4~~$15.1 million of total unrecognized compensation cost related to non-vested share-based compensation awards. That cost is expected to be recognized over a weighted average period of ~~2.2~~2.6 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~~three months ended ~~December 31,~~September 30, 2019 and 2018, the estimated annual forfeiture rates used to recognize the associated compensation expense and ~~2017:~~the weighted average fair value of the options granted:

Six Months Ended

December 31, 2018

December 31, 2017

September 30,
2019

September 30,
2018

Risk-free interest rate

2.9
%
1.9
%

1.9
%
2.9
%
Expected volatility

58.4
%
57.4
%

73.7
%
58.4
%
Expected dividend yield

—
%
—
%

—

—

Forfeiture rate

6.5
%
6.5
%

6.5
%
6.5
%
Expected term (in years)

5.3 years

5.4 years

5.1 years

5.3 years

Weighted average fair value

$
6.52

$
9.06

$4.04

$6.52

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~~summary as of ~~December 31, 2018~~September 30, 2019 and changes during the ~~six~~three 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, 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

Weighted

Weighted-

Average

Average

Aggregate

Remaining

Exercise

Intrinsic

Contractual

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

Awards

Price

Value

Life (yrs.)

Outstanding at June 30, 2019

572

$
17.56

$
273

5.0

Granted

522

$
6.57

Exercised

(9
)
$
9.76

$
35

Forfeited, expired or repurchased

(9
)
$
27.63

Outstanding at September 30, 2019

1,076

$
12.21

$
3,488

7.2

Vested and expected to vest at September 30, 2019

1,073

$
12.20

$
3,488

7.2

Exercisable at September 30, 2019

569

$
16.18

$
1,425

5.1

Restricted Stock

The Company measures restricted stock compensation costs based on the stock price at the grant date less an estimate for expected forfeitures. The annual forfeiture rate used to calculate compensation expense was 6.5% for the ~~six~~three months ended ~~December 31, 2018~~September 30, 2019 and ~~2017.~~2018.

A summary of restricted stock awards as of ~~December 31, 2018~~September 30, 2019 and changes during the ~~six~~three 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, 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

(In thousands, except for weighted average price data)

Awards

Weighted
Average Grant -
date Fair Value

Aggregate
Intrinsic Value

Non-vested at June 30, 2019

1,288

$
11.63

Granted

936

6.44

Vested

(575
)
10.82

$
4,634

Forfeited

(29
)
14.09

Non-vested at September 30, 2019

1,620

$
8.88

Performance-Based Shares

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

A summary of performance-based share awards as of ~~December 31, 2018~~September 30, 2019 and changes during the 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

Awards

Weighted
Average Grant -
date Fair Value

Aggregate
Intrinsic Value

Non-vested at June 30, 2018

20

$
25.58

Non-vested at June 30, 2019

72

$
19.92

Granted

52

$
17.69

178

$
10.71

Vested

—

$
—

$
—

(46
)
$
15.08

$
477

Forfeited

—

$
—

—

$
—

Non-vested at December 31, 2018

72

$
19.92

Non-vested at September 30, 2019

204

$
12.99

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~~three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017, 95~~29 thousand shares and 2850 thousand shares were issued under the ESPP, respectively. As of ~~December 31, 2018, 702~~September 30, 2019, 821 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

December 31,

December 31,

(In thousands)

2018

2017

2018

2017

Selling, general and administrative expenses

$
1,095

$
1,926

$
3,309

$
3,713

Research and development expenses

199

176

400

327

Cost of sales

655

461

1,276

712

Total

$
1,949

$
2,563

$
4,985

$
4,752

Tax benefit at statutory rate

$
439

$
756

$
1,122

$
1,402

Three Months Ended
September 30,

(In thousands)

2019

2018

Selling, general and administrative

$
3,635

$
2,213

Research and development

224

201

Cost of sales

600

621

Total

$
4,459

$
3,035

Tax benefit at statutory rate

$
1,003

$
683

Note ~~18.~~16. Employee Benefit Plan

The Company has a 401k defined contribution plan (the “Plan”) covering substantially all employees. Pursuant to the Plan provisions, the Company 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~~.year. Contributions to the Plan during the three months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017 were $445 thousand and $458 thousand, respectively. Contributions to the Plan during the six months ended December 31, 2018 and 2017 were $1.1 million and $1.0 million, respectively.~~was $0.6 million.
Note ~~19.~~17. Income Taxes

The Company uses the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which 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, 2018~~September 30, 2019 was ~~$2.6~~$1.8 million compared to ~~$18.1~~an income tax benefit of $75.6 million for the three months ended ~~December 31, 2017.~~September 30, 2018. The effective tax rates for the three months ended ~~December 31,~~September 30, 2019 and 2018 were (17.2)% and ~~2017 were 17.6% and 56.4%~~20.8%, respectively. The effective tax rate for the three months ended ~~December 31, 2018~~September 30, 2019 was lower compared to the three months ended ~~December 31, 2017~~September 30, 2018 primarily due to research and development credits relative to expected pre-tax income, partially offset by the ~~application~~impact of ~~2017 Tax Reform in the prior-year period, which resulted in a revaluation of the Company’s net long term deferred~~excess tax ~~assets. In addition, the federal statutory tax rate for the three months ended December 31, 2018 was 21% compared~~shortfalls related to ~~a blended federal statutory tax rate of 28% in the prior-year period.~~
The federal, state and local income tax benefit for the 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 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, 2018 was 21% compared to a blended federal statutory tax rate of 28% in the prior-year period.stock compensation.

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

As of ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018,~~ 2019, the Company has total unrecognized tax benefits of $2.4 million and $2.2 million, respectively, of which $2.2 million and ~~2.5~~$2.1 million ~~respectively, which~~ would impact the Company’s effective tax rate, respectively, 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, 2018~~September 30, 2019 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, 2018~~September 30, 2019 and June 30, ~~2018.~~2019. 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 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 (“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~~Commonwealth of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns.

Note ~~20.~~18. Related Party Transactions

The Company had sales of ~~$1.0~~$0.7 million and ~~$1.2~~$0.5 million during the three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 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 $2.0 million, respectively.~~ Jeffrey Farber, a current board member, is the owner of Auburn. Accounts receivable includes amounts due from Auburn of ~~$849 thousand~~$0.6 million and ~~$585 thousand~~$1.2 million at ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018,~~2019, respectively.
The Company also had sales of ~~$920 thousand~~$0.7 million and ~~$516 thousand~~$0.5 million during the three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ respectively, to a generic distributor, 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 $983 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 ~~$605 thousand~~$0.6 million and ~~$514 thousand~~$0.7 million as of ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018,~~2019, respectively.
The Company incurred expenses totaling $188 thousand and $369 thousand during the 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 variable interest entity of $58 thousand as of June 30, 2018. There were no amounts due to the variable interest entity as of December 31, 2018.
~~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, respectively. Purchases of finished goods inventory from JSP accounted for approximately 33% and 36% of the Company’s inventory purchases in the six months ended December 31, 2018 and 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. On August 20, 2018, the Company announced that the JSP Distribution Agreement, which expires on March 23, 2019, will not be renewed or extended.

Note ~~22.~~19. Assets Held for Sale

In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business, which includes the manufacturing and distribution of active pharmaceutical ingredients for use in finished goods production. 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 parta result of the ~~held for sale classification,~~plan, 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 Labs’ long-lived ~~assets.~~assets in the first quarter of Fiscal 2019.

The ~~following table summarizes the assets and liabilities of~~Company was unable to sell the Cody API business as an ongoing operation and intended to sell the equipment utilized by the Cody API business as well as the real estate upon receiving approval of ~~December 31, 2018:~~the Company’s cocaine hydrochloride solution Section 505(b)(2) NDA application and to have Cody Labs cease all operations. In the first quarter of Fiscal 2020, the Company completed the sale of a portion of the equipment associated with the Cody API business for $2.0 million. As of September 30, 2019, the real estate and remaining equipment associated with the Cody API business, totaling $4.6 million, was recorded in the assets held for sale caption in the Consolidated Balance Sheet.
(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~~September 30, 2019 and ~~2017:~~2018:

Three Months Ended

Six Months Ended

December 31,

December 31,

For the Three Months Ended

For the Three Months Ended

(In thousands)

2018

2017

2018

2017

September 30, 2019

September 30, 2018

Net sales

$
654

$
387

$
2,142

$
1,086

$
1,067

$
1,488

Pretax loss attributable to Cody API business

(4,314
)
(4,468
)
(39,335
)
(9,957
)

$
(4,417
)
$
(35,021
)

The pretax loss attributable to the Cody API business during the ~~six~~three months ended ~~December 31,~~September 30, 2019 includes a full impairment of the ROU lease asset, totaling $1.2 million, that was recorded upon adoption of ASU No. 2016-02 on July 1, 2019.
The pretax loss attributable to the Cody API business during the three months ended September 30, 2018 includes ~~the~~impairment charges totaling $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 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, 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.  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, ~~2018.~~2019. All references to “Fiscal 2020” or “Fiscal Year 2020” shall mean the fiscal year ended June 30, 2020 and 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~~ ended June 30, ~~2018.~~2019.

