Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
 
 
o
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)

(847) 279-6100
(Registrant’s telephone number, including area code)

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
þ
 
No
o


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 and post such files).
Yes
þ

 
No
o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 þ
 
 Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
 Emerging growth company  o
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.  o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
 
No
þ


[1]




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

At April 30, 2019, there were 125,850,278 shares of common stock, no par value, outstanding.

[2]




 
 
 
Page
PART I. FINANCIAL INFORMATION
 
ITEM 1. Financial Statements (unaudited).
 
Condensed Consolidated Balance Sheets - March 31, 2019 and December 31, 2018
Condensed Consolidated Statements of Comprehensive (Loss) - Three months ended March 31, 2019 and 2018
Condensed Consolidated Statements of Shareholders’ Equity - Three months ended March 31, 2019 and 2018
Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 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 research and development expenses and impairment of intangible assets, net on the condensed consolidated statements of comprehensive (loss) and other non-current assets, prepaid expenses and other current assets, accrued legal fees, FIN 48 reserve 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)
 
March 31, 2019 (Unaudited)

December 31, 2018
ASSETS



CURRENT ASSETS



Cash and cash equivalents
$
184,090


$
224,868

Trade accounts receivable, net
174,325


153,126

Inventories, net
162,752


173,645

Prepaid expenses and other current assets
29,286


32,180

TOTAL CURRENT ASSETS
550,453


583,819

PROPERTY, PLANT AND EQUIPMENT, NET
325,970


334,853

OTHER LONG-TERM ASSETS
 


 

Goodwill
267,923


283,879

Intangible assets, net
263,644


284,976

Right-of-use assets, net - Operating leases
21,973

 

Other non-current assets
7,228


7,730

TOTAL OTHER LONG-TERM ASSETS
560,768


576,585

TOTAL ASSETS
$
1,437,191


$
1,495,257

LIABILITIES AND SHAREHOLDERS’ EQUITY
 


 

CURRENT LIABILITIES
 


 

Trade accounts payable
$
38,419


$
39,570

Income taxes payable
13,925



Accrued royalties
7,079


6,786

Accrued compensation
16,529


19,745

Accrued administrative fees
28,165


36,767

Accrued legal fees and contingencies
49,710

 
52,413

Current portion of lease liability - Operating leases
2,238

 

Accrued expenses and other liabilities
12,721


15,542

TOTAL CURRENT LIABILITIES
168,786


170,823

LONG-TERM LIABILITIES
 


 

Long-term debt (net of non-current deferred financing costs)
821,715


820,411

Deferred tax liability
530


566

FIN 48 reserve
51,410

 
49,990

Long-term lease liability - Operating leases
21,480

 

Pension obligations and other liabilities
7,521


9,601

TOTAL LONG-TERM LIABILITIES
902,656


880,568

TOTAL LIABILITIES
1,071,442


1,051,391

SHAREHOLDERS’ EQUITY
 


 

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

 

   Common stock, no par value – 150,000,000 shares authorized; 125,578,913 and 125,492,373 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.
579,157


574,553

(Accumulated deficit)
(189,349
)

(107,168
)
Accumulated other comprehensive (loss)
(24,059
)

(23,519
)
TOTAL SHAREHOLDERS’ EQUITY
365,749


443,866

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,437,191


$
1,495,257

 See notes to condensed consolidated financial statements.

[5]




AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(In Thousands, Except Per Share Data)
(Unaudited) 
 
Three Months Ended
March 31,
 
2019

2018
Revenues, net
$
165,871


$
184,063

Cost of sales (exclusive of amortization of intangibles, included within operating expenses below)
112,358


101,835

GROSS PROFIT
53,513


82,228

 
 
 
 
Selling, general and administrative expenses
72,498


62,994

Research and development expenses
8,714


12,644

Amortization of intangibles
11,065


13,190

Impairment of goodwill
15,955

 

Impairment of intangible assets
10,354


18,815

Litigation rulings and settlements
410

 

TOTAL OPERATING EXPENSES
118,996


107,643







OPERATING (LOSS)
(65,483
)

(25,415
)
Amortization of deferred financing costs
(1,304
)

(1,304
)
Interest expense, net
(14,327
)

(9,578
)
Other non-operating income, net
353


270







(LOSS) BEFORE INCOME TAXES
(80,761
)

(36,027
)
Income tax provision (benefit)
1,420


(7,280
)






NET (LOSS)
$
(82,181
)

$
(28,747
)
NET (LOSS) PER SHARE
 


 

NET (LOSS) PER SHARE, BASIC
$
(0.65
)

$
(0.23
)
NET (LOSS) PER SHARE, DILUTED
$
(0.65
)

$
(0.23
)






SHARES USED IN COMPUTING NET (LOSS) PER SHARE
 


 

BASIC
125,566


125,240

DILUTED
125,566


125,240







COMPREHENSIVE (LOSS)
 


 

Net (loss)
$
(82,181
)

$
(28,747
)
Unrealized holding (loss) on available-for-sale securities, net of tax of $0 for the three month period ended March 31, 2018.


(1
)
Foreign currency translation (loss)
(424
)

(848
)
Pension liability adjustment (loss) gain, net of tax of $30 and ($1) for the three months ended March 31, 2019 and 2018, respectively.
(116
)

4

COMPREHENSIVE (LOSS)
$
(82,721
)

$
(29,592
)
See notes to condensed consolidated financial statements.

