NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and branded and private-label over-the-counter (“OTC”) consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products. We specialize in 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, product acquisitions, divestitures and dispositions, which resulted in significant growth.
Akorn 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 operate pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, Himachal Pradesh, India. We also operate a central distribution warehouse in Gurnee, Illinois and additional warehouse facilities in Amityville, New York and Decatur, Illinois. Our R&D centers are located in Vernon Hills, Illinois; Copiague, New York; and Cranbury, New Jersey. In the fourth quarter of 2016 we moved our previous R&D center in Warminster, Pennsylvania to Copiague, New York. We also have other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.
The Company has considered the accounting and disclosure of events occurring after the balance sheet date of
December 31, 2016
through the filing date of this Form 10-K.
Certain prior-period amounts have been reclassified to conform to current-period presentation including current and non-current deferred tax assets and liabilities and short-term and long-term deferred financing fee and debt disclosure on the consolidated balance sheet.
Note 2 — Summary of Significant Accounting Policies
Consolidation:
The accompanying 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 Label (“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 accounting principles generally accepted in the United States of America (“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, the carrying value of deferred income tax assets and liabilities, the assumptions underlying share-based compensation, accrued but unreported employee benefit costs and assumptions underlying the accounting for business combinations.
Going Concern:
In connection with the preparation of the financial statements for the year ended
December 31, 2016
, 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, noting that there did not appear to be evidence of substantial doubt of the entity's ability to continue as a going concern.
Revenue Recognition:
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. Revenues from product sales are recognized when title and risk of loss have passed to the customer.
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 amounts billed to customers for shipping and handling as revenue, and 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 purchased to be cash and cash equivalents. At
December 31, 2016
and 2015, approximately
$3.3 million
and
$4.3 million
of cash held by AIPL as of those dates was restricted, and was reported within
prepaid expenses and other current assets
and
other non-current assets
, respectively.
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. Depending on the products, the customers, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, rebates, chargebacks and other credits are recorded as deductions to the Company’s trade accounts receivable.
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 when sales 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 percentage of gross sales that were generated through direct and indirect sales channels and the percentage 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 estimates the percentage amount 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 year ended
December 31, 2016
, the Company incurred a chargeback provision of
$1,218.6 million
, or
42.1%
of gross sales of
$2,891.3 million
, compared to
$1,065.2 million
, or
42.4%
of gross sales of
$2,511.7 million
in the prior year. We note that the dollar
increase
and percent decrease in the comparative period was the result of gross sales increases and product mix shifts to products with lower chargeback expense percentages. 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, 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).
To better understand the impact of changes in chargeback reserve based on circumstances that are not fully outside of 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
380
basis point (“BP”) change in the ratio of sales subject to chargeback to indirect sales would increase the chargeback reserve by
$1.4 million
or decrease the chargeback reserve by
$3.1 million
depending on the change in the direction of the ratio. Fundamentally, the BP change calculation is determined based on the 6-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 6-month trend of the proportion of direct to indirect sales provides a representative basis for sensitivity analysis. However, the average change in the ratio of sales subject to chargeback to indirect sales in the last 6 months is immaterial. Accordingly, the BP change calculation for December 31, 2016 is based on the difference between the lowest and highest ratio of sales subject to chargeback to indirect sales during the last 6 months.
As of and for the year ended December 31, 2016, the Company determined that in order to more closely align with internal analysis of associated reserves it would adjust the allowances disclosure to separately report rebates from chargebacks and rebates for both net trade accounts receivable and gross sale adjustments and to consolidate administrative fees and others with rebates for purposes of reporting of gross to net revenue reserves. All prior period information, including as of and for the years ended December 31, 2015 and 2014 have been recasted to reflect this disclosure change.
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. Rebate, 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 rebate, administrative fees and other allowances. The Company reduces gross sales and increases the rebate, administrative fees and other allowance by the estimated rebate, administrative fees and other 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 necessary 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 credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices, and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available.