Company Overview

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

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,~~August 2018, JSP notified the Company ~~issued~~that it would not extend or renew the JSP Distribution Agreement. The Company determined that JSP’s decision represented a ~~total~~triggering event under U.S. GAAP to perform an analysis to determine the potential for impairment of ~~1.5~~goodwill. In October 2018, the Company completed the analysis based on market data and concluded that it would record a full impairment of goodwill totaling $339.6 million ~~shares of~~in Fiscal 2019. On March 23, 2019, the ~~Company’s common stock to~~ JSP Distribution Agreement expired and ~~JSP’s designees.~~was not renewed or extended.

Net sales of JSP products totaled ~~$253.1 million and $144.9~~$202.5 million in Fiscal Year ~~2018 and the first six months of Fiscal Year 2019, respectively.~~2019. Of that amount, Levothyroxine Sodium Tablets USP net sales totaled ~~$245.9 million and $142.4~~$197.5 million in Fiscal Year ~~2018 and the first six months~~2019, with gross margins 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~~generated a significant portion of our revenues and gross profits, JSP’s decision not to renew or extend its distribution agreement with us have and will materially adversely affect our future operating results and cash ~~flows beginning in the fourth quarter of Fiscal 2019.~~flows. 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 have and 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.
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:~~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:~~4.00:1:00 as of September 30, 2020. The Amended Senior Secured Credit Facility is also subject to a minimum liquidity covenant, which provides that the Company shall not permit its liquidity as of the last day of any fiscal quarter to be less than $75.0 million. On September 27, 2019, the Company issued $86,250,000 aggregate principal amount of its 4.50% convertible senior notes due 2026 (the “Notes”) and used the net proceeds to repay a portion of the outstanding Term Loan A balance. The Notes are senior unsecured obligations of the Company and therefore are not included within the calculation of the Secured Net Leverage Ratio under the existing Amended Senior Secured Credit Facility. As of September 30, 2019, the Company was in compliance with its financial covenants. As of September 30, 2019, cash and cash equivalents totaled $101.0 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~~September 30, 2019 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~~execute on 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~~28 new products since January 2018, which are expected to generate annualized net sales of over ~~$80~~$100 million, and ~~expects~~plans 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.~~going forward. The Company has also recently signed several distribution and in-licensing agreements ~~during this fiscal year~~ that will provide both immediate and longer-term contribution ~~margins in the near future.~~margins. Additionally, the Company ~~continues to supplement~~has supplemented 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 continue 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~~Cody API Restructuring Plan

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,June 11, 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 restructuring plan in(the “Cody API Restructuring Plan”) with respect to Cody Labs. In September 2018, the Company approved a plan to sell the active pharmaceutical ingredient manufacturing ~~and~~ distribution business of ~~its~~ Cody ~~Laboratories subsidiary~~Labs (the “Cody API business”)~~. As part of its decision,~~ but 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~~was unable to sell the Cody API business ~~all~~as an ongoing operation. Therefore, the Company intends to sell the real estate utilized by the Cody API business upon receiving approval of the ~~assets, excluding~~Company’s cocaine hydrochloride solution Section 505(b)(2) NDA application and to have Cody Labs cease all operations. In connection with the ~~Cocaine Hydrochloride product line mentioned above, and all~~Cody API Restructuring Plan, there has been a reduction of almost 70 positions at Cody Labs. The restructuring activities under the Cody API Restructuring Plan are substantially complete as of September 30, 2019. In the first quarter of Fiscal 2020, the Company completed the sale of a portion of the ~~liabilities~~equipment 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.$2.0 million.

~~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 API Restructuring Plan ~~comprised primarily of~~total approximately ~~$3.0~~$6.0 million, including approximately $3.5 million of severance and employee-related ~~costs. These amounts are preliminary estimates based on the information currently available~~costs and approximately $2.0 million of contract termination costs, as well as approximately $0.5 million of costs to ~~management. It is possible~~be incurred in connection with moving equipment and other property to other Company-owned facilities that ~~additional charges and future cash payments could occur in relation~~were originally anticipated to ~~the restructuring actions.~~
~~2016 Restructuring Plan~~
~~On February 1, 2016,~~be incurred in connection with the ~~acquisition of KUPI, the Company~~Cody Restructuring Plan 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 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.June 2018.

Financial Summary

For the ~~second~~first quarter of Fiscal Year ~~2019,~~2020, net sales ~~increased~~decreased to ~~$193.7~~$127.3 million as compared to ~~$184.3~~$155.1 million in the same prior-year period. Gross profit decreased to ~~$69.8~~$42.7 million compared to ~~$87.5~~$59.1 million in the prior-year period and gross profit percentage decreased to ~~36%~~33% compared to ~~47%~~38% in the prior-year period. R&D expenses decreased 9% to ~~$9.7~~$8.9 million compared to ~~$10.7~~$9.8 million in the second quarter of Fiscal Year 2018 while SG&A expenses decreased 19% to $23.2 million from $28.5 million in the prior-year period. Restructuring expenses decreased to $213 thousand from $1.0 million in the prior-year period. Operating income for the secondfirst quarter of Fiscal Year 2019 ~~was $36.7~~while SG&A expenses increased 3% to $21.3 million ~~compared~~from $20.6 million. Restructuring expenses increased to ~~$47.1~~$1.4 million infrom $1.0 million. Operating income for the ~~second~~first quarter of Fiscal Year ~~2018. Net income for~~2020, which included asset impairment charges totaling $1.6 million, was $9.4 million compared to operating loss of $341.8 million in the ~~second~~first quarter of Fiscal Year 2019, which included asset impairment charges totaling $369.5 million. Net loss for the first quarter of Fiscal Year 2020 was ~~$12.4~~$12.2 million, or $0.32 per diluted share compared to ~~$14.0~~net loss of $287.5 million or ~~$0.37~~$7.65 per diluted share in the ~~second~~first quarter of Fiscal Year ~~2018.~~
For the first six months of Fiscal 2019, net sales increased to $348.8 million compared to $339.3 million in the same prior-year period. Gross profit decreased to $129.0 million compared to $155.1 million in the prior-year period. Gross profit percentage decreased to 37% compared to 46% in the prior-year period. R&D expenses increased 8% to $19.5 million compared to $18.1 million in the first six months of Fiscal 2018 while SG&A expenses decreased 8% to $43.8 million from $47.5 million in the prior-year period. Restructuring expenses decreased to $1.2 million from $1.6 million in the prior-year period. Operating loss for the first six months of Fiscal 2019, which included asset impairment charges totaling $369.5 million was $305.1 million compared to operating income of $87.8 million in the prior-year period. Net loss for the first six months of Fiscal 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 in the prior-year period.2019.
A more detailed discussion of the Company’s financial results can be found below.

Results of Operations - Three months ended ~~December 31, 2018~~September 30, 2019 compared with the three months ended ~~December 31, 2017~~September 30, 2018

Net sales ~~increased 5%~~decreased to ~~$193.7~~$127.3 million for the three months ended ~~December 31, 2018.~~September 30, 2019. The ~~following~~ table below identifies the Company’s net product sales by medical indication for the three months ended ~~December 31,~~September 30, 2019 and 2018. The medical indication categories for the three months ended September 30, 2018 was reclassified to better align with industry standards and ~~2017:~~the Company’s peers.

(In thousands)

Three Months Ended December 31,

Three Months Ended September 30,

Medical Indication

2018

2017

2019

2018

Antibiotic

$
4,187

$
3,552

Analgesic

$
1,884

$
1,829

Anti-Psychosis

14,036

22,799

28,034

10,889

Cardiovascular

25,680

10,135

21,606

21,770

Central Nervous System

6,187

6,925

19,257

14,286

Gallstone

2,489

5,282

Endocrinology

—

53,878

Gastrointestinal

10,009

15,055

16,962

17,594

Glaucoma

512

2,164

Infectious Disease

11,895

4,480

Migraine

12,551

15,484

9,143

9,737

Muscle Relaxant

3,121

3,219

Pain Management

8,968

6,128

Respiratory

1,163

2,230

Thyroid Deficiency

88,477

68,794

Respiratory/Allergy/Cough/Cold

2,707

3,584

Urinary

1,606

2,840

435

1,541

Other

6,827

13,105

9,861

10,805

Contract manufacturing revenue

7,905

6,593

5,558

4,661

Net sales

$
193,718

$
184,305

Total

$
127,342

$
155,054

The ~~increase~~decrease in net sales was driven by ~~increased~~decreased volumes of ~~$39.8~~$19.9 million ~~partially offset by~~and, to a lesser extent, decreased average selling price of products of ~~$30.4~~$7.8 million. ~~Volumes were favorably impacted~~Overall volumes decreased primarily due to ~~increased sales~~the loss of Levothyroxine ~~as customer demand increased in anticipation~~sales associated with the expiration of the ~~transition of the Product.  Additional sales~~JSP Distribution Agreement, partially offset by additional volumes from product launches and increased market share in the 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 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 key products. Average selling prices were ~~also~~ impacted by product mix ~~changes within distribution channels~~and price decreases in certain key products and, to a lesser extent, competitive pricing pressures. Although the Company has benefited in the past from favorable pricing trends, these trends have reversed.