[6]




AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019 and 2018
(In Thousands)

 
 
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)
 

 

 
(82,181
)
 

 
(82,181
)
Compensation and share issuances related to restricted stock awards
 
121

 
3,110

 

 

 
3,110

Stock-based compensation expense - stock options
 

 
1,381

 

 

 
1,381

Foreign currency translation loss
 

 

 

 
(424
)
 
(424
)
Stock compensation plan withholdings for employee taxes
 
(34
)
 
(116
)
 

 

 
(116
)
Akorn AG pension liability adjustment
 

 

 

 
(116
)
 
(116
)
Employee stock purchase plan expense
 

 
229

 

 

 
229

BALANCES AT MARCH 31, 2019 (unaudited)
 
125,579

 
$
579,157

 
$
(189,349
)
 
$
(24,059
)
 
$
365,749


 
 
 
 
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)
 

 

 
(28,747
)
 

 
$
(28,747
)
Exercise of stock options
 
22

 
546

 

 

 
$
546

Compensation and share issuances related to restricted stock awards
 

 
2,349

 

 

 
$
2,349

Stock-based compensation expense - stock options
 

 
3,159

 

 

 
$
3,159

Foreign currency translation loss
 

 

 

 
(848
)
 
$
(848
)
Unrealized holding loss on available-for-sale securities
 

 

 

 
(1
)
 
$
(1
)
Akorn AG pension liability adjustment
 

 

 

 
4

 
$
4

Employee stock purchase plan payment expense
 
146

 
2,809

 

 

 
$
2,809

BALANCES AT MARCH 31, 2018 (unaudited)
 
125,259

 
$
559,335

 
$
265,994

 
$
(14,813
)
 
$
810,516


See notes to condensed consolidated financial statements.

[7]




AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2019

2018
OPERATING ACTIVITIES:
 

 
Net (loss)
$
(82,181
)

$
(28,747
)
Depreciation and amortization
18,750


20,278

Amortization of debt financing fees
1,304


1,304

Impairment of intangible assets
10,354


18,815

Goodwill impairment
15,955

 

Fixed asset impairment and other
10,089

 

Non-cash stock compensation expense
4,720


5,508

Deferred income taxes, net
(28
)

(7,833
)
Other
(31
)

218

Changes in operating assets and liabilities:





Other non-current assets
584

 
37

Trade accounts receivable
(21,283
)

(35,508
)
Inventories, net
10,819


(9,292
)
Prepaid expenses and other current assets
1,079


11,997

Trade accounts payable
722


11,318

Accrued Legal Fees
(2,703
)
 
(12,853
)
FIN 48 Reserve
1,420

 
512

Accrued expenses and other liabilities
(33
)

(7,345
)
NET CASH (USED IN) OPERATING ACTIVITIES
$
(30,463
)

$
(31,591
)
INVESTING ACTIVITIES:
 


 

Purchases of property, plant and equipment
(10,059
)

(22,340
)
NET CASH (USED IN) INVESTING ACTIVITIES
$
(10,059
)

$
(22,340
)
FINANCING ACTIVITIES:
 


 

Proceeds from the exercise of stock options


546

Stock compensation plan withholdings for employee taxes
(116
)


Payment of contingent acquisition liabilities


(4,793
)
Lease payments
$
(335
)

$
(3
)
NET CASH (USED IN) FINANCING ACTIVITIES
$
(451
)

$
(4,250
)
Effect of exchange rate changes on cash and cash equivalents
54


41

 (DECREASE) IN CASH AND CASH EQUIVALENTS
$
(40,919
)

$
(58,140
)
Cash and cash equivalents, and restricted cash at beginning of period
225,794


369,889

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
184,875


$
311,749

SUPPLEMENTAL DISCLOSURES:
 


 

Amount paid for interest
$
16,314


$
12,262

Amount (received) paid for income taxes, net
$
(14,526
)

$
8,205

Additional capital expenditures included in accounts payable
$
4,641

 
$
8,227

See notes to condensed consolidated financial statements.

[8]




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 generic 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 month periods ended March 31, 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.

On April 22, 2018, Fresenius Kabi AG delivered to Akorn a letter purporting to terminate the Merger Agreement. On April 23, 2018, Akorn filed a verified complaint entitled Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc. and Fresenius SE & Co. KGaA, in the Court of Chancery of the State of Delaware for breach of contract and declaratory judgment. The complaint alleged, among other things, that (i) the defendants anticipatorily breached their obligations under the Merger Agreement by repudiating their obligation to close the Merger, (ii) the defendants knowingly and intentionally breached their obligations under the Merger Agreement by working to slow the antitrust approval process and by engaging in a series of actions designed to hamper and ultimately block the Merger and (iii) Akorn had performed its obligations under the Merger Agreement, and was ready, willing and able to close the Merger. The complaint sought, among other things, a declaration that Fresenius Kabi AG's termination was invalid, an order enjoining the defendants from terminating the Merger Agreement, and an order compelling the defendants to specifically perform their obligations under the Merger Agreement to use reasonable best efforts to consummate and make effective the Merger. On April 30, 2018, the defendants filed a verified counterclaim alleging that, due primarily to purported data integrity deficiencies, the Company had breached representations, warranties and covenants in the Merger Agreement, and that it had experienced a material adverse effect. The verified counterclaim sought, among other things, a declaration that defendants’ purported termination of the Merger Agreement was valid and that defendants were not obligated to consummate the transaction, and damages.

Following expedited discovery, from July 9 to 13, 2018, the Court of Chancery held a trial on the parties’ claims (the “Delaware Action”). At the conclusion of trial, the Court of Chancery ordered post-trial briefing, which was completed on August 20, 2018, and a post-trial hearing, which was held on August 23, 2018.

On October 1, 2018, the Court of Chancery issued an opinion (the “Opinion”) denying Akorn’s claims for relief and concluding that Fresenius Kabi AG had validly terminated the Merger Agreement. The Court of Chancery concluded that Akorn had experienced a material adverse effect due to its financial performance following the signing of the Merger

[9]




Agreement; that Akorn had breached representations and warranties in the Merger Agreement and that those breaches would reasonably be expected to give rise to a material adverse effect; that Akorn had materially breached covenants in the Merger Agreement; and that Fresenius was materially in compliance with its own contractual obligations. On October 17, 2018, the Court of Chancery entered partial final judgment against Akorn on its claims and in favor of the Fresenius parties on their claims for declaratory judgment. The Court of Chancery entered an order holding proceedings on the Fresenius parties’ damages claims in abeyance pending the resolution of any appeal from the partial final judgment.

On October 18, 2018, Akorn filed a notice of appeal from the Opinion and the partial final judgment, as well as a motion seeking expedited treatment of its appeal. On October 23, 2018, the Delaware Supreme Court granted Akorn's motion for expedited treatment and set a hearing on Akorn's appeal for December 5, 2018.

