Company Quick10K Filing
Quick10K
Akorn
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.02 126 $380
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-11-12 Regulation FD, Exhibits
8-K 2019-11-05 Officers
8-K 2019-11-05 Regulation FD, Exhibits
8-K 2019-10-31 Earnings, Exhibits
8-K 2019-09-10 Regulation FD, Exhibits
8-K 2019-08-09 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-08-01 Earnings, Exhibits
8-K 2019-07-30 Other Events
8-K 2019-06-25 Regulation FD, Exhibits
8-K 2019-05-30 Regulation FD, Exhibits
8-K 2019-05-20 Regulation FD, Exhibits
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-05-06 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-05-01 Shareholder Vote
8-K 2019-04-16 Enter Agreement, Exhibits
8-K 2019-03-21 Officers, Regulation FD, Exhibits
8-K 2019-03-01 Regulation FD, Exhibits
8-K 2019-02-28 Earnings, Regulation FD, Exhibits
8-K 2019-02-20 Regulation FD, Exhibits
8-K 2019-01-24 Officers, Regulation FD, Exhibits
8-K 2019-01-24 Officers, Regulation FD, Exhibits
8-K 2019-01-09 Regulation FD, Exhibits
8-K 2018-12-31 Officers, Exhibits
8-K 2018-12-27 Officers, Shareholder Vote, Exhibits
8-K 2018-12-20 Officers, Regulation FD, Exhibits
8-K 2018-12-11 Officers, Exhibits
8-K 2018-12-07 Officers, Regulation FD, Exhibits
8-K 2018-11-26 Regulation FD, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-29 Regulation FD, Exhibits
8-K 2018-10-18 Regulation FD, Exhibits
8-K 2018-10-10 Regulation FD, Exhibits
8-K 2018-10-05 Other Events
8-K 2018-10-01 Other Events, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-04-23 Other Events, Exhibits
8-K 2018-02-26 Other Events, Exhibits
ALXN Alexion Pharmaceuticals 24,951
CBM Cambrex 1,997
INSM Insmed 1,268
ARVN Arvinas 775
CDMO Avid Bioservices 369
MRUS Merus 364
SLGL Sol-Gel Technologies 155
ACER Acer Therapeutics 26
SYN Synthetic Biologics 7
DMPI Delmar Pharmaceuticals 2
AKRX 2019-09-30
Part I. Financial Information
Item 1. Financial Statements.
Note 1 - Business and Basis of Presentation
Note 2 - Summary of Significant Accounting Policies
Note 3 - Equity Compensation Plans
Note 4 - Accounts Receivable, Sales and Allowances
Note 5 - Inventories, Net
Note 6 - Property, Plant and Equipment, Net
Note 7 - Goodwill and Other Intangible Assets, Net
Note 8 - Financing Arrangements
Note 9 - Earnings per Share
Note 10 - Segment Information
Note 11 - Share Repurchases
Note 12 - Commitments and Contingencies
Note 13 - Customer, Supplier and Product Concentration
Note 14 - Income Taxes
Note 15 - Related Party Transactions
Note 16 - Recently Issued and Adopted Accounting Pronouncements
Note 17 - Leasing Arrangements
Note 18 - Pension Plan and 401(K) Program
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 exhibit311-09302019.htm
EX-31.2 exhibit312-09302019.htm
EX-32.1 exhibit321-09302019.htm
EX-32.2 exhibit322-09302019.htm

Akorn Earnings 2019-09-30

AKRX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
FOR THE QUARTERLY PERIOD ENDED
September 30, 2019
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________   TO ____________                    

COMMISSION FILE NUMBER: 001-32360

AKORN, INC.
(Exact Name of Registrant as Specified in its Charter)
Louisiana
 
72-0717400
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
1925 W. Field Court,
Suite 300
 
Lake Forest,
Illinois
60045
(Address of Principal Executive Offices)
 
(Zip Code)

(847279-6100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, No Par Value
AKRX
The NASDAQ Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
 
No


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes

 
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
 Accelerated filer
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

[1]





Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
No
At October 23, 2019, there were 126,145,832 shares of common stock, no par value, outstanding.

[2]




 
 
 
Page
PART I. FINANCIAL INFORMATION
 
ITEM 1. Financial Statements (unaudited).
 
Condensed Consolidated Balance Sheets - September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Comprehensive Income/(Loss) - Three and nine months ended September 30, 2019 and 2018
Condensed Consolidated Statements of Shareholders’ Equity - Three and nine months ended September 30, 2019 and 2018
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2019 and 2018
PART II. OTHER INFORMATION
 
 
 
SIGNATURES
 
 
 
EXHIBIT INDEX
 

[3]




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Certain prior-period amounts have been reclassified to conform to current-period presentation, including selling, general and administrative expenses, acquisition-related costs, research and development expenses and impairment of intangible assets, on the condensed consolidated statements of comprehensive income/(loss) and other non-current assets, prepaid expenses and other current assets, accrued legal fees and contingencies, uncertain tax liabilities and accrued expenses and other liabilities on the condensed consolidated statements of cash flows.