Similar to rebates, the reserve for administrative fees and others represent 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 year ended
December 31, 2016
the Company incurred a rebates, administrative fees and others provision of
$463.7 million
, or
16.0%
of gross sales of
$2,891.3 million
, compared to
$367.5 million
, or
14.6%
of gross sales of
$2,511.7 million
in the prior year. We note that the dollar and percent
increase
from the comparative period was the result of gross sales increases and product mix shifts to products with higher rebates, administrative fees and others expense percentages. 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, 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 rebates, administrative fees and others reserves based on circumstances that are not fully outside of 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
380
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
$0.2 million
or decrease the same reserve by
$0.6 million
depending on the direction of the change in the ratio. Fundamentally, the BP change calculation is determined based on the 6-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’ strategy and shifts in contracted and non-contracted indirect sales, we believe the 6-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. However, the average change in the ratio of sales subject to rebates, administrative fees and others to indirect sales in the last 6 months is immaterial. Accordingly, the
380
BP change calculation for December 31, 2016 is based on the difference between the lowest and highest ratio of sales subject to rebates, administrative fees and others to indirect sales during the last 6 months.
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 year ended
December 31, 2016
the Company incurred a return provision of
$28.3 million
, or
1.0%
of gross sales of
$2,891.3 million
, compared to
$34.3 million
, or
1.4%
of gross sales of
$2,511.7 million
in the prior year. We note that the dollar and percent
decrease
from the comparative period was the result of gross sales increases partially offset by product mix shifts to products with lower return rates. 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 decrease the return rate as typically the Company purchases smaller entities with less contracting power and integrates those product sales to Akorn contracts; 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
1.24
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
$3.7 million
or a decrease of
$2.7 million
of the return reserve expense if the lag increases or decreases, respectively. The average
1.24
months change in the lag from the time of sale to the time the product return is processed was determined based on the average variances of the last 6-month historical activities. 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, Promotions and Co-Pay discount cards:
The Company issues coupons from time to time that are redeemable against certain of our Consumer Health products. Upon release of coupons into the market, the Company records an estimate of the dollar value of coupons expected to be redeemed. This estimate is based on historical experience and is adjusted as needed based on actual redemptions. In addition to couponing, from time to time the Company authorizes various retailers to run in-store promotional sales of its products. Upon receiving confirmation that a promotion was run, the Company accrues an estimate of the dollar amount expected to be owed back to the retailer. 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. Upon release of the cards into the market, the Company records an estimate of the dollar value of co-pay discounts expected to be utilized. This estimate is based on historical experience and is adjusted as needed based on actual usage.
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 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 and are evaluated in accordance with
ASC 605 —Revenue Recognition
as applicable. 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.
As of
December 31, 2016
, the Company had a total of
$5.1 million
of past due gross accounts receivable with no material amounts aged over 60 days. The Company performs monthly a detailed analysis of the receivables due from its customers and provides a specific reserve against known uncollectible items. The Company also includes in the allowance for doubtful accounts an amount that it estimates to be uncollectible for all other customers, based on a percentage of the past due receivables. The percentage reserved increases as the age of the receivables increases. Accounts are written off once all reasonable collection efforts have been exhausted and/or when facts or circumstances regarding the customer (i.e. bankruptcy filing) indicate that the chance of collection is remote.
Advertising and Promotional Allowances to Customers:
The Company routinely sells its consumer health products to major retail drug chains. From time to time, the Company may arrange for these retailers to run in-store promotional sales of the Company’s products. The Company reserves an estimate of the dollar amount owed back to the retailer, recording this amount as a reduction to revenue at the later of the date on which the revenue is recognized or the date the sales incentive is offered. When the actual invoice for the sales promotion is received from the retailer, the Company adjusts its estimate accordingly. Advertising and promotional expenses paid to customers are expensed as incurred in accordance with
ASC 605-50 - Customer Payments and Incentives
.
Inventories:
Inventories are stated at the lower of cost (average cost method) or market (see Note 5 — “Inventories”). The Company maintains an allowance for slow-moving and obsolete inventory as well as inventory where the cost is in excess of its net realizable value (“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. For the years ended
December 31, 2016
, 2015 and 2014, the Company recorded a provision for inventory obsolescence and NRV of
$32.1 million
,
$8.8 million
, and
$10.5 million
, respectively. The allowances for inventory obsolescence were
$33.5 million
and
$21.5 million
as of
December 31, 2016
and 2015, respectively.
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.
At
December 31, 2016
, the Company established a reserve of
$2.4 million
related to R&D raw materials that are not expected to be utilized prior to expiration while at the prior year end, the Company had approximately
$2.3 million
in reserves for R&D raw materials. The entire balance of R&D raw materials has been reserved, as the Company deemed it unlikely that the products would receive FDA approval far enough in advance of expiration to be sellable.