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~~$10.4 million during the three months ended ~~December 31,~~September 30, 2019 and $7.9 million during the three months ended September 30, 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

30
%
(12
)%
Analgesic

143
%
(140
)%
Anti-Psychosis

(15
)%
(23
)%

130
%
28
%
Cardiovascular

133
%
20
%

(28
)%
27
%
Central Nervous System

(3
)%
(8
)%

63
%
(28
)%
Gallstone

8
%
(61
)%
Endocrinology

(100
)%
—
%
Gastrointestinal

(3
)%
(31
)%

(2
)%
(1
)%
Glaucoma

(58
)%
(18
)%
Infectious Disease

197
%
(31
)%
Migraine

(7
)%
(12
)%

17
%
(23
)%
Muscle Relaxant

13
%
(16
)%
Pain Management

62
%
(16
)%
Respiratory

(47
)%
(1
)%
Thyroid Deficiency

34
%
(5
)%
Respiratory/Allergy/Cough/Cold

(19
)%
(6
)%
Urinary

(17
)%
(26
)%

(35
)%
(37
)%
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 September 30:
(In thousands)
Customer Distribution Channel

September 30,
2019

September 30,
2018

Wholesaler/Distributor

$
102,200

$
116,354

Retail Chain

17,088

25,041

Mail-Order Pharmacy

2,496

8,998

Contract manufacturing revenue

5,558

4,661

Total

$
127,342

$
155,054

Overall net sales decreased primarily due to the loss of the Levothyroxine sales associated with the expiration of the JSP Distribution Agreement, partially offset by additional volumes from product launches and increased market share in certain key products. The allocation of the Company’s sales among the various distribution channels remained consistent with the same prior-year period.
~~Central Nervous System.~~Cocaine Hydrochloride Solution
In December 2017, a competitor received approval from the FDA to market and sell a Cocaine Hydrochloride topical product. This approval affects the Company’s right to market and sell its unapproved cocaine hydrochloride solution product. According to FDA guidance, the FDA typically allows the marketing of unapproved products for up to one year following the approval of an NDA for the product. Upon the recent request of the FDA to cease manufacturing and distributing our unapproved cocaine hydrochloride solution product as a result of an approved product on the market, the Company committed to not manufacture or distribute cocaine hydrochloride 10% solution, which has not been sold during Fiscal 2019, as of April 15, 2019. The Company also ceased manufacturing its unapproved cocaine hydrochloride 4% solution on June 15, 2019 and ceased distributing the product on August 15, 2019. The Company does not believe the discontinuation will have a material impact on our future expected results of operations, as we had anticipated the withdrawal of this product. During the three months ended September 30, 2019 and September 30, 2018, the Company’s net sales of the unapproved cocaine hydrochloride solution product were $2.8 million and $3.0 million, respectively.
Meanwhile, the FDA continues to review the Company’s Section 505(b)(2) NDA application, and in July 2018 issued a Complete Response Letter (“CRL”) which required an additional study and other information. In June 2019, the Company submitted a response to the Complete Response Letter and received a new Prescription Drug User Fee Act (“PDUFA”) date of December 21, 2019. The Company 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) NDA application, treat as withdrawn any submissions made by the Company after December 2017 and withdraw the Company’s Section 505(b)(2) application. On April 24, 2019, the Company filed an opposition to the Citizen Petition requesting that it be denied. On July 3, 2019, the FDA denied the competitor’s Citizen Petition. Thereafter, the competitor filed a second Citizen Petition claiming that the FDA should rescind the acceptance of the Company’s Section 505(b)(2) application and only permit the Company to re-submit the application as an ANDA after the expiration of the competitor’s five year exclusivity. The Company filed an opposition to the second Citizen Petition asserting, among other things, that the FDA should summarily deny the second Citizen Petition as an improper attempt to delay competition. The FDA has not yet ruled on the second Citizen Petition. The Company believes the FDA is continuing to review its Section 505(b)(2) application.
Methylphenidate Hydrochloride Extended Release Tablets (“Methylphenidate ER”)

The Company markets one form of the product which is designated “BX.” Per a teleconference in November 2014, 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 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 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. The FDA has ~~not yet made a decision as to whether to grant a hearing to the Company.~~
~~The Company intends to continue~~been working with the FDA to regain the “AB” rating, and in the meantime, ~~maintain~~maintains 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 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®. In April 2019, Andor received approval from the FDA of its Methylphenidate ER tablets USP (CII) ANDA. The Company commenced the launch of the product in 18mg, 27mg, 36mg and 54mg strengths in May 2019.

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 affects the Company’s right to market and sell its unapproved 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. During the six months ended December 31, 2018 and 2017, the Company’s net sales of C-Topical were $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 based on the competitor product, 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~~Major CRL related to ~~market this product.~~
issues at its API supplier. The Company ~~sells its products~~filed a response to ~~customers~~the CRL. The Company received a second Major CRL 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,
2018

December 31,
2017

Wholesaler/Distributor

$
153,641

$
126,765

Retail Chain

24,627

40,233

Mail-Order Pharmacy

7,545

10,714

Contract manufacturing revenue

7,905

6,593

Net sales

$
193,718

$
184,305

~~Net sales to wholesalers/distributors increased significantly primarily due to additional sales~~first quarter of ~~Levothyroxine~~Fiscal 2020 related to continued issues at the ~~Amneal Agreement. Net sales~~API supplier, as well as issues with the REMS program hosted by Celgene. The Company is working on addressing the FDA comments and expects its product launch to retail chains decreased significantly as a result of additional sales in the three 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.be delayed until Fiscal Year 2021.

~~Cost of Sales, including amortization of intangibles.~~Ranitidine Oral Solution, USP Cost of sales, including amortization of intangibles, for the second quarter of Fiscal 2019 increased 28% to $123.9 million from $96.9 million in the same prior-year period. The increase was primarily attributable to 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. 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 2018.

~~Gross Profit.~~ ~~Gross profit for~~As part of an industry-wide action, the ~~second quarter~~Company is voluntarily recalling all lots within expiry of ~~Fiscal 2019 decreased 20%~~Ranitidine Syrup (Ranitidine Oral Solution, USP), 15mg/mL to ~~$69.8 million or 36% of net sales. In comparison, gross profit for~~ the second quarter of Fiscal 2018 was $87.5 million or 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 price of certain key products and increased product 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 decreased 9% to $9.7 million in Fiscal 2019 from $10.7 million in Fiscal 2018. The decrease was primarily~~consumer level due to ~~lower incentive compensation-related expenses.~~
~~Selling, General~~levels of N-Nitrosodimethylamine (“NDMA”), a probable human carcinogen, above the levels recently established by the FDA. On September 17, 2019, the FDA notified the Company about the possible presence of NDMA in its Ranitidine Oral Solution product and ~~Administrative Expenses.~~ ~~Selling, general~~the Company immediately commenced testing and ~~administrative expenses decreased 19% to $23.2 million in~~analysis of the ~~second quarter~~active pharmaceutical ingredient (“API”) and drug product, and confirmed the presence of Fiscal 2019 compared with $28.5 million in Fiscal 2018. The decrease was primarily due to lower incentive-based compensation and a reduction of selling and marketing expenses related to product salesforce, partially offset by depreciation related to software integration costs.
NDMA. 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 process of switching its API supplier for its Ranitidine Oral Solution, USP product. The Company’s ~~infrastructure and expansion may continue to impact operating expenses~~net sales of Ranitidine Oral Solution in ~~future periods.~~
~~Restructuring Expenses.~~ ~~Restructuring expenses decreased $822 thousand to $213 thousand for~~ the ~~second~~fourth quarter of ~~Fiscal Year~~fiscal year 2019 ~~compared to the prior-year period primarily due to a reversal of employee separation costs related to the Cody Restructuring Program. See Note 4 “Restructuring Charges” for more information.~~
~~Other Income (Loss).~~ ~~Interest expense for the three months ended December 31, 2018~~ totaled $21.5 million compared to $20.7 million for the three months ended December 31, 2017. The weighted average interest rate for the second quarter of Fiscal 2019 and 2018 was 9.6% and 8.3%, 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.
~~Income Tax.~~ The Company recorded income tax expense in the second quarter of Fiscal 2019 of $2.6 million compared to $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, 2018 was lower compared to the three months ended December 31, 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, 2018 was 21% compared to a blended federal statutory tax rate of 28% in the prior-year period.
~~Net Income.~~ For the three months ended December 31, 2018, the Company reported net income of $12.4 million, or $0.32 per diluted share. Comparatively, net income in the corresponding prior-year period was $14.0 million, or $0.37 per diluted share.
~~Results of Operations - Six months ended December 31, 2018 compared with the six months ended December 31, 2017~~
Net sales increased 3% to $348.8 million for the six months ended December 31, 2018. The following table identifies the Company’s net product sales by medical indication for the six months ended December 31, 2018 and 2017:
(In thousands)