[4]




AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

September 30, 2019 (Unaudited)

December 31,
2018
ASSETS



CURRENT ASSETS



Cash and cash equivalents
$
205,542


$
224,868

Trade accounts receivable, net
142,871


153,126

Inventories, net
167,701


173,645

Prepaid expenses and other current assets
17,842


32,180

TOTAL CURRENT ASSETS
533,956


583,819

PROPERTY, PLANT AND EQUIPMENT, NET
322,119


334,853

OTHER LONG-TERM ASSETS
 


 

Goodwill
267,923


283,879

Intangible assets, net
243,926


284,976

Right-of-use assets, net - Operating leases
23,016

 

Other non-current assets
7,424


7,730

TOTAL OTHER LONG-TERM ASSETS
542,289


576,585

TOTAL ASSETS
$
1,398,364


$
1,495,257

LIABILITIES AND SHAREHOLDERS’ EQUITY
 


 

CURRENT LIABILITIES
 


 

Trade accounts payable
$
52,389


$
39,570

Income taxes payable
165



Accrued royalties
7,285


6,786

Accrued compensation
29,695


19,745

Accrued administrative fees
32,400


36,767

Current portion of accrued legal fees and contingencies
40,891

 
52,413

Current portion of lease liability - Operating leases
2,334

 

Accrued expenses and other liabilities
12,235


15,542

Current portion of long-term debt (net of deferred financing costs)
838,517

 

TOTAL CURRENT LIABILITIES
1,015,911


170,823

LONG-TERM LIABILITIES
 


 

Long-term debt (net of non-current deferred financing costs)


820,411

Deferred tax liability
943


566

Uncertain tax liabilities
2,285

 
49,990

Long-term lease liability - Operating leases
22,562

 

Long-term portion of accrued legal fees and contingencies
37,000

 

Pension obligations and other liabilities
7,255


9,601

TOTAL LONG-TERM LIABILITIES
70,045


880,568

TOTAL LIABILITIES
1,085,956


1,051,391

SHAREHOLDERS’ EQUITY
 


 

   Preferred stock, $1 par value - 5,000,000 shares authorized; no shares issued or outstanding at September 30, 2019 and December 31, 2018.

 

   Common stock, no par value – 150,000,000 shares authorized; 126,145,832 and 125,492,373 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.
590,274


574,553

Accumulated deficit
(253,278
)

(107,168
)
Accumulated other comprehensive (loss)
(24,588
)

(23,519
)
TOTAL SHAREHOLDERS’ EQUITY
312,408


443,866

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,398,364


$
1,495,257


[5]




 See notes to condensed consolidated financial statements.
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In Thousands, Except Per Share Data)
(Unaudited) 
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
 
2019

2018

2019

2018
Revenues, net
$
176,244


$
165,625


$
520,172


$
540,632

Cost of sales (exclusive of amortization of intangibles, included within operating expenses below)
104,842


108,363


327,273


319,863

GROSS PROFIT
71,402


57,262


192,899


220,769

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
55,550


63,197


189,090


209,949

Research and development expenses
9,334


12,439


27,543


36,454

Amortization of intangibles
9,375


13,613


30,390


39,985

Impairment of goodwill

 

 
15,955

 

Impairment of intangible assets


29,649


10,748


112,998

Litigation rulings, settlements and contingencies
(11,625
)
 
14,344

 
63,254

 
13,944

TOTAL OPERATING EXPENSES
62,634


133,242


336,980


413,330













OPERATING INCOME/(LOSS)
8,768


(75,980
)

(144,081
)

(192,561
)
Amortization of deferred financing costs
(8,581
)

(1,304
)

(15,540
)

(3,912
)
Interest expense, net
(18,982
)

(11,691
)

(50,650
)

(32,331
)
Other non-operating income/(expense), net
208


436


806


(18
)












(LOSS) BEFORE INCOME TAXES
(18,587
)

(88,539
)

(209,465
)

(228,822
)
Income tax (benefit)
(66,257
)

(18,399
)

(63,355
)

(41,951
)












NET INCOME/(LOSS)
$
47,670


$
(70,140
)

$
(146,110
)

$
(186,871
)
NET INCOME/(LOSS) PER SHARE
 

 
 


 


 

NET INCOME/(LOSS) PER SHARE, BASIC
$
0.38


$
(0.56
)

$
(1.16
)
 
$
(1.49
)
 
 
 
 
 
 
 
 
NET INCOME/(LOSS) PER SHARE, DILUTED
$
0.38


$
(0.56
)

$
(1.16
)
 
$
(1.49
)












SHARES USED IN COMPUTING NET INCOME/(LOSS) PER SHARE
 


 


 


 

BASIC
126,144


125,462


125,920


125,346

DILUTED
126,826


125,462


125,920


125,346













COMPREHENSIVE INCOME/(LOSS)
 


 


 


 

Net income/(loss)
$
47,670


$
(70,140
)

$
(146,110
)

$
(186,871
)
Unrealized holding (loss) on available-for-sale securities, net of tax of $0 and $2 for the three month periods ended September 30, 2019 and 2018, and $1 and $3 the nine month periods ended September 30, 2019 and 2018, respectively.


(4
)

(3
)

(9
)
Foreign currency translation (loss)
(2,135
)

(4,669
)

(1,179
)

(11,867
)
Pension liability adjustment gain, net of tax of ($10) and ($1) for the three month periods ended September 30, 2019 and 2018, and ($29) and ($3) for the nine month periods ended September 30, 2019 and 2018, respectively.
39


4


113


12

COMPREHENSIVE INCOME/(LOSS)
$
45,574


$
(74,809
)

$
(147,179
)

$
(198,735
)
See notes to condensed consolidated financial statements.