Property, Plant and Equipment:
Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is provided 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. Depreciation expense was
$22.2 million
,
$19.9 million
and
$14.2 million
for the years ended
December 31, 2016
, 2015 and 2014, respectively. The following table sets forth the average estimated useful lives at acquisition of the Company’s property, plant and equipment, by asset category:
|
|
|
|
Asset category
|
|
Depreciable Life (years)
|
Buildings
|
|
30 - 50
|
Leasehold improvements
|
|
20 - 30
|
Furniture and equipment
|
|
7 - 20
|
Automobiles
|
|
5 - 7
|
Computer hardware and software
|
|
3 - 5
|
Net Income Per Common Share:
Basic net income per common share is based upon weighted average common shares outstanding. Diluted net 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 convertible securities using the treasury stock and if converted methods. Anti-dilutive shares excluded from the computation of diluted net income per share for 2016, 2015 and 2014 include
3.6 million
,
0.9 million
and
0.7 million
shares, respectively, related to options.
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.
Fair Value of Financial Instruments:
The Company applies
ASC 820
, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework.
ASC 820
defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in
ASC 820
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.
Our financial instruments include cash and cash equivalents, accounts receivable, available for sale securities and accounts payable. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate book value because of the short maturity of these instruments.
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 and the portion of the value of the Nicox S.A. ("Nicox") shares which are available to be traded on the exchange 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 additional consideration payable as a result of prior years' divestitures and other insignificant contingent amounts are considered Level 3 liabilities.
|
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
|
December 31,
2016
|
|
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
|
$
|
200,772
|
|
|
$
|
200,772
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale securities
|
1,106
|
|
|
1,074
|
|
|
—
|
|
|
32
|
|
Total assets
|
$
|
201,878
|
|
|
$
|
201,846
|
|
|
$
|
—
|
|
|
$
|
32
|
|
Purchase consideration payable
|
$
|
4,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,994
|
|
Total liabilities
|
$
|
4,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
December 31,
2015
|
|
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
|
$
|
346,266
|
|
|
$
|
346,266
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale securities
|
5,941
|
|
|
4,843
|
|
|
—
|
|
|
1,098
|
|
Total assets
|
$
|
352,207
|
|
|
$
|
351,109
|
|
|
$
|
—
|
|
|
$
|
1,098
|
|
Purchase consideration payable
|
$
|
4,967
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,967
|
|
Total liabilities
|
$
|
4,967
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,967
|
|
As of
December 31, 2016
, the Company was carrying available-for-sale investments in shares of Nicox stock fair valued at
$1.1 million
. In 2014, the Company initially acquired Nicox stock fair valued at
$12.5 million
, carrying an original cost basis of
$10.8 million
and unrealized gain of
$1.7 million
. The unrealized gain was the result of discounting to reflect certain lockup provisions preventing immediate sale of the underlying shares. During the years ended December 31, 2016, 2015 and 2014, the Company sold available-for-sale securities with original cost bases of
$6.0 million
,
$2.6 million
and
$0.6 million
, respectively, realizing immaterial losses through these sales. The remaining available-for-sale securities owned as of December 31, 2016 have an original cost basis of approximately
$1.5 million
, less an unrealized loss of
$0.4 million
, resulting in a net carrying value (fair value) of
$1.1 million
. The fair value of the investment is estimated using observable and unobservable inputs to discount for lack of marketability. See Note 16 -
Business Combinations and Other Strategic Investments
for further discussion.
The remaining purchase consideration payable is principally comprised of amounts owed relating to various prior years divestitures, at fair value as determined based on the underlying contracts and the Company’s subjective evaluation of the additional consideration obligation estimate.
Discontinued Operations:
During the three months ended June 30, 2014 and subsequent to the Hi-Tech Pharmacal Co. Inc. (“Hi-Tech”) acquisition, the Company divested the ECR subsidiary. As a result of the sale the Company will have no continuing involvement or cash flows from the operations of this business. In accordance with FASB
ASC 205 - Presentation of Financial Statements
, and to allow for meaningful comparison of our continuing operations, the operating results of this business are reported as “discontinued operations.” All other operations are considered “continuing operations.” Unless noted otherwise, discussion in these notes to the financial statements pertain to our continuing operations.