Six Months Ended December 31,

Medical Indication

2018

2017

Antibiotic

$
8,276

$
6,900

Anti-Psychosis

24,924

37,791

Cardiovascular

47,450

21,441

Central Nervous System

13,384

15,742

Gallstone

4,703

11,846

Gastrointestinal

25,048

29,608

Glaucoma

1,060

4,832

Migraine

22,288

30,499

Muscle Relaxant

6,300

7,010

Pain Management

13,915

11,889

Respiratory

2,178

3,876

Thyroid Deficiency

142,354

116,008

Urinary

3,158

5,837

Other

21,168

25,802

Contract manufacturing revenue

12,566

10,185

Net sales

$
348,772

$
339,266

~~The increase in net sales was driven by increased volumes of $52.3 million, partially offset by decreased average selling price of products of $42.8~~$1.9 million.  Volumes were favorably impacted due to increased sales of Levothyroxine as customer demand increased in anticipation of the transition of the Product.  Additional sales in the 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 continues to operate its business in the normal course. The Company does not believe ~~this~~the recall will ~~materially affect~~have a significant impact on our ~~distribution agreement with Aralez. Average selling prices were negatively impacted by price protection~~future expected financial position, results of operations 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.
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 %

Antibiotic

16
%
4
%
Anti-Psychosis

(13
)%
(21
)%
Cardiovascular

124
%
(3
)%
Central Nervous System

(10
)%
(5
)%
Gallstone

(2
)%
(58
)%
Gastrointestinal

2
%
(17
)%
Glaucoma

(61
)%
(17
)%
Migraine

(18
)%
(9
)%
Muscle Relaxant

(3
)%
(7
)%
Pain Management

32
%
(15
)%
Respiratory

(49
)%
5
%
Thyroid Deficiency

28
%
(5
)%
Urinary

(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, 2018 and 2017:
(In thousands)
Customer Distribution Channel

December 31,
2018

December 31,
2017

Wholesaler/Distributor

$
269,994

$
247,566

Retail Chain

49,668

59,001

Mail-Order Pharmacy

16,544

22,514

Contract manufacturing revenue

12,566

10,185

Net sales

$
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 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. The decrease in sales to retail chains was partially offset by additional sales of a product in the Cardiovascular medical indication related to a distribution agreement entered into with Aralez in November 2017.cash flows.

Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles for the first ~~six months~~quarter of Fiscal ~~2019 increased 19%~~Year 2020 decreased 12% to ~~$219.8~~$84.7 million from ~~$184.1~~$95.9 million in the same prior-year period. The ~~increase~~decrease was primarily attributable to ~~increased~~the loss of Levothyroxine sales associated with the expiration of the JSP Distribution Agreement, partially offset by additional volumes of products sold ~~and to a lesser extent,~~as well as increased product ~~royalties.~~royalties expense related to various distribution agreements. Product royalties expense included in cost of sales totaled ~~$16.8~~$16.3 million for the first ~~six months~~quarter of Fiscal Year ~~2019~~2020 and ~~$13.9~~$5.9 million for the first ~~six months~~quarter of Fiscal Year ~~2018.~~2019. Amortization expense included in cost of sales totaled ~~$16.4~~$7.0 million for the first ~~six months~~quarter of Fiscal Year ~~2019~~2020 and ~~$15.7~~$8.2 million for the first ~~six months~~quarter of Fiscal Year ~~2018.~~2019.
Gross Profit. Gross profit for the first ~~six months~~quarter of Fiscal ~~2019~~2020 decreased ~~17%~~28% to ~~$129.0~~$42.7 million or ~~37%~~33% of net sales. In comparison, gross profit for the first ~~six months~~quarter of Fiscal ~~2018~~2019 was ~~$155.1~~$59.1 million or ~~46%~~38% of net sales. The decrease in gross profit percentage was primarily attributable to ~~price protection and stock-shelf adjustments in~~ the ~~second quarter~~loss of ~~Fiscal 2019~~Levothyroxine sales associated with the expiration of the JSP Distribution Agreement as well as ~~lower average selling price of certain key products and~~ increased product royalties related to distribution agreements, partially offset by manufacturing efficiencies as a ~~distribution agreement entered into with Aralez in November 2017.~~result of cost reduction initiatives.

Research and Development Expenses. Research and development expenses for the first ~~six months increased 8%~~quarter decreased 9% to ~~$19.5~~$8.9 million in Fiscal ~~2019~~Year 2020 from ~~$18.1~~$9.8 million in Fiscal ~~2018.~~Year 2019. The ~~increase~~decrease was primarily due to ~~higher product development~~lower R&D expenses ~~related~~as a result of the Company’s decision to ~~various pipeline projects, partially offset by lower incentive compensation-related expenses.~~cease operations at Cody Labs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ~~decreased 8%~~increased 3% to ~~$43.8~~$21.3 million in the first ~~six months~~quarter of Fiscal ~~2019~~Year 2020 compared with ~~$47.5~~$20.6 million in Fiscal ~~2018.~~Year 2019. The ~~decrease~~increase was primarily ~~due to lower incentive compensation-related expenses~~driven by increased legal costs and ~~a reduction of selling and marketing expenses related to product salesforce,~~separation costs associated with the Company’s former chief financial officer, partially offset by ~~additional regulatory~~lower expenses at the Company’s Cody Labs subsidiary and ~~quality control costs as well as depreciation related to software integration costs.~~other cost reduction initiatives.

The Company is focused on controlling operating expenses and has ~~implemented~~executed on its 2016 Restructuring Plan, Cody Restructuring Plan and Cody API Restructuring Plan as noted ~~above,~~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.
Restructuring Expenses. Restructuring expenses ~~decreased 21%~~totaled $1.4 million in the first quarter of Fiscal Year 2020 compared to ~~$1.2~~$1.0 million ~~compared to~~in the prior-year period, primarily due to ~~a reversal~~the timing of ~~employee separation costs related to~~ the ~~Cody Restructuring Program in the second quarter of Fiscal 2019.~~Company’s various restructuring plans. See Note 4 “Restructuring Charges” for more information.

Asset Impairment Charges. In the first quarter of Fiscal 2020, the Company recorded a ROU lease asset totaling $1.2 million related to an existing lease at Cody Labs upon adoption of ASU No. 2016-02. The Company subsequently recorded a full impairment of the asset as a result of the decision to cease operations at Cody Labs.
In the 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 Cody API business ~~are~~were recorded in the assets and liabilities held for sale captions in the Consolidated Balance Sheet as of ~~December 31,~~September 30, 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.~~

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 that it would record a full impairment of goodwill totaling $339.6 million. See Note 109 “Goodwill and Intangible Assets” for more information.

Other Income (Loss). Interest expense for the three months ended September 30, 2019 totaled $19.3 million compared to $21.4 million for the three months ended September 30, 2018. The decrease was due to a lower weighted-average debt balance in the first ~~six months~~quarter of Fiscal ~~2019 totaled $42.9 million~~2020 as compared to ~~$41.6 million in Fiscal 2018.~~the prior-year period. The weighted average interest rate for the first ~~six months~~quarter of Fiscal 2020 and 2019 was 9.8% and ~~2018 was 9.5% and 8.3%~~9.3%, respectively. Investment income totaled $0.7 million in the first ~~six months~~quarter of Fiscal ~~2019 totaled $935 thousand~~2020 compared ~~with investment income of $3.5~~to $0.4 million in the first quarter of Fiscal ~~2018.~~2019.

Income Tax. The Company recorded an income tax ~~benefit in the first six months of Fiscal 2019 of $73.0 million compared to income tax~~ expense of ~~$25.6~~$1.8 million in the first ~~six~~quarter of Fiscal Year 2020 as compared to an income tax benefit of $75.6 million in the first quarter of Fiscal Year 2019. The effective tax rate for the three months ~~of Fiscal~~ended September 30, 2019 was (17.2)%, compared to 20.8% for the three months ended September 30, 2018. The effective tax rate for the ~~six~~three 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, 2018~~September 30, 2019 was lower compared to the ~~same prior-year period~~three months ended September 30, 2018 primarily due to research and development credits relative to expected pre-tax income, partially offset by the ~~application~~impact of ~~2017 Tax Reform in the prior-year period, which resulted in a revaluation of the Company’s net long term deferred~~excess tax ~~assets. In addition, the federal statutory tax rate for the six months ended December 31, 2018 was 21% compared~~shortfalls related to ~~a blended federal statutory tax rate of 28% in the prior-year period.~~stock compensation.