[6]




AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 and 2018
(In Thousands)
 
 
Shares
 
Common Stock
 
Accumulated Deficit
 
Other
Comprehensive
(Loss)
 
Total
BALANCES AT June 30, 2019 (unaudited)
 
126,108

 
$
584,592

 
$
(300,948
)
 
$
(22,492
)
 
$
261,152

Consolidated net income
 

 

 
47,670

 

 
47,670

Exercise of stock options
 

 

 

 

 

Compensation and share issuances related to stock awards
 
47

 
3,934

 

 

 
3,934

Stock-based compensation expense - stock options
 

 
1,453

 

 

 
1,453

Foreign currency translation (loss)
 

 

 

 
(2,135
)
 
(2,135
)
Stock compensation plan withholdings for employee taxes
 
(9
)
 
(44
)
 

 

 
(44
)
Unrealized holding loss on available-for-sale securities
 

 

 

 

 

Akorn AG pension liability adjustment
 

 

 

 
39

 
39

Employee stock purchase plan expense
 

 
339

 

 

 
339

BALANCES AT September 30, 2019 (unaudited)
 
126,146

 
$
590,274

 
$
(253,278
)
 
$
(24,588
)
 
$
312,408



 
 
Shares
 
Common Stock
 
Retained Earnings
 
Other
Comprehensive
(Loss)
 
Total
BALANCES AT June 30, 2018 (unaudited)
 
125,404

 
$
564,988

 
$
178,010

 
$
(21,163
)
 
$
721,835

Consolidated net (loss)
 

 

 
(70,140
)
 

 
(70,140
)
Exercise of stock options
 

 

 

 

 

Compensation and share issuances related to stock awards
 
118

 
3,389

 

 

 
3,389

Stock-based compensation expense - stock options
 

 
2,357

 

 

 
2,357

Foreign currency translation (loss)
 

 

 

 
(4,669
)
 
$
(4,669
)
Stock compensation plan withholdings for employee taxes
 
(30
)
 
(484
)
 

 

 
(484
)
Unrealized holding loss on available-for-sale securities
 

 

 

 
(4
)
 
(4
)
Akorn AG pension liability adjustment
 

 

 

 
4

 
4

Employee stock purchase plan expense
 

 

 

 

 

BALANCES AT September 30, 2018 (unaudited)
 
125,492

 
$
570,250

 
$
107,870

 
$
(25,832
)
 
$
652,288



[7]




 
 
Shares
 
Common Stock
 
Accumulated Deficit
 
Other
Comprehensive
(Loss)
 
Total
BALANCES AT DECEMBER 31, 2018
 
125,492

 
$
574,553

 
$
(107,168
)
 
$
(23,519
)
 
$
443,866

Consolidated net (loss)
 

 

 
(146,110
)
 

 
(146,110
)
Exercise of stock options
 

 

 

 

 

Compensation and share issuances related to stock awards
 
751

 
10,923

 

 

 
10,923

Stock-based compensation expense - stock options
 

 
4,274

 

 

 
4,274

Foreign currency translation (loss)
 

 

 

 
(1,179
)
 
(1,179
)
Stock compensation plan withholdings for employee taxes
 
(97
)
 
(313
)
 

 

 
(313
)
Unrealized holding loss on available-for-sale securities
 

 

 

 
(3
)
 
(3
)
Akorn AG pension liability adjustment
 

 

 

 
113

 
113

Employee stock purchase plan expense
 

 
837

 

 

 
837

BALANCES AT SEPTEMBER 30, 2019 (unaudited)
 
126,146

 
$
590,274

 
$
(253,278
)
 
$
(24,588
)
 
$
312,408



 
 
 
 
Common Stock
 
Retained Earnings
 
Other
Comprehensive
(Loss)
 
Total
BALANCES AT DECEMBER 31, 2017
 
125,091

 
$
550,472

 
$
294,741

 
$
(13,968
)
 
$
831,245

Consolidated net (loss)
 

 

 
(186,871
)
 

 
(186,871
)
Exercise of stock options
 
22

 
546

 

 

 
546

Compensation and share issuances related to restricted stock awards
 
288

 
9,206

 

 

 
9,206

Stock-based compensation expense - stock options
 

 
7,993

 

 

 
7,993

Foreign currency translation (loss)
 

 

 

 
(11,867
)
 
(11,867
)
Stock compensation plan withholdings for employee taxes
 
(55
)
 
(776
)
 

 

 
(776
)
Unrealized holding loss on available-for-sale securities
 

 

 

 
(9
)
 
(9
)
Akorn AG pension liability adjustment
 

 

 

 
12

 
12

Employee stock purchase plan expense
 
146

 
2,809

 

 

 
2,809

BALANCES AT SEPTEMBER 30, 2018 (unaudited)
 
125,492

 
$
570,250

 
$
107,870

 
$
(25,832
)
 
$
652,288


See notes to condensed consolidated financial statements.