On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s opinion denying Akorn’s claims for declaratory and injunctive relief and granting Defendants’ counterclaim for a declaration that the termination was valid. On December 27, 2018, the Delaware Supreme Court issued a mandate returning the case to the Court of Chancery for consideration of all remaining issues, including the Fresenius parties’ damages claims.

On January 15, 2019, the parties filed a joint letter to the Court of Chancery seeking thirty days to discuss the potential resolution of the Fresenius parties’ damages claims. On February 19, 2019, the parties filed a joint letter advising the Court that they have been unable to resolve the Fresenius parties’ damages claims. The Fresenius parties stated their intention to seek leave to amend their counterclaims to assert a new claim for fraud and that they would seek an expedited trial on such claim purportedly due to Akorn’s financial condition. Akorn stated that it expected to oppose the motions for amendment and expedition, and that it would move to dismiss the Fresenius parties’ damages claims in their entirety.

On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement their counterclaim. The Fresenius parties’ proposed amended and supplemented counterclaim alleged that Akorn fraudulently induced Fresenius to enter into the Merger Agreement and thereafter breached contractual representations and warranties and covenants therein. It sought damages of approximately $102 million. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’ motion for leave to amend and supplement their counterclaim, arguing that the motion was untimely and prejudicial. On February 27, 2019, the Fresenius parties filed a reply in further support of their motion to file an amended and supplemented counterclaim. On February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and supplemented counterclaim. On March 15, 2019, the Fresenius parties served interrogatories in furtherance of their claim for damages purportedly resulting from breaches of contractual representations and warranties and covenants in the Merger Agreement.

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 month period ended March 31, 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 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 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

[10]




tax assets and liabilities, the assumptions underlying share-based compensation and accrued but unreported employee benefit costs.
 
Going Concern: In connection with the preparation of the financial statements for the three month period ended March 31, 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” to the Term Loan Agreements 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 will actively seek to refinance or otherwise address the Term Loans or enter into a “Comprehensive Amendment” to the Term Loan Agreements by December 13, 2019. Based on discussions with the Company’s financial advisor, the Company believes that it will be able to refinance or otherwise address the Term Loans within this timeframe. 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 March 31, 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 consolidated statement of cash flows for the three month periods ended March 31, 2019 and 2018 (in thousands):


[11]




Cash, Cash Equivalents, and Restricted Cash
Three Months Ended
March 31,
 
2019
 
2018
Cash and cash equivalents
$
184,090

 
$
309,377

Restricted cash
785

 
2,372

Total cash, cash equivalents, and restricted cash
$
184,875

 
$
311,749



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 vs. 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 March 31, 2019, the Company incurred a chargeback provision of $205.4 million, or 44.8% of gross sales of $458.6 million, compared to $224.0 million, or 43.0% of gross sales of $520.5 million in the prior year period. The dollar decrease and percent increase in the comparative period was the result of gross sales decreases and a change in contractual terms with a major customer in the first quarter of 2018. 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 chargeback rates include: changes in product pricing 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).


[12]




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 560 basis point (“BP”) change in the ratio of sales subject to chargeback to indirect sales would increase the chargeback reserve by $0.7 million or decrease the chargeback reserve by $2.9 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 recent 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 March 31, 2019, the Company incurred rebates, administrative fees and others of $64.3 million, or 14.0% of gross sales of $458.6 million, compared to $92.3 million, or 17.7% of gross sales of $520.5 million in the prior year period. The dollar and percent decreases from the comparative period were the result of gross sales decreases and product mix shifts to products with lower rebates, administrative fees and others expense percentages. Additionally, a change in contractual terms with a major customer in the first quarter of 2018, resulted in a decrease in rebates, which is also a contributing factor in the variances between the two periods compared. 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 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 560 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 $0.0 million or decrease the same reserve by $0.4 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 recent experience with wholesalers’

[13]




strategy and shifts in contracted and non-contracted indirect sales, we 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 one-time 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, the expected impact of any product recalls and the amount of wholesaler’s inventory 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 for substitute products which can increase or decrease the pull through for sales of the Company’s products and ultimately impact the level of sales returns.

For the three month period ended March 31, 2019, the Company incurred a return provision of $11.9 million, or 2.6% of gross sales of $458.6 million, compared to $7.1 million, or 1.4% of gross sales of $520.5 million in the prior year period. We note that the dollar and percentage increased in the comparative period was primarily due to the timing of returns processing. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter return rates include: acquisitions and integration activities that consolidate dissimilar contract terms and could increase or decrease the return rate depending on the contracting power of the acquired business and consumer demand shifts by products, which could either increase or decrease the return rate depending on the product or products specifically demanded and ultimately returned.

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 0.3 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 $0.3 million or decrease of $0.4 million in return reserve expense if the lag increases or decreases, respectively. The average 0.3 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 twelve month historical activities. This sensitivity analysis is a change from the three month period ended March 31, 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 couponing, from time to time the Company authorizes various retailers to run in-store promotional sales and co-pay discount of 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 co-pay discount as variable consideration since the Company intends to continuously issue coupons, advertising promotion and co-pay discount from time to time. This 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 utilized based on historical experience and is adjusted 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

[14]




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. 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 or lease terms.

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 (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 asset also include any lease prepayments and is 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.

Net (Loss) Income Per Common Share: Basic net (loss) income per common share is based upon the weighted average common shares outstanding. Diluted net (loss) income per common 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 (loss) income 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

[15]




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 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
March 31, 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
$
184,090

 
$
184,090

 
$

 
$

Nicox stock with lockup provisions
18

 

 

 
18

Total assets
$
184,108

 
$
184,090

 
$

 
$
18

 
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. As of March 31, 2019, the Company maintained rights to receive a small number of shares of Nicox stock held in an expense escrow. The unrealized holding loss on these shares was a negligible dollar amount as of March 31, 2019. The escrow shares are not expected to be released within one year, and accordingly, the original cost basis of less than $0.1 million on these shares is included within other non-current assets on the Company’s Condensed Consolidated Balance Sheet as of March 31,

[16]




2019. The fair value of the investment is estimated using observable and unobservable inputs to discount for lack of marketability.