Net ~~Income (Loss).~~Loss. For the ~~six~~three months ended ~~December 31, 2018,~~September 30, 2019, the Company reported net loss of ~~$275.2~~$12.2 million, or ~~$7.30~~$0.32 per diluted share. Comparatively, net ~~income~~loss in the corresponding prior-year period was ~~$27.3~~$287.5 million, or ~~$0.72~~$7.65 per diluted share.
Liquidity and Capital Resources

Cash Flow

~~Until November 25, 2015, the date of the KUPI acquisition, the~~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, 2018,~~September 30, 2019, working capital was ~~$350.6~~$256.0 million as compared to ~~$326.0~~$295.6 million at June 30, ~~2018, an increase~~2019, a decrease of ~~$24.6~~$39.6 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~~$4.3 million for the ~~six~~three months ended ~~December 31, 2018~~September 30, 2019 reflected net loss of ~~$275.2~~$12.2 million, adjustments for non-cash items of ~~$334.3~~$23.0 million, as well as cash used bythrough changes in operating assets and liabilities of ~~$34.9~~$6.6 million. In comparison, net cash provided by operating activities of ~~$76.1~~$54.7 million for the ~~six~~three months ended ~~December 31, 2017~~September 30, 2018 reflected net ~~income~~loss of ~~$27.3~~$287.5 million, adjustments for non-cash items of ~~$61.7~~$314.2 million, as well as cash ~~used~~provided by changes in operating assets and liabilities of ~~$12.9~~$28.0 million.
Significant changes in operating assets and liabilities from June 30, 2019 to September 30, 2019 were comprised of:
·                  An increase in accounts receivable of $8.4 million mainly due to the timing of sales and product launches in the first quarter of Fiscal 2020. The Company’s days sales outstanding (“DSO”) at September 30, 2019, based on gross sales for the three months ended September 30, 2019 and gross accounts receivable at September 30, 2019, was 81 days. The level of DSO at September 30, 2019 was comparable to the Company’s expectation that DSO will be in the 70 to 85-day range based on customer payment terms.
·                  An increase in accounts payable totaling $13.4 million primarily due to the timing of payments.
·                  A decrease in accrued payroll and payroll-related costs of $7.6 million primarily related to payments made in August 2019 in connection with incentive compensation accrued in Fiscal Year 2019, partially offset by the timing of payroll payments.
·                  A decrease in other assets totaling $6.8 million primarily due to receipt of an indemnification asset from UCB related to a government pricing contract compliance review.

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

·                  ~~An increase~~A decrease in accounts receivable of ~~$25.9~~$44.1 million ~~primarily~~mainly due to decreased sales in the first quarter of Fiscal 2019 compared to the fourth quarter of Fiscal 2018 as ~~a result of~~well as the timing of ~~receipts as well as increased sales of Levothyroxine as customer demand increased in anticipation of the transition of the Product.~~collections. The Company’s days sales outstanding (“DSO”) at ~~December 31,~~September 30, 2018, based on gross sales for the ~~six~~three months ended ~~December 31,~~September 30, 2018 and gross accounts receivable at ~~December 31,~~September 30, 2018, was 8176 days. The level of DSO at ~~December 31,~~September 30, 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 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 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 expectationsexpectation that DSO will be in the 70 to 80 day range based on customer payment terms.
·                  ~~An increase~~A decrease in ~~accounts~~prepaid income taxes totaling $14.4 million primarily due to receipt of approximately $15.2 million in tax refunds from the IRS.
·                  A decrease in rebates payable totaling ~~$28.9~~$12.9 million primarily due to the timing of ~~payments to a few major suppliers.~~processing Medicaid-related rebates.
·                  An increase in inventories totaling ~~$13.0~~$9.8 million primarily due to the timing of customer order fulfillment.
·                  ~~An increase~~
Net cash used in ~~accrued payroll and payroll-related costs~~investing activities of ~~$11.2~~$21.5 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~~three months ended September 30, 2019 was mainly the result of purchases of intangible assets of $23.5 million ~~primarily due to income tax refunds received~~and purchases of property, plant and equipment of $4.0 million, partially offset by proceeds from the ~~IRS.~~
sale of property, plant and equipment of $6.3 million. Net cash provided by investing activities of ~~$5.7~~$13.8 million for the ~~six~~three months ended ~~December 31,~~September 30, 2018 iswas mainly the result of proceeds from the sale of property, plant and equipment of ~~$14.1~~$14.0 million and proceeds from the sale of an outstanding VIE loan to a third party of $5.6 million, partially offset by purchases of property, plant and equipment of ~~$12.0~~$5.8 million.
Net cash used in financing activities of $22.0 million for the three months ended September 30, 2019 was primarily due to debt repayments of $96.6 million, purchase of a capped call in connection with the 4.50% Convertible Senior Notes offering totaling $7.1 million, payments of debt issuance costs totaling $3.5 million, and purchases of an intangible asset of $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 $2.0treasury stock totaling $1.4 million, partially offset by proceeds from the ~~sale~~issuance of ~~investment securities~~4.50% Convertible Senior Notes of ~~$44.9 million.~~
~~Net cash used in financing activities of $34.5~~$86.3 million ~~for the six months ended December 31, 2018 was primarily due to debt repayments of $33.4 million, payments of debt issuance costs totaling $1.1 million~~ and ~~purchases of treasury stock totaling $475 thousand, partially offset by~~ proceeds from issuance of stock pursuant to stock compensation plans of ~~$521 thousand.~~$0.2 million. Net cash used in financing activities of ~~$27.5~~$16.8 million for the ~~six~~three months ended ~~December 31, 2017~~September 30, 2018 was primarily due to debt repayments of ~~$27.3~~
$16.7 million and purchases of treasury stock totaling ~~$1.0~~$0.4 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of ~~$806 thousand.~~$0.3 million.
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 acquisitions, various capital investments and potential strategic opportunities. These borrowing arrangements as of ~~December 31, 2018~~September 30, 2019 are as follows:

Amended Senior Secured Credit Facility

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

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

~~On December 10, 2018, the Company entered into 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.
Refer to the Company’s Form 10-K for the fiscal year ended June 30, ~~2018~~2019 for further details on the Amended Senior Secured Credit Facility.
4.50% Convertible Senior Notes due 2026
On September 27, 2019, the Company issued $86,250,000 aggregate principal amount of the Notes in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 4.50% payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2020. The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted in accordance with their terms. The Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 65.4022 shares per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $15.29 per share), subject to adjustments upon the occurrence of certain events (but will not be adjusted for any accrued and unpaid interest). The Company may redeem all or a part of the Notes on or after October 6, 2023 at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, subject to certain conditions relating to the Company’s stock price having been met. Following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or notice of redemption. The indenture covering the Notes contains certain other customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable.
In connection with the offering of the Notes, the Company also entered into privately negotiated “capped call” transactions with several counterparties. The capped call transaction will initially cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Notes. The capped call transactions are expected to generally reduce the potential dilutive effect on the Company’s common stock upon any conversion of the Notes with such reduction subject to a cap which is initially $19.46 per share.

Other Liquidity Matters

Refer to the “JSP Distribution Agreement” section above for the impact of the nonrenewal of the JSP agreement on our future liquidity.

Future Acquisitions

We are continuously evaluating the potential for product and company acquisitions as a part of our future growth strategy. In conjunction with a potential acquisition, the Company may utilize current resources or seek additional sources of capital to finance any such acquisition, which could have an impact on future liquidity.
We may also from time to time depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to prepay outstanding debt or repurchase our outstanding debt through open market purchases, privately negotiated purchases, or otherwise. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings.

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 is detailed in Note 3 “Summary of Significant Accounting Policies.” A subsection of these accounting policies ~~have~~has been identified by management as “Critical Accounting Policies.” Critical accounting policies are those which require management to make estimates using assumptions that were uncertain at the time the estimates were made and for which the use of different assumptions, which reasonably could have been used, could have a material impact on the financial condition or results of operations.

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

Revenue Recognition

On July 1, 2018, the Company adopted ~~Accounting Standards Codification (“ASC”)~~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 (ii) we do not generally receive consideration until the performance obligation is fully satisfied. The new revenue standard also impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time”. However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position. The Company adopted ASC 606 using the modified retrospective method. ~~Refer to the “~~~~Recent Accounting Pronouncements~~~~” section of this footnote for further discussion of the impact of the adoption.~~

When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments. These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual. Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.
Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity. While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions. Each major category is discussed in detail below:

Chargebacks

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

Rebates

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a new cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their FDA approval was granted under a NDA or 505(b) NDA versus an ANDA. Because our drugs used for the treatment of thyroid deficiency and our Morphine Sulfate Oral Solution product were both approved by the FDA as 505(b)(2) NDAs, they are considered “brand” drugs for purposes of the PPACA. Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

Returns

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

Other Adjustments

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

Refer to the Company’s Form 10-K for the fiscal year ended June 30, ~~2018~~2019 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 and December 2018.~~2016. Based on the variable-rate debt outstanding at ~~December 31, 2018,~~September 30, 2019, each 1/8% increase in interest rates would yield ~~$1.1~~$0.8 million of incremental annual interest expense.