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
Note 3 — 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 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, which entitles it to a particular deduction). This process can lead to partial payments 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 consolidated statements of comprehensive income. 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 consolidated balance sheets.
As of and for the year ended
December 31, 2016
, the Company determined that in order to more closely align with internal analysis of associated reserves it would adjust the allowances disclosure to separately report rebates from chargebacks and rebates for both net trade accounts receivable and gross sales adjustments and to consolidate administrative fees and others with rebates for purposes of reporting gross sales to net revenues. All prior period information, including as of and for the years ended December 31, 2015 and 2014, have been recast to reflect this disclosure change.
Trade accounts receivable, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Gross accounts receivable
|
$
|
519,175
|
|
|
$
|
466,570
|
|
Less reserves for:
|
|
|
|
Chargebacks
|
(80,360
|
)
|
|
(91,844
|
)
|
Rebates (1)
|
(97,935
|
)
|
|
(162,596
|
)
|
Product returns
|
(43,689
|
)
|
|
(48,333
|
)
|
Discounts and allowances
|
(12,389
|
)
|
|
(10,079
|
)
|
Advertising and promotions
|
(688
|
)
|
|
(1,518
|
)
|
Doubtful accounts
|
(960
|
)
|
|
(1,579
|
)
|
Trade accounts receivable, net
|
$
|
283,154
|
|
|
$
|
150,621
|
|
(1) - The primary reason for the significant decrease in the reserve for rebates for the twelve months period ended December 31, 2016 compared to the balance at December 31, 2015 is due to an abnormal delay in processing the 2015 rebates driven in part by the 2014 Financial Restatement efforts. In 2016, the rebates reserve balance declined each subsequent quarter-end reporting period as the Company progressively returned to normal processing timing of rebate claims. The rebates processed during full year 2016 are disclosed under the caption “charges processed,” in the table below.
For the years ended
December 31, 2016
,
2015
and
2014
, the Company recorded the following adjustments to gross sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Gross sales
|
$
|
2,891,267
|
|
|
$
|
2,511,693
|
|
|
$
|
1,433,603
|
|
Less adjustments for:
|
|
|
|
|
|
Chargebacks
|
(1,218,560
|
)
|
|
(1,065,244
|
)
|
|
(643,004
|
)
|
Rebates, administrative fees and others
|
(463,724
|
)
|
|
(367,514
|
)
|
|
(177,518
|
)
|
Product returns
|
(28,285
|
)
|
|
(34,272
|
)
|
|
(20,993
|
)
|
Discounts and allowances
|
(55,494
|
)
|
|
(50,384
|
)
|
|
(30,782
|
)
|
Advertising, promotions, and others
|
(8,361
|
)
|
|
(9,203
|
)
|
|
(6,258
|
)
|
Revenues, net
|
$
|
1,116,843
|
|
|
$
|
985,076
|
|
|
$
|
555,048
|
|
The annual activity in the Company’s allowance for customer deductions accounts for the three years ended
December 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns
|
|
Chargebacks
|
|
Rebates (1)
|
|
Discounts
|
|
Doubtful Accounts
|
|
Advert. & Promotions
|
|
Total
|
Balance at December 31, 2013
|
8,164
|
|
|
8,635
|
|
|
4,247
|
|
|
1,644
|
|
|
25
|
|
|
452
|
|
|
23,167
|
|
Provision
|
20,993
|
|
|
643,004
|
|
|
132,960
|
|
|
30,782
|
|
|
247
|
|
|
6,258
|
|
|
834,244
|
|
Additions from acquisitions
|
35,542
|
|
|
38,500
|
|
|
—
|
|
|
5,160
|
|
|
51
|
|
|
311
|
|
|
79,564
|
|
Charges processed
|
(20,053
|
)
|
|
(587,701
|
)
|
|
(41,533
|
)
|
|
(22,032
|
)
|
|
(14
|
)
|
|
(6,262
|
)
|
|
(677,595
|
)
|
Balance at December 31, 2014
|
$
|
44,646
|
|
|
$
|
102,438
|
|
|
$
|
95,674
|
|
|
$
|
15,554
|
|
|
$
|
309
|
|
|
$
|
759
|
|
|
$
|
259,380
|
|
Provision
|
34,272
|
|
|
1,065,244
|
|
|
295,787
|
|
|
50,384
|
|
|
840
|
|
|
9,203
|
|
|
1,455,730
|
|
Additions from acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
291
|
|
|
—
|
|
|
291
|
|
Charges processed
|
(30,585
|
)
|
|
(1,075,838
|
)
|
|
(228,865
|
)
|
|
(55,859
|
)
|
|
139
|
|
|
(8,444
|
)
|
|
(1,399,452
|
)
|
Balance at December 31, 2015
|
$
|
48,333
|
|
|
$
|
91,844
|
|
|
$
|
162,596
|
|
|
$
|