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 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 an advanced option-pricing model, such as a 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.

Note 3 — Stock Options, Restricted Stock Units and Employee Stock Purchase Plan

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”). Under the Omnibus Plan, 8.0 million shares of the Company’s common stock were made available for issuance pursuant to equity awards. 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 March 31, 2019, there were approximately 3.2 million stock options and 0.1 million RSU shares outstanding under the 2014 Plan. The 2014 Plan had replaced the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6, 2013. No awards remain outstanding under the 2003 Plan.

Under the Omnibus Plan, there were approximately 3.8 million RSU shares, 1.0 million PSU shares and 0.5 million stock option award shares outstanding as of March 31, 2019. As of March 31, 2019, approximately 2.2 million shares remained available for future award grants under the Omnibus Plan.

Also granted in, and outstanding as of the three month period ended March 31, 2019, were inducement awards consisting of 0.5 million RSU shares, 0.2 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

[17]




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.

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 by, performance conditions are valued at 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 month period ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Stock options
$
1,381

 
$
3,159

Employee stock purchase plan
229

 

Restricted stock units and Performance share units
3,110

 
2,349

Total stock-based compensation expense
$
4,720

 
$
5,508


 
Stock Option awards

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 month period ended March 31, 2019, along with the weighted-average grant date fair values:
 
Three Months Ended
March 31,
 
2019
 
2018
Expected volatility
67
%
 
%
Expected life (in years)
6.2

 

Risk-free interest rate
2.52
%
 
%
Dividend yield

 

Fair value per stock option
$
2.44

 
$

Forfeiture rate
8
%
 
%

 
The table below sets forth a summary of stock option activity within the Company’s stock-based compensation plans for the three month period ended March 31, 2019
 
Number of
Options
(in thousands)
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in thousands) (1)
Outstanding at December 31, 2018
3,418

 
$
28.55

 
3.69
 
$

Granted
860

 
3.90

 
 
 
 
Exercised

 

 
 
 
 
Forfeited
(196
)
 
27.61

 
 
 
 
Outstanding at March 31, 2019
4,082

 
$
23.40

 
4.38
 
$

Exercisable at March 31, 2019
2,599

 
$
28.64

 
2.61
 
$




[18]




(1) The Aggregate Intrinsic Value of stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock as of the date indicated and the exercise price of the stock options. Stock options for which the exercise price exceeded the market price have been omitted. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and the timing and volume of option grants, exercises and forfeitures.

Restricted Stock Unit awards

From time to time, the Company has granted RSUs to certain employees, executives and directors. Historically, the majority of RSU grants to employees and executives have been pursuant to the Company's Long-Term Incentive Plans (the "LTIPs"), which call for annual grants of RSUs to all eligible employees and executives. The RSU awards vest 25% per year on each of the first four anniversaries of the grant date. 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. During the three month period ended March 31, 2019, the Company granted 3.2 million RSUs to certain employees, executives and directors. Of this total, 2.7 million RSUs were granted to certain employees as a retention incentive. These awards vest in full two years after grant date. The remaining 0.5 million RSUs were granted as an inducement award to the Company’s new CEO.

Set forth below is a summary of unvested RSU activity during the three month period ended March 31, 2019:
 
Number of Units
(in thousands)
 
Weighted Average Per Share
Grant Date Fair Value
Unvested at December 31, 2018
1,643
 
$
19.85

Granted
3,197
 
$
4.02

Vested
(273)
 
$
23.75

Forfeited
(153)
 
$
16.44

Unvested at March 31, 2019
4,414
 
$
9.52


 
During the three month period ended March 31, 2019, approximately 0.3 million RSU shares vested and were released, generating tax-deductible expenses totaling $1.0 million, while no RSU shares vested during the three month period ended March 31, 2018.

Performance Share Unit awards

During the quarter ended March 31, 2019, the Company granted 1.2 million PSU award shares to certain executives. Of this total, 1.0 million vest two years after grant with vesting level contingent upon meeting various performance conditions, while the remaining 0.2 million vest four years after grant with vesting level contingent on various market conditions. No PSU awards were granted by the Company prior to the quarter ended March 31, 2019.

Set forth below is a summary of unvested PSU activity during the three month period ended March 31, 2019:
 
Total Number of Units
(in thousands)
Weighted Average Grant Date Fair Value per Unit
 
Vesting Based on Performance Conditions
Weighted Average Grant Date Fair Value per Unit
 
Vesting Based on Market Conditions
Weighted Average Grant Date Fair Value per Unit
Unvested at December 31, 2018

$

 

$

 

$

Granted
1,239

3.99

 
985

4.06

 
254

3.73

Vested


 


 


Forfeited


 


 


Unvested at March 31, 2019
1,239

$
3.99

 
985

$
4.06

 
254

$
3.73



Set forth below is a summary of the valuation inputs for PSUs granted with vesting subject to market conditions during the three month period ended March 31, 2019:

[19]




Valuation Inputs for PSUs with Vesting Subject to Market Conditions:
 
PSUs Issued (units in thousands)
254

Risk Free Rate
2.58
%
Volatility
55.10
%
Dividend
%
Valuation Per Share
$
3.73

Total Fair Value (in thousands)
$
947

 
 
Expected Term (years)
4

 
 
Forfeiture Rate Assumed
8.00
%


Employee Stock Purchase Plan

The 2016 Akorn, Inc. Employee Stock Purchase Plan (the “ESPP”) permits eligible employees to acquire shares of the Company’s common stock through payroll deductions. The ESPP has been structured to qualify under Section 423 of the Internal Revenue Code (“IRC”). Employees who elect to participate in the ESPP may withhold from 1% to 15% of eligible wages toward the purchase of stock. Shares will be purchased at a 15% discount off the lesser of the market price at the beginning or the ending of the applicable offering period. The ESPP is designed with two offering periods each year, one running from January 1st to December 31st and the other running from July 1st to December 31st. In a given year, employees may enroll in only one offering period, not both. Per IRC rules, annual purchases per employee are limited to $25,000 worth of stock, valued as of the beginning of the offering period. Accordingly, with the 15% discount, employees may withhold no more than $21,250 per year toward the purchase of stock under the ESPP. Employees are further limited to purchasing no more than 15,000 shares of stock per year. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016. A total of 2.0 million shares of the Company’s stock have been set aside for issuance under the ESPP, of which 146,247 shares have been issued to date.