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Change in Internal Control Over Financial Reporting

There has been no change in Lannett’s internal control over financial reporting during the three months ended ~~December 31, 2018~~September 30, 2019 that has materially affected, or 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.~~11 “Legal, Regulatory Matters and Contingencies” of the Consolidated Financial Statements included in Part I, Item 1.1 of this Quarterly Report on Form 10-Q and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

Lannett Company, ~~Inc.’s~~Inc’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018~~2019 includes a detailed description of its risk factors.
In the first quarter of Fiscal 2020, the Company updated Item 1A. Risk Factors to include the following:
Health care initiatives and other third-party payor cost-containment pressures have and could continue to cause us to sell our products at lower prices, resulting in decreased revenues.
Some of our products are purchased or reimbursed by state and federal government authorities, private health insurers and other organizations, such as health maintenance organizations, or HMOs and managed care organizations, or MCOs. Third-party payors increasingly challenge pharmaceutical product pricing. There also continues to be a trend toward managed health care in the United States. Pricing pressures by third-party payors and the growth of organizations such as HMOs and MCOs could result in lower prices and a reduction in demand for our products.
One such governmental program, known as the 340B Program, requires pharmaceutical manufacturers to enter into an agreement, called a pharmaceutical pricing agreement (PPA), with the Secretary of Health and Human Services. Under the PPA, the manufacturer agrees to provide front-end discounts on covered outpatient drugs purchased by specified providers, called “covered entities,” that serve the nation’s most vulnerable patient populations. Outpatient prescription drugs, over the counter drugs (accompanied by a prescription), and clinic administered drugs within eligible facilities are covered.
In addition, legislative and regulatory proposals and enactments to reform health care and government insurance programs could significantly influence the manner in which pharmaceutical products and medical devices are prescribed and purchased. We expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that could limit the amounts that federal and state governments will pay for health care products and services. The extent to which future legislation or regulations, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted or what effect such legislation or regulation would have on our business remains uncertain. For example, H.R.987, the “Strengthening Health Care and Lowering Prescription Drug Costs Act,” which incorporated a bipartisan effort to address prescription drug pricing combined with broader provisions protecting the Affordable Care Act, was passed by the House of Representatives on May 16, 2019, but it is not expected to pass in the Senate. The bill does represent bipartisan consensus on the need to reform the drug pricing system. Additionally, in 2019, President Trump stated that he was considering an executive order that would require drug manufacturers to offer the Federal Government most favored nation pricing (i.e., the lowest pricing offered to anybody else in the world). Such measures or other health care system reforms that are adopted could have a material adverse effect on our industry generally and our ability to successfully commercialize our products or could limit or eliminate our spending on development projects and affect our ultimate profitability.
We may need to change our business practices to comply with changes to fraud and abuse laws.
We are subject to various federal and state laws pertaining to health care fraud and abuse, including the Medicare and Medicaid Anti-Kickback Statute (the “Anti-Kickback Statute”), which apply to our sales and marketing practices and our relationships with physicians and other referral sources. At the federal level, the Anti-Kickback Statute prohibits any person or entity from knowingly and willfully soliciting, receiving, offering, or paying any remuneration, including a bribe, kickback, or rebate, directly or indirectly, in return for or to induce the referral of patients for items or services covered by federal health care programs, or the furnishing, recommending, or arranging for products or services covered by federal health care programs. Federal health care programs have been defined to include plans and programs that provide health benefits funded by the federal government, including Medicare and Medicaid, among others. The definition of “remuneration” has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the federal Anti- Kickback Statute’s intent requirement to mean that if even one purpose in an arrangement involving remuneration is to induce referrals or otherwise generate business involving goods or services reimbursed in whole or in part under federal health care programs, the statute has been violated. The federal government has issued regulations, commonly known as safe harbors that set forth certain provisions which, if fully met, will assure parties that they will not be prosecuted under the federal Anti-Kickback Statute. The failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement will be illegal or that prosecution under the federal Anti-Kickback Statute will be pursued, but such transactions or arrangements face an increased risk of scrutiny by government enforcement authorities and an ongoing risk of prosecution. If our sales and marketing practices or our relationships with physicians are considered by federal or state enforcement authorities to be knowingly and willfully soliciting, receiving, offering, or providing any remuneration in exchange for arranging for or recommending our products and services and such activities do not fit within a safe harbor, then these arrangements could be challenged under the federal Anti-Kickback Statute.
If our operations are found to be in violation of the federal Anti-Kickback Statute we may be subject to civil and criminal penalties including fines of up to $100 thousand per violation, civil monetary penalties of up to $100 thousand per violation, assessments of up to three times the amount of the prohibited remuneration, imprisonment and exclusion from participating in the federal health care programs. Violations of the Anti-Kickback Statute also may result in a finding of civil liability under the FFCA (as further discussed below) and the potential imposition of additional civil fines and monetary penalties that could be substantial. Falsely certifying compliance with the Anti-Kickback Statute in connection with a claim submitted to a federally funded insurance program is actionable under the FFCA. In addition, HIPAA and its implementing regulations created two new federal crimes: health care fraud and false statements relating to health care matters. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private payors. A violation of this statue is a felony and may result in fines, imprisonment and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items, or services.
A number of states also have anti-fraud and anti-kickback laws similar to the federal Anti-Kickback Statute that prohibit certain direct or indirect payments if such arrangements are designed to induce or encourage the referral of patients or the furnishing of goods or services. Some states’ anti-fraud and anti-kickback laws apply only to goods and services covered by Medicaid. Other states’ anti-fraud and anti-kickback laws apply to all health care goods and services, regardless of whether the source of payment is governmental or private. Due to the breadth of these laws and the potential for changes in laws, regulations, or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could materially adversely affect our business.
Certain federal and state governmental agencies, including the U.S. Department of Justice and the U.S. Department of Health and Human Services, have been investigating issues surrounding pricing information reported by drug manufacturers and used in the calculation of reimbursements as well as sales and marketing practices. For example, many government and third-party payors, historically including Medicare and Medicaid, reimburse doctors and others for the purchase of certain pharmaceutical products based on the product’s average wholesale price (“AWP”) reported by pharmaceutical companies, although the Company has not used the term AWP since 2000. Medicare currently uses average sales price (“ASP”) and wholesale acquisition cost (“WAC”) when ASP data is unavailable. The federal government, certain state agencies and private payors are investigating and have begun to file court actions related to pharmaceutical companies’ reporting practices with respect to AWP, alleging that the practice of reporting prices for pharmaceutical products has resulted in a false and overstated AWP, which in turn is alleged to have improperly inflated the reimbursement paid by Medicare beneficiaries, insurers, state Medicaid programs, medical plans and others to health care providers who prescribed and administered those products. In addition, some of these same payors are also alleging that companies are not reporting their “best price” to the states under the Medicaid program.
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~~10.58+*
Cediprof Agreement
Filed Herewith
10.59+*
Sinotherapeutics Distribution and Supply Agreement
Filed Herewith
10.60
Lannett Company, Inc. Non-Qualified Deferred Compensation Plan
Filed Herewith
101.INS**

XBRL Instance Document

~~101.SCH~~101.SCH**

XBRL ~~Taxonomy~~ Extension Schema Document

~~101.CAL~~101.CAL**

XBRL ~~Taxonomy Extension~~ Calculation Linkbase Document

~~101.DEF~~101.DEF**

XBRL ~~Taxonomy Extension~~ Definition Linkbase Document

~~101.LAB~~101.LAB**

XBRL ~~Taxonomy Extension~~ Label Linkbase Document

~~101.PRE~~101.PRE**

XBRL ~~Taxonomy Extension~~ Presentation Linkbase Document

* Certain portions of this Exhibit have been redacted to preserve confidentiality. The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request.
+ Certain portions of this Exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to provide further information regarding such omitted materials to the Commission upon request.
** Furnished Herewith
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~~November 7, 2019
By:
/s/ Timothy C. Crew

Timothy C. Crew

Chief Executive Officer

Dated: November 7, 2019
By:
/s/ John Kozlowski

John Kozlowski
~~Dated:~~ ~~February 7, 2019~~
~~By:~~
~~/s/ Martin P. Galvan~~
~~Martin P. Galvan~~

Vice President of Finance and Chief Financial Officer

Dated: ~~February~~November 7, 2019
By:
/s/ G. Michael Landis

G. Michael Landis

Senior Director of Finance, Principal Accounting Officer and Treasurer

4945

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

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

Large accelerated filer xo		Accelerated filer ox

Non-accelerated filer o		Smaller reporting company o
		Emerging growth company o

Class		Outstanding as of ~~January~~October 31, 2019
Common stock, par value $0.001 per share		~~39,286,744~~40,335,406