10,079
|
|
|
$
|
1,579
|
|
|
$
|
1,518
|
|
|
$
|
315,949
|
|
Provision
|
28,285
|
|
|
1,218,560
|
|
|
384,074
|
|
|
55,494
|
|
|
—
|
|
|
8,361
|
|
|
1,694,774
|
|
Charges processed
|
(32,929
|
)
|
|
(1,230,044
|
)
|
|
(448,735
|
)
|
|
(53,184
|
)
|
|
(619
|
)
|
|
(9,191
|
)
|
|
(1,774,702
|
)
|
Balance at December 31, 2016
|
$
|
43,689
|
|
|
$
|
80,360
|
|
|
$
|
97,935
|
|
|
$
|
12,389
|
|
|
$
|
960
|
|
|
$
|
688
|
|
|
$
|
236,021
|
|
(1) - As provisions for rebates, administrative fees and others represent both contra-receivables and current liabilities, depending on the method of settlement, the cumulative provision relating to rebates, administrative fees and others is bifurcated as applicable based on the associated consolidated balance sheet classification. Accordingly, for the years ended December 31, 2016, 2015 and 2014, an additional
$79.7 million
,
$71.7 million
and
$44.6 million
, respectively, of provision was associated with administrative fees and others.
Provisions and utilizations of provisions activity in the current period which relate to prior period revenues are not provided because to do so would be impracticable. Our current systems and processes do not capture the chargeback and rebate settlements by the period in which the original sales transaction was recorded. Chargeback and rebate claims are not submitted by customers with sufficient details to link the accrual recorded at the point of sale with the settlement of the accrual. As a result, the Company is unable to reasonably determine the dollar amount of the change in estimate in its gross to net reporting reflected in its results of operations for each period presented, and, those changes could be significant. However, the Company uses a combination of factors and applications to estimate the dollar amount of reserves for chargebacks and rebates at each balance sheet date. The Company regularly monitors the chargeback reserve based on an analysis of the Company’s product sales and most recent claims, wholesaler inventory, current pricing, and anticipated future pricing changes. If claims are different from the estimate due to changes from estimated rates, accrual rate adjustments are considered prospectively when determining provisions in accordance with authoritative GAAP.
Note 4 — Inventories, Net
The components of inventories, net of allowances, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Finished goods
|
$
|
73,027
|
|
|
76,512
|
|
Work in process
|
14,719
|
|
|
8,905
|
|
Raw materials and supplies
|
87,047
|
|
|
99,899
|
|
|
$
|
174,793
|
|
|
$
|
185,316
|
|
The Company maintains an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of its net realizable value. The activity in the allowance for excess, obsolete, and net realizable value inventory account for the two years ended
December 31, 2016
and 2015, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
21,537
|
|
|
$
|
21,368
|
|
Provision
|
32,072
|
|
|
8,827
|
|
Additions from acquisitions
|
—
|
|
|
2,064
|
|
Charges processed
|
(20,077
|
)
|
|
(10,722
|
)
|
Balance at end of year
|
$
|
33,532
|
|
|
$
|
21,537
|
|
Note 5 - Goodwill and Other Intangible Assets
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, normally ranging from
one year
to
thirty years
. Accumulated amortization of intangible assets was
$195.3 million
and
$144.1 million
at
December 31, 2016
and 2015, respectively. Amortization expense was
$65.7 million
,
$66.3 million
and
$43.5 million
for the years ended December 31, 2016, 2015 and 2014, respectively. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows, and through this analysis incurred impairment expense for intangible assets during the years ended December 31, 2016, 2015 and 2014, of
$40.5 million
,
$30.4 million
and
$0.0 million
, respectively. 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 also models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. The Company performed its annual impairment test on October 1, 2016 and determined that the fair value of its reporting units are substantially in excess of its carrying value and, therefore,
no
goodwill impairment charge was necessary.