During the quarter ended March 31, 2019, participants contributed approximately $0.5 million through payroll deductions toward the future purchase of shares under the ESPP.

Note 4 — Accounts Receivable, Sales and Allowances
 
The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is typical of the pharmaceutical industry and is not necessarily specific to the Company. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the terms of the respective agreement with the end-user customer (which in turn depends on the specific end-user customer, each having its own pricing arrangement that entitles it to a particular deduction). This process can lead to partial payments to the Company against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.
 
With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying Condensed Consolidated Statements of Comprehensive (Loss). Additionally, with the exception of administrative fees and others, which is included as a current liability, the ending reserve balances are included in trade accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.
 
Trade accounts receivable, net consists of the following (in thousands):

[20]




 
March 31,
2019
 
December 31,
2018
Gross accounts receivable (1)
$
361,065

 
$
308,305

Less reserves for:
 
 
 
Chargebacks (2)
(67,474
)
 
(55,312
)
Rebates (2)
(74,723
)
 
(55,963
)
Product returns
(34,411
)
 
(35,146
)
Discounts and allowances
(7,740
)
 
(6,561
)
Advertising and promotions
(1,769
)
 
(1,574
)
Doubtful accounts
(623
)
 
(623
)
Trade accounts receivable, net
$
174,325

 
$
153,126



(1) The increase in the Gross accounts receivable balance as of March 31, 2019, when compared to the December 31, 2018 balance is due to higher accounts receivable carryover due to timing of sales during the compared period.

(2) The increase in the Chargebacks and Rebates balances as of March 31, 2019, when compared to the December 31, 2018 balance were primarily due to payment timing, product mix, customer mix and higher wholesaler inventory.

For the three month periods ended March 31, 2019 and 2018, the Company recorded the following adjustments to gross sales (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Gross sales
$
458,641

 
$
520,533

Less adjustments for:
 
 
 
Chargebacks (1)
(205,394
)
 
(223,963
)
Rebates, administrative and other fees (1)
(64,264
)
 
(92,279
)
Product returns (2)
(11,902
)
 
(7,121
)
Discounts and allowances
(9,050
)
 
(10,238
)
Advertising, promotions and others
(2,160
)
 
(2,869
)
Revenues, net
$
165,871

 
$
184,063



(1) The decreases in chargebacks and rebates, administrative and other fees for the three month periods ended March 31, 2019 as compared to the same periods in 2018, were primarily due to volume declines as well as product mix and customer mix.
(2) The increase in product returns for the three month periods ended March 31, 2019, as compared to the same periods in 2018, was primarily due to the timing of returns processing.
Note 5 — Inventories, Net
 
The components of inventories are as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Finished goods
$
68,876

 
$
76,981

Work in process
14,060

 
13,870

Raw materials and supplies
79,816

 
82,794

Inventories, net 
$
162,752

 
$
173,645


 
The Company maintains an allowance for excess and obsolete inventory, as well as inventory for which its cost is in excess of its net realizable value. Inventory at March 31, 2019 and December 31, 2018, was reported net of these reserves of $48.5 million and $46.5 million, respectively.

[21]





Note 6 — Property, Plant and Equipment, Net
 
Property, plant and equipment, net consist of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Land and land improvements
$
17,516

 
$
17,608

Buildings and leasehold improvements
138,526

 
138,126

Furniture and equipment
244,178

 
240,080

Sub-total
400,220

 
395,814

Accumulated depreciation
(166,300
)
 
(158,824
)
Property, plant and equipment in service, net
$
233,920

 
$
236,990

Construction in progress 
92,050

 
97,863

Property, plant and equipment, net
$
325,970

 
$
334,853



At March 31, 2019 and December 31, 2018, property, plant and equipment, net, with a net carrying value of $94.0 million and $91.9 million, respectively, was located outside the United States.

At March 31, 2019, the Company had $92.1 million of assets under construction which consisted primarily of investment in equipment, and compliance with the Drug Supply Chain Security Act ("DSCSA"). Depreciation will begin on these assets once they are placed into service. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. During the three month period ended March 31, 2019, the Company recorded impairment losses of $8.9 million, as a result of the Company announcing that it was exploring strategic alternatives to exit the India manufacturing facility. No impairment losses were recorded during three month period ended March 31, 2018.
 
The Company recorded depreciation expense of $7.6 million and $7.1 million during the three month periods ended March 31, 2019 and 2018, respectively.

Note 7 — Goodwill and Other Intangible Assets, Net

Intangible assets consist primarily of Goodwill, which is carried at its initial value, subject to evaluation for impairment, 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, ranging from one to thirty years.

As of March 31, 2019 and 2018, accumulated amortization of intangible assets was $224.0 million and $232.2 million, respectively. The Company recorded amortization expense of $11.1 million and $13.2 million during the three month periods ended March 31, 2019 and 2018, respectively. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows.

IPR&D intangible assets represent the value assigned to acquired R&D projects that principally represent rights to develop and sell a product that the Company has acquired which have not yet been completed or approved. These assets are subject to impairment testing until completion or abandonment of each project. Impairment testing requires significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenue, cost of sales, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, and competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the IPR&D product, the assets are impaired.

During the three month period ended March 31, 2019, no IPR&D projects were impaired, while during the three month period ended March 31, 2018, three IPR&D projects were impaired due to the Company's expectations of market conditions upon launch, resulting in an impairment expense of $17.9 million. Additionally, during the three month period ended March 31, 2019, one product licensing rights was impaired due to competition resulting in impairment expenses of $10.4

[22]




million; compared to impairments of $0.9 million expenses on one product licensing rights due to competition during the comparative prior year period.