[8]




AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2019

2018
OPERATING ACTIVITIES:
 

 
Net (loss)
$
(146,110
)

$
(186,871
)
Adjustments to reconcile consolidated net (loss) to net cash provided by/(used in) operating activities:
 


 

Depreciation and amortization
53,237


61,101

Amortization of debt financing costs
15,540


3,912

Impairment of intangible assets
10,748


112,998

Goodwill impairment
15,955

 

Fixed asset impairment and other
10,385

 

Non-cash stock compensation expense
16,034


17,199

Non-cash interest expense
2,567



Deferred income taxes, net
381


(42,726
)
Other
(29
)

467

Changes in operating assets and liabilities:





Other non-current assets
455

 
(2,389
)
Trade accounts receivable
10,148


(22,269
)
Inventories, net
5,909


(11,422
)
Prepaid expenses and other current assets
12,486


373

Trade accounts payable
15,868


10,752

Accrued legal fees and contingencies
25,478

 
20,922

Uncertain tax liabilities
(47,705
)
 
646

Accrued expenses and other liabilities
3,447


567

NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES
$
4,794


$
(36,740
)
INVESTING ACTIVITIES:
 


 

Proceeds from disposal of assets


28

Payments for intangible assets
(87
)

(50
)
Purchases of property, plant and equipment
(23,522
)

(51,045
)
NET CASH (USED IN) INVESTING ACTIVITIES
$
(23,609
)

$
(51,067
)
FINANCING ACTIVITIES:
 


 

Proceeds from the exercise of stock options


546

Stock compensation plan withholdings for employee taxes
(313
)

(776
)
Payment of contingent acquisition liabilities


(4,793
)
Lease payments
$
(344
)

$
(10
)
NET CASH (USED IN) FINANCING ACTIVITIES
$
(657
)

$
(5,033
)
Effect of exchange rate changes on cash and cash equivalents
19


(900
)
(DECREASE) IN CASH AND CASH EQUIVALENTS
$
(19,453
)

$
(93,740
)
Cash, cash equivalents, and restricted cash at beginning of period
225,794


369,889

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
206,341


$
276,149

SUPPLEMENTAL DISCLOSURES:
 


 

Amount paid for interest
$
52,973


$
40,487

Amount (received) paid for income taxes, net
$
(14,460
)

$
9,667

Additional capital expenditures included in accounts payable
$
3,515

 
$
10,504

See notes to condensed consolidated financial statements.

[9]




AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Note 1 — Business and Basis of Presentation
 
Business: Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn,” the “Company,” “we,” “our” or “us”) is a specialty pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals, branded as well as private-label over-the-counter consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products in alternative dosage forms. We focus on difficult-to-manufacture sterile and non-sterile dosage forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays. In previous years, the Company completed numerous mergers, acquisitions and product acquisitions which resulted in significant growth.
 
Akorn, Inc. is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, we relocated our corporate headquarters to the Chicago, Illinois area and currently maintain our principal corporate offices in Lake Forest, Illinois. We have pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, Himachal Pradesh, India. We operate a central distribution warehouse in Gurnee, Illinois and additional distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers are located in Vernon Hills, Illinois and Cranbury, New Jersey. We maintain other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.

During the three and nine month periods ended September 30, 2019 and 2018, the Company reported results for two reportable segments: Prescription Pharmaceuticals and Consumer Health. For further detail concerning our reportable segments please see Part I, Item 1, Note 10 - “Segment Information.”

Our common shares are traded on The NASDAQ Global Select Market under the ticker symbol AKRX. Our principal corporate office is located at 1925 West Field Court Suite 300, Lake Forest, Illinois 60045, with telephone number (847) 279-6100.

Terminated Merger Agreement: On April 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fresenius Kabi AG, a German stock corporation (“Parent”), Quercus Acquisition, Inc., a Louisiana corporation and wholly-owned subsidiary of Parent (“Merger Sub”) and, solely for purposes of Article VIII thereof, Fresenius SE & Co. KGaA, a German partnership limited by shares, which Merger Agreement subsequently resulted in litigation following Parent’s purported termination of the Merger Agreement. For a more detailed description of the litigation, please see Part I, Item 1, Note 12 - “Commitments and Contingencies-Litigation Related to the Terminated Merger.

Basis of Presentation: The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and accordingly do not include all the information and footnotes required by GAAP for annual financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in these financial statements. Operating results for the three and nine month periods ended September 30, 2019, are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2019.
 
Note 2 — Summary of Significant Accounting Policies
 
Consolidation:  The accompanying condensed consolidated financial statements include the accounts of Akorn, Inc. and its wholly-owned domestic and foreign subsidiaries. All inter-company transactions and balances have been eliminated in consolidation, and the financial statements of Akorn India Private Limited ("AIPL") and Akorn AG have been translated from Indian Rupees to U.S. Dollars and Swiss Francs to U.S. Dollars, respectively, based on the currency translation rates in effect during the period or as of the date of consolidation, as applicable. The Company has no involvement with variable interest entities.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and

[10]




liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Significant estimates and assumptions for the Company relate to the allowances for chargebacks, rebates, product returns, coupons, promotions and doubtful accounts, as well as the reserve for slow-moving and obsolete inventories, the carrying value and lives of intangible assets, the useful lives of fixed assets, impairments of fixed assets, the carrying value of deferred income tax assets and liabilities, the assumptions underlying share-based compensation, accrued but unreported employee benefit costs and legal settlement accruals.
 
Going Concern: In connection with the preparation of the financial statements as of and for the nine month period ended September 30, 2019, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity's ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued.

As further described in Note 8 - "Financing Arrangements,” on May 6, 2019, the Company and certain Lenders entered into a Standstill Agreement and First Amendment (the “Standstill Agreement”) to its Term Loan Agreements. Pursuant to the terms of the Standstill Agreement, the Company must enter into a comprehensive amendment of the Term Loan Agreements (the “Comprehensive Amendment”) that is satisfactory in form and substance to the Lenders. If the Company does not enter into a Comprehensive Amendment by December 13, 2019 or refinance or otherwise address the outstanding Term Loans, an event of default will occur under the Term Loan Agreements which, if not waived, could materially affect the Company’s business, financial position and results of operations. If an event of default occurs and the Lenders accelerate the obligations under the Term Loan Agreements, the Company may not be able to repay the obligations that become immediately due and it could have a material negative impact on the Company’s liquidity and business.
  