	(Unaudited)						(Unaudited)
	December 31, 2018			June 30, 2018			September 30, 2019			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	163,774		$	98,586		$	101,008		$	140,249
Accounts receivable, net	275,364			252,651			173,109			164,752
Inventories	136,128			141,635			149,162			143,971
Prepaid income taxes	—			15,159			159			—
Assets held for sale	11,422			13,976			4,637			9,671
Other current assets	7,958			4,863			6,994			13,606
Total current assets	594,646			526,870			435,069			472,249
Property, plant and equipment, net	195,607			233,247			184,889			186,670
Intangible assets, net	409,870			424,425			427,253			411,229
Goodwill	—			339,566
Operating lease right-of-use assets							6,410			—
Deferred tax assets	100,013			22,063			110,396			109,305
Other assets	19,320			29,133			7,914			7,960
TOTAL ASSETS	$	1,319,456		$	1,575,304		$	1,171,931		$	1,187,413

LIABILITIES
Current liabilities:
Accounts payable	$	60,178		$	56,767		$	26,927		$	13,493
Accrued expenses	7,283			7,425			6,233			5,805
Accrued payroll and payroll-related expenses	15,545			7,819			12,347			19,924
Deferred revenue	23,998			—
Rebates payable	44,384			49,400			43,358			46,175
Royalties payable	9,615			5,955			16,597			16,215
Restructuring liability	5,693			6,706			1,167			2,315
Liabilities held for sale	1,204			—
Settlement liability	8,000			—
Income taxes payable	1,346			—			—			2,198
Current operating lease liabilities							1,932			—
Short-term borrowings and current portion of long-term debt	66,845		��	66,845			66,845			66,845
Other current liabilities							3,652			3,652
Total current liabilities	244,091			200,917			179,058			176,622
Long-term debt, net	746,607			772,425			654,432			662,203
Long-term operating lease liabilities							5,626			—
Other liabilities	2,247			3,047			14,711			14,547
TOTAL LIABILITIES	992,945			976,389			853,827			853,372
Commitments and Contingencies (Note 12 and 13)
Commitments and contingencies (Note 12)

STOCKHOLDERS’ EQUITY
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
Common stock ($0.001 par value, 100,000,000 shares authorized; 39,629,271 and 38,969,518 shares issued; 38,526,558 and 38,010,714 shares outstanding at September 30, 2019 and June 30, 2019, respectively)							40			39
Additional paid-in capital	312,322			306,817			314,645			317,023
Retained earnings	29,016			306,464			19,918			32,075
Accumulated other comprehensive loss	(502		)	(515		)	(661		)	(615		)
Treasury stock (943,880 and 876,322 shares at December 31, 2018 and June 30, 2018, respectively)	(14,364		)	(13,889		)
Treasury stock (1,102,713 and 958,804 shares at September 30, 2019 and June 30, 2019, respectively)							(15,838		)	(14,481		)
Total stockholders’ equity	326,511			598,915			318,104			334,041
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,319,456		$	1,575,304		$	1,171,931		$	1,187,413

	Three months ended						Six months ended
	December 31,						December 31,
	2018			2017			2018			2017			Three Months Ended September 30,
													2019			2018
Net sales	$	193,718		$	184,305		$	348,772		$	339,266		$	127,342		$	155,054
Cost of sales	115,751			88,914			203,441			168,467			77,656			87,690
Amortization of intangibles	8,157			7,941			16,380			15,678			7,028			8,223
Gross profit	69,810			87,450			128,951			155,121			42,658			59,141
Operating expenses:
Research and development expenses	9,723			10,722			19,533			18,131			8,940			9,810
Selling, general and administrative expenses	23,197			28,493			43,785			47,531			21,308			20,588
Acquisition and integration-related expenses	—			65			—			83
Restructuring expenses	213			1,035			1,235			1,562			1,388			1,022
Asset impairment charges	—			—			369,499			—			1,618			369,499
Total operating expenses	33,133			40,315			434,052			67,307			33,254			400,919
Operating income (loss)	36,677			47,135			(305,101		)	87,814			9,404			(341,778		)
Other income (loss):
Loss on extinguishment of debt													(2,145		)	—
Investment income	556			2,325			935			3,489			729			379
Interest expense	(21,512		)	(20,686		)	(42,945		)	(41,598		)	(19,292		)	(21,433		)
Other	(712		)	3,386			(1,008		)	3,135			934			(296		)
Total other loss	(21,668		)	(14,975		)	(43,018		)	(34,974		)	(19,774		)	(21,350		)
Income (loss) before income tax	15,009			32,160			(348,119		)	52,840
Loss before income tax													(10,370		)	(363,128		)
Income tax expense (benefit)	2,647			18,138			(72,953		)	25,561			1,787			(75,600		)
Net income (loss)	$	12,362		$	14,022		$	(275,166	)	$	27,279
Net loss													$	(12,157	)	$	(287,528	)

Earnings (loss) per common share:
Loss per common share:
Basic	$	0.33		$	0.38		$	(7.30	)	$	0.74		$	(0.32	)	$	(7.65	)
Diluted	$	0.32		$	0.37		$	(7.30	)	$	0.72
Diluted (1)													$	(0.32	)	$	(7.65	)

Weighted average common shares outstanding:
Basic	37,761,176			37,066,902			37,674,200			37,029,483			38,309,267			37,586,327
Diluted	39,112,547			38,290,358			37,674,200			38,087,826
Diluted (1)													38,309,267			37,586,327

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

	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

	Six Months Ended December 31,
	2018			2017
OPERATING ACTIVITIES:
Net income (loss)	$	(275,166	)	$	27,279
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	28,622			27,354
Deferred income tax expense (benefit)	(77,950		)	22,169
Share-based compensation	4,985			4,752
Asset impairment charges	369,499			—
Loss on sale of assets	644			233
Loss (gain) on investment securities	—			(2,834		)
Amortization of debt discount and other debt issuance costs	8,934			9,987
Other noncash (income) expenses	(510		)	87
Changes in assets and liabilities which provided (used) cash:	—
Accounts receivable, net	(25,887		)	(52,662		)
Inventories	2,156			(12,987		)
Prepaid income taxes/Income taxes payable	17,516			15,040
Other assets	(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	(5,016		)	3,786
Royalties payable	3,660			2,564
Restructuring liability	(1,013		)	(850		)
Settlement liability	8,000			—
Net cash provided by operating activities	93,992			76,105
INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(12,030		)	(26,402		)
Proceeds from sale of property, plant and equipment	14,091			17
Proceeds from sale of outstanding loan to Variable Interest Entity (“VIE”)	5,600			—
Purchase of intangible asset	(2,000		)	(2,038		)
Proceeds from sale of investment securities	—			44,924
Purchase of investment securities	—			(42,841		)
Net cash provided by (used in) investing activities	5,661			(26,340		)
FINANCING ACTIVITIES:
Repayments of long-term debt	(33,422		)	(27,283		)
Proceeds from issuance of stock	521			806
Payment of debt issuance costs	(1,102		)	—
Purchase of treasury stock	(475		)	(1,038		)
Net cash used in financing activities	(34,478		)	(27,515		)
Effect on cash and cash equivalents of changes in foreign exchange rates	13			(125		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	65,188			22,125
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	98,586			117,737
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	163,774		$	139,862
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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

(In thousands)	Three Months Ended December 31,				Six Months Ended December 31,				Three Months Ended September 30,
Medical Indication	2018		2017		2018		2017		2019		2018
Antibiotic	$	4,187	$	3,552	$	8,276	$	6,900
Analgesic									$	1,884	$	1,829
Anti-Psychosis	14,036		22,799		24,924		37,791		28,034		10,889
Cardiovascular	25,680		10,135		47,450		21,441		21,606		21,770
Central Nervous System	6,187		6,925		13,384		15,742		19,257		14,286
Gallstone	2,489		5,282		4,703		11,846
Endocrinology									—		53,878
Gastrointestinal	10,009		15,055		25,048		29,608		16,962		17,594
Glaucoma	512		2,164		1,060		4,832
Infectious Disease									11,895		4,480
Migraine	12,551		15,484		22,288		30,499		9,143		9,737
Muscle Relaxant	3,121		3,219		6,300		7,010
Pain Management	8,968		6,128		13,915		11,889
Respiratory	1,163		2,230		2,178		3,876
Thyroid Deficiency	88,477		68,794		142,354		116,008
Respiratory/Allergy/Cough/Cold									2,707		3,584
Urinary	1,606		2,840		3,158		5,837		435		1,541
Other	6,827		13,105		21,168		25,802		9,861		10,805
Contract manufacturing revenue	7,905		6,593		12,566		10,185		5,558		4,661
Net sales	$	193,718	$	184,305	$	348,772	$	339,266
Total									$	127,342	$	155,054

	2019		2018
Customer A	27	%	18	%
Customer B	25	%	29	%
Customer C	13	%	7	%

(In thousands)	Employee Separation Costs			Facility Closure Costs		Total			Employee Separation Costs			Facility Closure Costs		Total
Balance at June 30, 2018	$	3,092		$	—	$	3,092
Balance at June 30, 2019									$	108		$	—	$	108
Restructuring Charges	(496		)	—		(496		)	—			—		—
Payments	(1,074		)	—		(1,074		)	(108		)	—		(108		)
Balance at December 31, 2018	$	1,522		—		$	1,522
Balance at September 30, 2019									$	—		—		$	—