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 also models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. The Company performed an interim impairment test on October 1, 2018 and determined that the fair value of its reporting units are in excess of its carrying value and; therefore, no goodwill impairment charge was necessary. As a result of Akorn announcing that it was exploring strategic alternatives to exit the India manufacturing facility, the Company performed impairment testing as of March 31, 2019, which resulted in a goodwill impairment of $16.0 million.

The following table provides a summary of the activity in goodwill by segment for the three month period ended March 31, 2019 (in thousands):
 
Consumer
Health
 
Prescription
Pharmaceuticals
 
Total
Balances at December 31, 2018
$
16,717

 
$
267,162

 
$
283,879

Currency translation adjustments

 
(1
)
 
(1
)
Acquisitions

 

 

Impairments

 
(15,955
)
 
(15,955
)
Dispositions

 

 

Balances at March 31, 2019
$
16,717

 
$
251,206

 
$
267,923



The following table sets forth the major categories of the Company’s intangible assets as of March 31, 2019 and December 31, 2018, and the weighted average remaining amortization period as of March 31, 2019 and December 31, 2018 (dollar amounts in thousands):
 
Gross
Amount (2)
 
Accumulated
Amortization
 
Reclassifications
 
Impairment (1)
 
Net
Balance
 
Wtd Avg Remaining
Amortization Period
(years)
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Product licensing rights
$
472,041

 
$
(209,135
)
 
$

 
$
(15,000
)
 
$
247,906

 
8.9
IPR&D
4,400

 

 

 

 
4,400

 
N/A - Indefinite lived
Trademarks
16,000

 
(6,535
)
 

 

 
9,465

 
17.4
Customer relationships
4,225

 
(2,383
)
 

 

 
1,842

 
7.1
Other intangibles
6,000

 
(5,969
)
 

 

 
31

 
0
 
502,666

 
$
(224,022
)
 
$

 
$
(15,000
)
 
$
263,644

 
 
December 31, 2018
 

 
 

 
 
 
 
 
 

 
 
Product licensing rights
$
597,960

 
$
(203,323
)
 
$
5,300

 
$
(131,306
)
 
$
268,631

 
9.2
IPR&D
149,161

 

 
(5,300
)
 
(139,461
)
 
4,400

 
N/A - Indefinite lived
Trademarks
16,000

 
(6,304
)
 

 

 
9,696

 
17.5
Customer relationships
4,225

 
(2,318
)
 

 

 
1,907

 
7.3
Other intangibles
11,235

 
(5,658
)
 

 
(5,235
)
 
342

 
0.3
 
$
778,581

 
$
(217,603
)
 
$

 
$
(276,002
)
 
$
284,976

 
 

(1) Impairment of product licensing rights is stated at gross carrying cost of $15.0 million less accumulated amortization of $4.6 million as of the impairment date. Accordingly, the total net impairment expense was $10.4 million, for the three month period ended March 31, 2019.

(2) Differences in the Gross Amounts between periods are due to the write down of fully amortized assets and additions during the period.


[23]




Note 8 — Financing Arrangements

Term Loans

During 2014, in order to finance its acquisitions of Hi-Tech Pharmacal Co Inc. and VersaPharm Inc., Akorn, Inc., together with certain of its subsidiaries (Akorn, Inc., together with such subsidiaries, the “Akorn Loan Parties”), entered into two term loan agreements (the “Term Loan Agreements” and the loans outstanding thereunder, the “Term Loans”) with certain lenders (the “Lenders”) and with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent (the “Term Loan Administrative Agent”). The aggregate principal amount of the Term Loans was $1,045.0 million. As of March 31, 2019, outstanding debt under the Term Loan Agreements was $831.9 million. The Company believes it was in compliance with all applicable covenants in the Term Loan Agreements, which included customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities, as of March 31, 2019. As of March 31, 2019, the Term Loans were scheduled to mature on April 16, 2021.

During the three month periods ended March 31, 2019 and 2018, the Company amortized $1.3 million and $1.3 million, respectively of the deferred financing cost related to the Term Loans, resulting in $10.2 million remaining balance of deferred financing costs at March 31, 2019. The Company will amortize this balance using the straight-line method over the life of the Term Loan Agreements.

As of March 31, 2019, the Company's spread was based upon the Ratings Level as documented below. As of March 31, 2019, the Company was a Ratings Level III for the Term Loan Agreements.
Ratings Level
Index Ratings
(Moody’s/S&P)
Adjusted LIBOR (Eurodollar) Spread
Adjusted Base Rate (ABR) Spread
Level I
B1/B+ or higher
4.25%
3.25%
Level II
B2/B
4.75%
3.75%
Level III
B3/B- or lower
5.50%
4.50%

For the three month periods ended March 31, 2019 and 2018, the Company recorded interest expense of $16.7 million and $12.3 million, respectively in relation to the Term Loans. The increase in interest expense is related to higher interest rates during the three month period ended March 31, 2019, compared to the same period in 2018.

On May 6, 2019, the Akorn Loan Parties entered into a Standstill Agreement and First Amendment (the “Standstill Agreement”) in respect of the Term Loan Agreements with an ad hoc group of Lenders (the “Ad Hoc Group”), certain other Lenders (together with the Ad Hoc Group, the “Standstill Lenders”) and the Term Loan Administrative Agent (together with the Akorn Loan Parties and the Standstill Lenders, the “Standstill Parties”). Capitalized terms used but not defined herein have the meanings given to them in the Standstill Agreement or the Term Loan Agreements, as applicable.