The Company evaluated the impact of entering into the Standstill Agreement on its ability to continue as a going concern. As the Company’s ability to enter into a Comprehensive Amendment with the Lenders is not within its control, and failure to do so would result in an event of default under the Term Loan Agreements, these conditions in the aggregate raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying financial statements are filed. The Company is actively seeking to refinance or otherwise address the Term Loans or enter into a Comprehensive Amendment to the Term Loan Agreements by December 13, 2019. In the event that the Company is unable to refinance or otherwise address the Term Loans, the Company would seek to enter into a Comprehensive Amendment to the Term Loan Agreements. The Standstill Agreement requires the Company and Lenders to negotiate in good faith to enter into such a Comprehensive Amendment.
Revenue Recognition:  Revenue is recognized at a point in time upon the transfer of control of the Company’s products, which occurs upon delivery for substantially all of the Company’s sales. The promises within the contract that are distinct are primarily the Company’s supply of products, which represents a single performance obligation. The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company makes significant estimates for related variable consideration at the point of sale, including chargebacks, rebates, product returns and other discounts and allowances. All sales taxes are excluded from the transaction price. The Company expenses contract fulfillment costs when incurred since the amortization period would have been less than one year. Payment terms are primarily less than 90 days.
 
Provision for estimated chargebacks, rebates, discounts, managed care rebates, product returns and doubtful accounts is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.

Freight:  The Company records shipping and handling expense related to product sales as cost of sales.

Cash and Cash Equivalents: The Company considers all unrestricted, highly liquid investments with maturity of three months or less when acquired, to be cash and cash equivalents. At September 30, 2019 and December 31, 2018, approximately $0.8 million and $0.9 million, respectively, of cash held by AIPL was restricted, and was reported within prepaid expenses and other current assets.

The following table sets forth the components of the Company’s cash, cash equivalents, and restricted cash as reported in the Condensed Consolidated Statement of Cash Flows for the nine month periods ended September 30, 2019 and 2018 (in thousands):

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Cash, Cash Equivalents, and Restricted Cash
Nine Months Ended
September 30,
 
2019
 
2018
Cash and cash equivalents
$
205,542

 
$
275,346

Restricted cash
799

 
803

Total cash, cash equivalents, and restricted cash
$
206,341

 
$
276,149



Accounts Receivable: Trade accounts receivable are stated at their net realizable value.  The nature of the Company’s business involves, in the ordinary course, significant judgments and estimates relating to chargebacks, coupon redemption, product returns, rebates, discounts given to customers and allowances for doubtful accounts.  Certain rebates, chargebacks and other credits are recorded as deductions to the Company’s trade accounts receivable where applicable, based on product and customer specific terms.

Unless otherwise noted, the provisions and allowances for the following customer deductions are reflected in the accompanying consolidated financial statements as reductions of revenues and trade accounts receivable, respectively.

Chargebacks: The Company enters into contractual agreements with certain third parties such as retailers, hospitals, group-purchasing organizations (“GPOs”) and managed care organizations to sell certain products at predetermined prices. Similarly, we maintain an allowance for rebates and discounts related to billbacks, wholesaler fee for service contracts, GPO administrative fees, government programs, prompt payment and other adjustments with certain customers. Most of the parties have elected to have these contracts administered through wholesalers that buy the product from the Company and subsequently sell it to these third parties. As noted elsewhere, these wholesalers represent a significant percentage of the Company’s gross sales. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific contract is charged back to the Company by the wholesaler. This process typically takes four to six weeks, but for some products may extend out to twelve weeks. The Company tracks sales and submitted chargebacks by product number and contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product and records an allowance as a reduction to gross sales when the Company records its sale of the products. The Company reduces the chargeback allowance when a chargeback request from a wholesaler is processed. Actual chargebacks processed by the Company can vary materially from period to period based upon actual sales volume through the wholesalers. However, the Company’s provision for chargebacks is fully reserved for at the time revenues are recognized.

Management obtains product inventory reports from certain wholesalers to aid in analyzing the reasonableness of the chargeback allowance and to monitor whether wholesaler inventory levels do not significantly exceed customer demand. The Company assesses the reasonableness of its chargeback allowance by applying a product chargeback percentage that is based on a combination of historical activity and future price and mix expectations to the quantities of inventory on hand at the wholesalers according to wholesaler inventory reports. In addition, the Company estimates the percent of gross sales generated through direct and indirect sales channels and the percent of contract versus non-contract revenue in the period, as these each affect the estimated reserve calculation. In accordance with its accounting policy, the Company also estimates the percent of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a trend of such sales through wholesalers. The Company uses this percentage estimate until historical trends indicate that a revision should be made. On an ongoing basis, the Company evaluates its actual chargeback rate experience and new trends are factored into its estimates each quarter as market conditions change.

For the three month period ended September 30, 2019, the Company incurred a chargeback provision of $141.9 million, or 37.4% of gross sales of $379.0 million, compared to $188.9 million, or 43.3% of gross sales of $436.7 million in the prior year period. The dollar decrease and percent decrease from the comparative period were due to volume declines as well as decreases in wholesale acquisition cost of certain products in the current period as compared to prior year. The Company ensures that the chargeback rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter chargeback rates include: changes in product pricing or contract pricing structures as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences and customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the chargeback rate depending on the direction and velocity of the change(s).