(In thousands)	Three Months Ended September 30, 2019
Employee separation costs	$	892
Facility closure costs	496
Total	$	1,388

(In thousands)	Employee Separation Costs			Contract Termination Costs		Facility Closure Costs			Total
Balance at June 30, 2019	$	2,207		$	—	$	—		$	2,207
Restructuring Charges	892			—		496			1,388
Payments	(1,932		)	—		(496		)	(2,428		)
Balance at September 30, 2019	$	1,167		$	—	—			$	1,167

	Three
	Months Ended
(In thousands)	September 30, 2018
Employee separation costs	$	414
Facility closure costs	464
Total	$	878

(In thousands)	December 31, 2018			June 30, 2018
Gross accounts receivable	$	515,266		$	503,175
Less Chargebacks reserve	(128,102		)	(153,034		)
Less Rebates reserve	(34,673		)	(33,102		)
Less Returns reserve	(49,508		)	(43,059		)
Less Other deductions	(26,263		)	(20,021		)
Less Allowance for doubtful accounts	(1,356		)	(1,308		)
Accounts receivable, net	$	275,364		$	252,651

(In thousands)	September 30, 2019			June 30, 2019
Gross accounts receivable	$	362,309		$	361,323
Less: Chargebacks reserve	(83,483		)	(89,567		)
Less: Rebates reserve	(31,473		)	(32,099		)
Less: Returns reserve	(53,992		)	(55,554		)
Less: Other deductions	(19,109		)	(18,128		)
Less: Allowance for doubtful accounts	(1,143		)	(1,223		)
Accounts receivable, net	$	173,109		$	164,752

Reserve Category (In thousands)	Chargebacks			Rebates			Returns			Other			Total			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
Balance at June 30, 2019																$	89,567		$	78,274		$	55,554		$	18,128		$	241,523
Current period provision	612,560			143,578			18,662			34,574			809,374			207,933			58,509			3,694			12,705			282,841
Credits issued during the period	(637,492		)	(147,023		)	(12,213		)	(31,868		)	(828,596		)	(214,017		)	(61,952		)	(5,256		)	(11,724		)	(292,949		)
Balance at December 31, 2018	$	128,102		$	79,057		$	49,508		$	26,263		$	282,930
Balance at September 30, 2019																$	83,483		$	74,831		$	53,992		$	19,109		$	231,415

(In thousands)	Useful Lives	December 31, 2018			June 30, 2018
Land	—	$	2,283		$	2,900
Building and improvements	10 - 39 years	85,958			105,041
Machinery and equipment	5 - 10 years	156,903			173,988
Furniture and fixtures	5 - 7 years	3,224			4,099
Less: accumulated depreciation		(79,991		)	(89,996		)
		168,377			196,032
Construction in progress		27,230			37,215
Property, plant and equipment, net		$	195,607		$	233,247

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

	Weighted	Gross Carrying Amount				Accumulated Amortization						Intangible Assets, Net				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		Avg. Life (Yrs.)	September 30, 2019		June 30, 2019		September 30, 2019			June 30, 2019			September 30, 2019		June 30, 2019

Definite-lived:
Cody Labs import license	15	$	—	$	581	$	—		$	(386	)	$	—	$	195	15	$	581	$	581	$	(434	)	$	(424	)	$	147	$	157
KUPI product rights	15	416,154		416,154		(83,712		)	(69,840		)	332,442		346,314		15	416,154		416,154		(104,519		)	(97,583		)	311,635		318,571
KUPI trade name	2	2,920		2,920		(2,920		)	(2,920		)	—		—		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		15	19,000		19,000		(4,878		)	(4,562		)	14,122		14,438
Silarx product rights	15	10,000		10,000		(2,389		)	(2,056		)	7,611		7,944		15	10,000		10,000		(2,889		)	(2,722		)	7,111		7,278
Other product rights	13	21,692		19,693		(3,396		)	(1,875		)	18,296		17,818		13	30,192		26,579		(3,954		)	(4,243		)	26,238		22,336
Total definite-lived		$	469,766	$	468,348	$	(96,345	)	$	(80,372	)	$	373,421	$	387,976		$	478,847	$	475,234	$	(119,594	)	$	(112,454	)	$	359,253	$	362,780

Indefinite-lived:
KUPI in-process research and development	—	$	18,000	$	18,000	$	—		$	—		$	18,000	$	18,000	—	$	18,000	$	18,000	$	—		$	—		$	18,000	$	18,000
Silarx in-process research and development	—	18,000		18,000		—			—			18,000		18,000		—	18,000		18,000		—			—			18,000		18,000
Other product rights	—	449		449		—			—			449		449		—	32,000		12,449		—			—			32,000		12,449
Total indefinite-lived		36,449		36,449		—			—			36,449		36,449			68,000		48,449		—			—			68,000		48,449
Total intangible assets, net		$	506,215	$	504,797	$	(96,345	)	$	(80,372	)	$	409,870	$	424,425		$	546,847	$	523,683	$	(119,594	)	$	(112,454	)	$	427,253	$	411,229

(In thousands) Fiscal Year Ending June 30,	Annual Amortization Expense
2019	$	15,224
2020	30,443
2021	30,443
2022	30,443
2023	30,443
Thereafter	236,425
	$	373,421

(In thousands) Fiscal Year Ending June 30,	Amortization Expense
2020	$	24,228
2021	32,304
2022	32,304
2023	32,304
2024	31,967
Thereafter	206,146
	$	359,253

	December 31,			June 30,			September 30,			June 30,
(In thousands)	2018			2018			2019			2019
Term Loan A due 2020; 7.52% as of December 31, 2018	$	213,526		$	227,276
Term Loan A due 2020; 7.04% as of September 30, 2019							$	69,469		$	153,933
Unamortized discount and other debt issuance costs	(8,843		)	(10,178		)	(1,713		)	(4,722		)
Term Loan A, net	204,683			217,098			67,756			149,211
Term Loan B due 2022; 7.90% as of December 31, 2018	650,338			670,011
Term Loan B due 2022; 7.42% as of September 30, 2019							602,366			614,468
Unamortized discount and other debt issuance costs	(41,569		)	(47,839		)	(31,611		)	(34,631		)
Term Loan B, net	608,769			622,172			570,755			579,837
4.50% Convertible Senior Notes due 2026							86,250			—
Unamortized discount and other debt issuance costs							(3,484		)	—
4.50% Convertible Senior Notes, net							82,766			—
Revolving Credit Facility due 2020	—			—			—			—
Total debt, net	813,452			839,270			721,277			729,048
Less short-term borrowings and current portion of long-term debt	(66,845		)	(66,845		)	(66,845		)	(66,845		)
Total long-term debt, net	$	746,607		$	772,425		$	654,432		$	662,203

	Amounts Payable		Amounts Payable
(In thousands)	to Institutions		to Institutions
2019	$	66,845
2020	225,371		$	66,845
2021	39,345		81,314
2022	532,303		39,345
2023			484,331
Thereafter			86,250
Total	$	863,864	$	758,085

		Three Months Ended
		September 30, 2019
Weighted-average remaining lease term		9 years
Weighted-average discount rate		7.50%

(In thousands)	Amounts Due
Remainder of 2020	$	1,460
2021	1,487
2022	1,169
2023	1,169
2024	1,169
Thereafter	3,929
Total lease payments	10,383
Less: Imputed interest	2,825
Present value of lease liabilities	$	7,558

(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	)

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

Net income	$	12,362	$	14,022

Basic weighted average common shares outstanding	37,761,176		37,066,902
Effect of potentially dilutive stock options and restricted stock awards	1,351,371		1,223,456
Diluted weighted average common shares outstanding	39,112,547		38,290,358

Earnings per common share:
Basic	$	0.33	$	0.38
Diluted	$	0.32	$	0.37

	Six Months Ended
	December 31, 2018			December 31, 2017			September 30, 2019		September 30, 2018
Risk-free interest rate	2.9		%	1.9		%	1.9	%	2.9	%
Expected volatility	58.4		%	57.4		%	73.7	%	58.4	%
Expected dividend yield	—		%	—		%	—		—
Forfeiture rate	6.5		%	6.5		%	6.5	%	6.5	%
Expected term (in years)	5.3 years			5.4 years			5.1 years		5.3 years
Weighted average fair value	$	6.52		$	9.06		$4.04		$6.52

(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

							Weighted
			Weighted-				Average
			Average		Aggregate		Remaining
			Exercise		Intrinsic		Contractual
(In thousands, except for weighted average price and life data)	Awards		Price		Value		Life (yrs.)
Outstanding at June 30, 2019	572		$	17.56	$	273	5.0
Granted	522		$	6.57
Exercised	(9	)	$	9.76	$	35
Forfeited, expired or repurchased	(9	)	$	27.63
Outstanding at September 30, 2019	1,076		$	12.21	$	3,488	7.2

Vested and expected to vest at September 30, 2019	1,073		$	12.20	$	3,488	7.2
Exercisable at September 30, 2019	569		$	16.18	$	1,425	5.1