The Standstill Agreement provides that, for the duration of the Standstill Period (as defined below), among other matters, neither the Term Loan Administrative Agent nor the Lenders may (i) declare any Event of Default or (ii) otherwise seek to exercise any rights or remedies, in each case of clauses (i) and (ii) above, to the extent directly relating to any alleged Event of Default arising from any alleged breach of any of the covenants contained in Sections 5.01, 5.02, 5.03, 5.06 or 5.07 of the Term Loan Agreements (the “Specified Covenants”), to the extent the facts and circumstances giving rise to any such breach have been (x) publicly disclosed by the Company or (y) disclosed in writing by the Company to private side Lenders or certain advisors to the Ad Hoc Group (collectively, the “Specified Matters”). “Standstill Period” means the period of time from the effective date of the Standstill Agreement (the “Effective Date”) through the earliest of (a) December 13, 2019; (b) the delivery of a notice of termination of the Standstill Period by Lenders holding a majority of the Term Loans (the “Required Lenders”) upon the occurrence of a Default or Event of Default under the Term Loan Agreements, excluding any Default or Event of Default relating to a Specified Matter; or (c) the delivery of a notice of termination of the Standstill Period by the Required Lenders as a result of any breach of, or non-compliance with, any provision of the Standstill Agreement by the Akorn Loan Parties, including without limitation any such breach or noncompliance by the Akorn Loan Parties of or with any Affirmative Covenants and Milestones or Negative Covenants (each as defined below) or other covenants set forth in the Standstill Agreement, subject, in each case, to any applicable cure period expressly set forth therein (each, a “Standstill Event of Default”).
In exchange for the agreement of the Lenders to standstill during the Standstill Period, the Standstill Agreement provides, among other matters, that:

[24]




during the Standstill Period:

the Company must deliver certain financial and other reporting to the Lenders or their advisors, including monthly financial statements, 13-week cash flow forecasts and variance reports and certain regulatory information, and participate in various update calls with the Lenders and their advisors (the “Affirmative Covenants and Milestones”);

the Company and its subsidiaries are restricted, among other matters, from (i) consummating certain asset sales and investments, (ii) making certain restricted payments with respect to the Company’s common stock and any subordinated indebtedness, (iii) engaging in sale and leaseback transactions, (iv) incurring certain liens and indebtedness, (v) reinvesting any proceeds received from certain asset sales, and (vi) without the consent of the Required Lenders at such time, (A) designating any Restricted Subsidiary as an Unrestricted Subsidiary, or otherwise creating or forming any Unrestricted Subsidiary, and/or (B) transferring any assets of the Company or any of its Restricted Subsidiaries to any Unrestricted Subsidiary, except as otherwise permitted under the Term Loan Agreements (after giving effect to the Standstill Agreement) (collectively, the “Negative Covenants”);

the Company must pay a fee in an amount equal to 0.625% of the outstanding principal of any Term Loans prepaid or repaid during the Standstill Period (other than as a result of any asset sale, condemnation event, incurrence of non-permitted indebtedness or excess cash flow);

the Company must notify the Ad Hoc Group and/or such advisors before making certain payments in respect of judgments or settlements of ongoing litigation matters (a “Specified Litigation Payment”); and

the Company must pay the fees and expenses of certain advisors to the Ad Hoc Group;

the Company and the Standstill Lenders must negotiate in good faith to enter into a comprehensive amendment of the Term Loan Agreements (the “Comprehensive Amendment”), which Comprehensive Amendment must be satisfactory in form and substance to the Required Lenders;
 
on the Effective Date, the Company paid a one-time in-kind fee in an amount equal to 1.75% of the aggregate principal amount of the Term Loans of the Standstill Lenders outstanding on such date; and
 
the interest margins payable by the Company with respect to outstanding Term Loans (as described above) were increased by 1.50% (i.e., 150 basis points), with 0.75% (i.e., 75 basis points) of such increase payable in cash and 0.75% (i.e., 75 basis points) of such increase payable in kind.

Subject to a five business day cure period (the “Cure Period”), the Company’s failure to comply with the Affirmative Covenants and Milestones during the Standstill Period would permit the Required Lenders to terminate the Standstill Period and exercise any rights and remedies under the Term Loan Agreements with respect to the Specified Matters or a Standstill Event of Default. The Company’s failure to comply with the Negative Covenants during the Standstill Period would permit the Required Lenders to terminate the Standstill Agreement and constitute an immediate Event of Default under the Term Loan Agreements. The Company’s failure to comply with any Affirmative Covenants and Milestones (subject to the Cure Period), Negative Covenants or other covenants in the Standstill Agreement would also result in a further increase of the interest margins payable with respect to outstanding Term Loans by 0.50% (i.e., 50 basis points), which increased interest would be payable in kind.
Any Specified Litigation Payment made over the objection of the Ad Hoc Group would (i) entitle the Required Lenders to terminate the Standstill Period and (ii) constitute an Event of Default under the Term Loan Agreements if such payment has a Material Adverse Effect (as defined in the Term Loan Agreements). The failure of the Company to comply with the
covenant in respect of the Specified Litigation Payment during the Standstill Period would result in an Event of Default
under the Loan Agreement.

The failure to enter into a Comprehensive Amendment on or prior to November 15, 2019, would result in payment by the Company of a one-time in-kind fee in an amount equal to 0.625% of the Term Loans outstanding on such date and require the Akorn Loan Parties to pledge for the benefit of the Lenders all unpledged equity interests in foreign subsidiaries. The failure to enter into a Comprehensive Amendment on or prior to December 13, 2019, constitutes an immediate Event of Default under the Term Loan Agreements.

[25]




The execution of the Standstill Agreement should not be construed as (and does not constitute an admission as to) any right, remedy, claim, defense, liability or wrongdoing or responsibility on the part of any Standstill Party. Entry into the Standstill Agreement also should not be construed as (and does not constitute an admission as to) the occurrence of a Default or Event of Default. In the Standstill Agreement, the Standstill Lenders acknowledged that, as of the Effective Date, to the best of their knowledge, they were not aware of any potential Defaults or Events of Default under the Term Loan Agreements other than with respect to the Specified Covenants relating to the Specified Matters.
The Company will actively seek to refinance or otherwise address the Term Loans or enter into a “Comprehensive Amendment” to the Term Loan Agreements by December 13, 2019. Based on discussions with the Company’s financial advisor, the Company believes that it will be able to refinance or otherwise address the Term Loans within this timeframe. In the event that the Company is unable to refinance or otherwise address the Term Loans by such date, the Company would seek to enter into a “Comprehensive Amendment” to the Term Loan Agreements.
JPMorgan Credit Facility

On April 17, 2014, the Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan, as administrative agent, Bank of America, N.A., as syndication agent, and the lenders party thereto (at closing, JPMorgan, Bank of America, N.A. and Wells Fargo Bank, N. A.) for a $150.0 million revolving credit facility (the “JPM Revolving Facility”).