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To better understand the impact of changes in chargeback reserve based on circumstances that are not fully outside the Company’s control, for instance, the ratio of sales subject to chargeback to indirect sales, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a 249 basis point (“BP”) change in the ratio of sales subject to chargeback to indirect sales would increase the chargeback reserve by $0.4 million or decrease the chargeback reserve by $0.9 million depending on the change in the direction of the ratio. Fundamentally, the BP change calculation is determined based on the six month trend of the average ratio of sales subject to chargeback to indirect sales. Due to the competitive generic pharmaceutical industry and our experience with wholesalers’ strategy and shifts in contracted and non-contracted indirect sales, we believe that the six month trend of the proportion of direct to indirect sales provides a representative basis for sensitivity analysis.

Rebates, Administrative Fees and Others: The Company maintains an allowance for rebates, administrative fees and others, related to contracts and other rebate programs that it has in place with certain customers. Rebates, administrative fees and other percentages vary by product and by volume purchased by each eligible customer. The Company tracks sales by product number for each eligible customer and then applies the applicable rebate, administrative fees and other percentage, using both historical trends and actual experience to estimate its rebates, administrative fees and others allowances. The Company reduces gross sales and increases the rebates, administrative fees and others allowance by the estimated rebates, administrative fees and others amounts when the Company sells its products to eligible customers. The Company reduces the rebate allowance when it processes a customer request for a rebate. At each balance sheet date, the Company analyzes the allowance for rebates, administrative fees and others against actual rebates processed and makes adjustments as appropriate. The amount of actual rebates processed can vary materially from period to period as discussed below.

The allowances for rebates, administrative fees and others further takes into consideration price adjustments which are 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 shelf-stock adjustment credit may be given for product remaining in customer’s inventories at the time of the price reduction and is reserved at the point of sale. 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 protection are based upon specified terms with 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.

Similar to rebates, the reserve for administrative fees and others represents those amounts processed related to contracts and other fee programs which have been in place with certain entities, but they are settled through cash payment to these entities and accordingly are accounted for as a current liability. Otherwise, administrative fees and others operate similarly to rebates.

For the three month period ended September 30, 2019, the Company incurred rebates, administrative fees and others of $46.2 million, or 12.2% of gross sales of $379.0 million, compared to $66.8 million, or 15.3% of gross sales of $436.7 million in the prior year period. The dollar and percent decreases from the comparative period was primarily due to volume declines, decreases in contract prices and product mix. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter rebates, administrative fees and others rates include: changes in product pricing or contract pricing structures as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences and customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the rebate rate depending on the direction and velocity of the change(s).

To better understand the impact of changes in reserves for rebates, administrative fees and others based on circumstances that are not fully outside the Company’s control, for instance, the proportion of direct to indirect sales subject to rebates, administrative fees and others, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a 249 BP change in the ratio of sales subject to rebates, administrative fees and others to indirect sales would increase the reserve for rebates, administrative fees and others by less than twenty-five thousand seven hundred dollars or decrease the same reserve by $0.1 million depending on the direction of the change in the ratio. Fundamentally, the BP change calculation is determined based on the six month trend of the average ratio of sales subject to rebates, administrative fees and others to indirect sales. Due to the competitive generic pharmaceutical industry and our experience with wholesalers’ strategy and shifts in contracted and non-contracted indirect sales, we

[13]




believe the six month trend of the average ratio of sales subject to rebates, administrative fees and others to indirect sales provides a representative basis for sensitivity analysis.

Sales Returns:  Certain of the Company’s products are sold with the customer having the right to return the product within specified periods. Provisions are made at the time of sale based upon historical experience. Historical factors, such as recall events as well as pending new developments like comparable product approvals or significant pricing movement that may impact the expected level of returns, are taken into account to determine the appropriate reserve estimate at each balance sheet date. As part of the evaluation of the reserve required, the Company considers actual returns to date that are in process, wholesaler inventory levels, and the expected impact of any product recalls to assess the magnitude of unconsumed product that may result in sales returns to the Company in the future. The sales returns level can be impacted by factors such as overall market demand and market competition and availability of substitute products which can increase or decrease the pull-through of sales of the Company’s products and ultimately impact the level of sales returns.

For the three month period ended September 30, 2019, the Company incurred a return provision of $5.9 million, or 1.6% of gross sales of $379.0 million, compared to $4.8 million, or 1.1% of gross sales of $436.7 million in the prior year period. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of historical trends and evaluation of recent activity.

To better understand the impact of changes in return reserve based on certain circumstances, the Company performs a sensitivity analysis. Holding all other assumptions constant, for an average 0.5 months change in the lag from the time of sale to the time the product return is processed, this change would result in an increase of $0.4 million or decrease of $0.5 million in return reserve expense if the lag increases or decreases, respectively. The average 0.5 months change in the lag from the time of sale to the time the product return is processed was determined based on the difference between the high and low lag time for the past six month historical activities. This sensitivity analysis is a change from the three month period ended September 30, 2018, which was determined based on the average variances for the last six months of returns activity. The prior method did not give a measurable variance to calculate a sensitivity. Due to the change in the volume and type of products sold by the Company in the recent past, we have determined that the lag calculation provides a reasonable basis for sensitivity analysis.