The Company believes it was in compliance with all covenants applicable to the JPM Revolving Facility as of March 31, 2019.

The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At March 31, 2019, there were no outstanding borrowings under the JPM Revolving Facility, and availability was $135.0 million.

The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of the Akorn Loan Parties and their respective subsidiaries in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries.

On April 16, 2019, the Akorn Loan Parties, entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) governing the JPM Revolving Facility with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The A&R Credit Agreement provides for a revolving line of credit of up to $150.0 million on an uncommitted basis, and amends the Existing Credit Agreement in certain other respects, including, among other things:
extending the maturity date by 90 days to July 16, 2019; and
decreasing the undrawn fee from 0.25% to 0.05%.

The JPM Revolving Facility, as amended by the A&R Credit Agreement, is fully uncommitted and discretionary with each lender under the A&R Credit Agreement permitted to make revolving loans or issue letters of credit in its sole discretion.

Debt Maturities Schedule

Aggregate cumulative maturities of debt obligations (including the Term Loans and the JPM Revolving Facility) as of March 31, 2019 are:
(In thousands)
 
2019
 
2020
 
2021
Maturities of debt
 
$
 
 
$
 
 
$
831,938
 


Note 9 — (Loss) Earnings Per Share
 
Basic net (loss) income per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of potentially dilutive securities using the treasury stock method.

The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money, and (ii) unvested RSUs and PSUs.

A reconciliation of the (loss) per share data from a basic to a fully diluted basis is detailed below (amounts in thousands, except per share data):

[26]




 
Three Months Ended
March 31,
 
2019
 
2018
Net (loss)
$
(82,181
)
 
$
(28,747
)
Net (loss) per share:
 
 
 
Basic
$
(0.65
)
 
$
(0.23
)
Diluted
$
(0.65
)
 
$
(0.23
)
Shares used in computing net (loss) per share:
 

 
 

Weighted average basic shares outstanding
125,566

 
125,240

Dilutive securities:
 

 
 

Stock option

 

Unvested RSUs and PSUs


 

Total dilutive securities

 

Weighted average diluted shares outstanding
125,566

 
125,240

 
 
 
 
Shares subject to stock options omitted from the calculation of (loss) per share as their effect would have been anti-dilutive
3,917

 
3,287

Shares subject to unvested RSUs and PSUs omitted from the calculation of (loss) per share as their effect would have been anti-dilutive

4,423

 
70



Note 10 — Segment Information
 
During the three month period ended March 31, 2019 and 2018, the Company reported results for the following two reportable segments:

-    Prescription Pharmaceuticals
-    Consumer Health

The Company’s Prescription Pharmaceuticals segment principally consists of generic and branded prescription pharmaceuticals products which span a broad range of indications as well as a variety of dosage forms including: sterile ophthalmics, injectables and inhalants, and non-sterile oral liquids, topicals and nasal sprays. The Company’s Consumer Health segment principally consists of animal health and OTC products, both branded and private label. OTC products include, but are not limited to, a suite of products for the treatment of dry eye sold under the TheraTears® brand name.

Financial information about the Company’s reportable segments is based upon internal financial reports that aggregate certain operating information. The Company’s Chief Operating Decision Maker (“CODM”), as defined in ASC 280 - Segment Reporting, who is also the CEO, oversees operational assessments and resource allocations based upon the results of the Company’s reportable segments, which have available and discrete financial information.

Selected financial information by reportable segment is presented below (in thousands):

[27]




 
Three Months Ended
March 31,
 
2019
 
2018
Revenues, net:
 
 
 
Prescription Pharmaceuticals
$
148,015

 
$
164,302

Consumer Health
17,856

 
19,761

Total revenues, net
165,871

 
184,063

 
 
 
 
Gross Profit:
 

 
 

Prescription Pharmaceuticals
45,443

 
73,508

Consumer Health
8,070

 
8,720

Total gross profit
53,513

 
82,228

 
 
 
 
Operating expenses
118,996

 
107,643

 
 
 
 
Operating (loss)
(65,483
)
 
(25,415
)
 
 
 
 
Other expenses, net
(15,278
)
 
(10,612
)
 
 
 
 
(Loss) before income taxes
$
(80,761
)
 
$
(36,027
)


The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. Inter-segment activity at the gross profit level is minimal. The Company does not have discrete assets by segment, as certain manufacturing and warehouse facilities support more than one segment, and therefore does not report assets by segment. Financial information including revenues and gross profit from external customers by product or product line is not provided as to do so would be impracticable.

The following table sets forth the Company’s net revenues by geographic region for the three month periods ended March 31, 2019 and 2018. The Domestic region represents sales within the United States of America and its territories while the Foreign region represents sales within all other countries and territories (dollar amounts in thousands):
 
 
Three Months Ended
March 31, 2019
 
Three Months Ended
March 31, 2018
Region
Amount
 
% of Total Revenues
 
Amount
 
% of Total Revenues
Domestic
$
164,134

 
99.0%
 
$
181,015

 
98.3%
Foreign
1,737

 
1.0%
 
3,048

 
1.7%
Total Revenues
$
165,871

 
100.0%
 
$
184,063

 
100.0%



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Note 11 – Share Repurchases

In July 2016, the Company announced that the Board of Directors authorized a stock repurchase program (the "Stock Repurchase Program") pursuant to which the Company may repurchase up to $200.0 million of the Company’s common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or others, including accelerated stock repurchase arrangements, pursuant to a Rule 10b5-1 repurchase plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be suspended or discontinued at any time without notice and at the Company's discretion, and at this time no estimate to the effect on the results of the Company due to the Stock Repurchase Program can be made.

The Company did not repurchase any shares during the three month period ended March 31, 2019. In aggregate, over the life of the Stock Repurchase Program, the Company repurchased