Allowance for Coupons, Advertising, Promotions and Co-Pay Discount Cards: The Company issues coupons from time to time that are redeemable against certain of our Consumer Health products. In addition to coupons, from time to time the Company authorizes various retailers to run in-store promotions and co-pay discounts for its products. At the point of sale, the Company records an estimate of the dollar value of coupons expected to be redeemed, the dollar amount owed back to the retailer and the co-pay discount as variable consideration since the Company intends to continue to issue coupons, advertising promotion and co-pay discount from time to time. The coupon estimate is based on historical experience and is adjusted as needed based on actual redemptions. Upon receiving confirmation that an advertising promotion was run, the Company adjusts the estimate of the dollar amount expected to be owed back to the retailer as needed. This estimate is then adjusted to actual upon receipt of an invoice from the retailer. Additionally, the Company provides consumer co-pay discount cards, administered through outside agents, to provide discounted products when redeemed. The Company records an estimate of the dollar value of co-pay discounts expected to be redeemed based on historical experience and adjusts as needed based on actual experience.

Doubtful Accounts: Provisions for doubtful accounts, which reflect trade receivable balances owed to the Company that are believed to be uncollectible, are recorded as a component of selling, general and administrative ("SG&A") expenses. In estimating the allowance for doubtful accounts, the Company considers its historical experience with collections and write-offs, the credit quality of its customers and any recent or anticipated changes thereto, and the outstanding balances and past due amounts from its customers. Note that in the ordinary course of business, and consistent with our peers, we may from time to time offer extended payment terms to our customers as an incentive for new product launches or in other circumstances in accordance with standard industry practices. These extended payment terms do not represent a significant risk to the collectability of accounts receivable as of the period-end. Accounts are considered past due when they remain uncollected beyond the due date specified in the applicable contract or on the applicable invoice, whichever is deemed to take precedence.

Inventories: Inventories are stated at the lower of cost and net realizable value ("NRV") (see Note 5 - Inventories, net). The Company maintains an allowance for slow-moving and obsolete inventory as well as inventory where the cost is in excess of its NRV. For finished goods inventory, the Company estimates the amount of inventory that may not be sold prior to its expiration or is slow-moving based upon recent sales activity by unit and wholesaler inventory information. The Company also analyzes its raw material and component inventory for slow-moving items and NRV.

The Company capitalizes inventory costs associated with its products prior to regulatory approval when, based on management judgment, future commercialization is considered probable and future economic benefit is expected to be realized.

[14]




The Company assesses the regulatory approval process and where the product stands in relation to that approval process including any known constraints or impediments to approval. The Company also considers the shelf life of the product in relation to the product timeline for approval.

Property, Plant and Equipment: Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method in amounts considered sufficient to amortize the cost of the assets to operations over their estimated useful lives.

Intangible Assets: Intangible assets consist primarily of goodwill, which is carried at its initial value, subject to impairment testing, In-Process Research and Development ("IPR&D"), which is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other such costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from one year to thirty years. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows. If the Company incurs additional costs to renew or extend the life of an intangible asset, such costs are added to the remaining unamortized cost of the asset, if any, and the sum is amortized over the extended remaining life of the asset. Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. The Company models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. Impairments are recorded within the impairment of intangible assets line in the Condensed Consolidated Statements of Comprehensive Income/(Loss).

Leases: The Company leases real and personal property in the normal course of business under various operating leases and other insignificant finance leases, including non-cancelable and month-to-month agreements. Our leases have initial lease terms of one to ten years, some of which include options to extend and/or terminate the lease. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and lease payment obligation. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants. Certain leases have free rent periods or escalating rent payment provisions. Leases with an initial term of twelve months or less ("Short-term leases") are not recorded on the Condensed Consolidated Balance Sheet. We recognize rent expense on a straight-line basis over the lease term. Right-of-use ("ROU") assets, net represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. The operating lease ROU assets also include any lease prepayments and are reduced by any lease incentives. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. When the lease agreement does not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including the lease term. See Note 17 — Leasing Arrangements for more information.

Earnings Per Share: Basic net income/(loss) per share is based upon the weighted average common shares outstanding. Diluted net income/(loss) per share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of stock options and restricted stock using the treasury stock method. Anti-dilutive shares are excluded from the computation of diluted net income/(loss) per share.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. See Note 14 — Income Taxes for more information.

Fair Value of Financial Instruments: The Company applies ASC 820 - Fair Value Measurement, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 - Fair Value Measurement defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 - Fair Value Measurement generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own

[15]




assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability, and are to be developed based on the best information available in the circumstances.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The levels within the valuation hierarchy are described below:

-
Level 1—Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities. The carrying value of the Company's cash and cash equivalents are considered Level 1 assets.

-
Level 2—Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company has no Level 2 assets or liabilities in any of the periods presented.

-
Level 3—Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities. The portion of the fair valuation of the available-for-sale investment held in shares of Nicox stock that is subject to a lock-up provision is considered a Level 3 asset.

The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (amounts in thousands):
 
 
 
Fair Value Measurements at Reporting Date, Using:
Description
September 30, 2019
 
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
205,542

 
$
205,542

 
$

 
$

Nicox stock with lockup provisions
16

 

 

 
16

Total assets
$
205,558

 
$
205,542

 
$

 
$
16


Description
December 31, 2018
 
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
224,868

 
$
224,868

 
$

 
$

Nicox stock with lockup provisions
18

 

 

 
18

Total assets
$
224,886

 
$
224,868

 
$

 
$
18



In accordance with ASC 820 - Fair Value Measurement, the Company records unrealized holding gains and losses on available-for-sale securities in the “Accumulated other comprehensive (loss)” caption in the Condensed Consolidated Balance Sheet.

Stock-Based Compensation: Stock-based compensation cost is estimated at grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions to be used in the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its common stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities of similar term in effect during the quarter in which the options were granted. The dividend yield reflects the Company’s historical experience as well as future expectations over the expected term of the option. The Company estimates

[16]




forfeitures at the time of grant and revises the estimate in subsequent periods, as necessary, if actual forfeitures differ from initial estimates.

The stock-based compensation expense related to performance share units (“PSUs”) is estimated at grant date based on the fair value of the award. For PSUs granted with vesting subject to market conditions, the fair value of the award is determined at grant date using the Monte Carlo model, and expense is recognized ratably over the requisite service period regardless of whether or not the market condition is satisfied. For PSUs granted with vesting subject to performance conditions, the fair value of the award is based on the market price of the underlying shares on grant date. Expense from such awards is recognized ratably over the vesting period, but is based upon an ongoing evaluation of the number of shares expected to vest and will be adjusted to reflect those awards that do ultimately vest.

The stock-based compensation expense related to restricted stock unit awards (“RSUs”) is based on the fair value of the underlying shares on date of grant. Expense is recognized ratably over the vesting period, reduced by an estimate of future forfeitures.


[17]




Note 3 — Equity Compensation Plans

The Company maintains equity compensation plans that allow the Company’s Board of Directors to grant stock options and other equity awards to eligible employees, officers, directors and consultants.  On April 27, 2017, the Company’s shareholders voted to approve the Akorn, Inc. 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”), setting aside 8.0 million shares of the Company’s common stock for issuance pursuant to equity awards. Subsequently, at the 2019 Annual Meeting of Shareholders on May 1, 2019, the Company’s shareholders approved a 4.4 million increase to the shares available for awards granted under the Omnibus Plan, raising the overall total to 12.4 million shares. The Omnibus Plan replaced the Akorn, Inc. 2014 Stock Option Plan (the "2014 Plan"), which was approved by shareholders at the Company's 2014 Annual Meeting of Shareholders on May 2, 2014 and subsequently amended by proxy vote of the Company’s shareholders on December 16, 2016. The 2014 Plan had reserved 7.5 million shares for issuance upon the grant of stock options, restricted stock units (“RSUs”), performance share unit awards ("PSUs") or various other instruments to directors, employees and consultants.  Following shareholder approval of the Omnibus Plan, no new awards could be granted under the 2014 Plan, although previously granted awards remain outstanding pursuant to their original terms.

As of September 30, 2019, there were approximately 2.1 million stock options and thirty-four thousand one hundred RSU shares outstanding under the 2014 Plan.

Under the Omnibus Plan, there were approximately 4.5 million RSU shares, 1.0 million PSU shares and 2.6 million stock option award shares outstanding as of September 30, 2019. As of September 30, 2019, approximately 3.5 million shares remained available for future award grants under the Omnibus Plan.

Also granted in, and outstanding as of the nine month period ended September 30, 2019, were inducement awards consisting of 0.5 million RSU shares, 0.3 million PSU shares and 0.4 million stock option award shares.

The Company accounts for stock-based compensation in accordance with ASC Topic 718 - Compensation — Stock Compensation. Accordingly, stock-based compensation cost for stock options and RSUs is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, as necessary, if actual forfeitures differ from those estimates.

All RSUs are valued at the closing market price of the Company’s common stock on the day of grant and the total value of the units is recognized as expense ratably over the vesting period of the grant. PSU awards granted with vesting subject to market conditions are valued at date of grant through a Monte Carlo simulation model. The calculated grant-date fair value is recognized ratably over the vesting period, subject to forfeiture estimates. PSU awards granted with vesting subject to, and determined based on achievement of, performance conditions are valued at date of grant based on the closing price of the Company’s stock and anticipated vesting level at grant date. The awards are re-evaluated quarterly to determine the vesting level that is more likely than not to be achieved, and cumulative expense is adjusted accordingly.

The Company uses the single-award method for allocating compensation cost related to stock options to each period. The following table sets forth the components of the Company’s share-based compensation expense for the three and nine month periods ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Stock options
$
1,453

 
$
2,357

 
$
4,274

 
$
7,993

Employee stock purchase plan
339

 

 
837

 

Restricted stock units and Performance share units
3,934

 
3,389

 
10,923

 
9,206

Total stock-based compensation expense
$
5,726

 
$
5,746

 
$
16,034

 
$
17,199



Stock Option awards

[18]





From time to time, the Company has granted stock option awards to certain employees, executives and directors. No stock options were granted in 2018. Set forth in the following table are the weighted-average assumptions used in estimating the grant date fair value of the stock options granted under the Company's equity compensation plans during the three and nine month periods ended September 30, 2019, along with the weighted-average grant date fair values:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Expected volatility
55.86
%
 
%
 
56.45
%
 
%
Expected life (in years)
6.2

 

 
6.2

 
0

Risk-free interest rate
1.60
%
 
%
 
2.34
%
 
%
Dividend yield

 

 

 

Fair value per stock option
$
1.73

 
$

 
$
2.35

 
$

Forfeiture rate
8
%
 
%
 
8