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 the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenues, cost of sales, R&D costs, 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. In 2016, one IPR&D project was partially impaired due to the Company's expectations of market conditions upon launch, resulting in an impairment expense of
$3.9 million
, while in 2015, the Company impaired
two
IPR&D projects based on an analysis of launch expectations and technical feasibility, resulting in an impairment of the full asset values of each product that aggregated to
$2.6 million
. These impairments were recorded in R&D expenses in the Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015.
Changes in goodwill during the two years ended
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
Goodwill
|
December 31, 2014
|
$
|
285,283
|
|
Acquisitions and other adjustments
|
—
|
|
Impairments
|
—
|
|
Dispositions
|
—
|
|
Foreign currency translation
|
(573
|
)
|
December 31, 2015
|
$
|
284,710
|
|
Acquisitions and other adjustments
|
$
|
—
|
|
Impairments
|
—
|
|
Dispositions
|
$
|
—
|
|
Foreign currency translation
|
(417
|
)
|
December 31, 2016
|
$
|
284,293
|
|
The following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of
December 31, 2016
for those assets that are not already fully amortized (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Reclassifications
|
|
Impairment (1)
|
|
Net
Carrying
Amount
|
|
Weighted Average
Remaining Amortization
Period (years)
|
Product licensing rights
|
$
|
790,143
|
|
|
$
|
(182,901
|
)
|
|
$
|
9,400
|
|
|
$
|
(52,637
|
)
|
|
$
|
564,005
|
|
|
10.5
|
IPR&D
|
187,007
|
|
|
—
|
|
|
(9,400
|
)
|
|
(3,850
|
)
|
|
173,757
|
|
|
N/A - Indefinite lived
|
Trademarks
|
16,000
|
|
|
(4,244
|
)
|
|
—
|
|
|
—
|
|
|
11,756
|
|
|
18.0
|
Customer relationships
|
6,290
|
|
|
(3,863
|
)
|
|
—
|
|
|
—
|
|
|
2,427
|
|
|
9.3
|
Other intangibles
|
11,235
|
|
|
(4,326
|
)
|
|
—
|
|
|
—
|
|
|
6,909
|
|
|
6.0
|
|
$
|
1,010,675
|
|
|
$
|
(195,334
|
)
|
|
$
|
—
|
|
|
(56,487
|
)
|
|
758,854
|
|
|
|
(1)
Impairment of product licensing rights is stated at gross carrying cost of
$52.6 million
less accumulated amortization of
$12.1 million
as of the impairment date. Accordingly, the net impairment expense recognized in product licensing rights was
$40.5 million
as of and for the year ended
December 31, 2016
.
Changes in intangible assets during the two years ended
December 31, 2016
and 2015, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
licensing
rights
|
|
IPR&D
|
|
Trademarks
|
|
Customer
relationships
|
|
Other
intangibles
|
|
Non-compete
agreements
|
December 31, 2014
|
$
|
704,791
|
|
|
$
|
227,259
|
|
|
$
|
14,279
|
|
|
$
|
3,035
|
|
|
$
|
10,356
|
|
|
$
|
683
|
|
Acquisitions
|
3,535
|
|
|
300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
|
(62,323
|
)
|
|
—
|
|
|
(1,261
|
)
|
|
(381
|
)
|
|
(1,721
|
)
|
|
(586
|
)
|
Impairments
|
(30,376
|
)
|
|
(2,627
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
123
|
|
|
—
|
|
|
(97
|
)
|
Reclassifications
|
38,000
|
|
|
(38,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2015
|
$
|
653,627
|
|
|
$
|
186,932
|
|
|
$
|
13,018
|
|
|
$
|
2,777
|
|
|
$
|
8,635
|
|
|
$
|
—
|
|
Acquisitions
|
3,872
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
|
(62,375
|
)
|
|
—
|
|
|
(1,262
|
)
|
|
(350
|
)
|
|
(1,726
|
)
|
|
—
|
|
Impairments
|
(40,519
|
)
|
|
(3,850
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassifications
|
9,400
|
|
|
(9,400
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2016
|
$
|
564,005
|
|
|
$
|
173,757
|
|
|
$
|
11,756
|
|
|
$
|
2,427
|
|
|
$
|
6,909
|
|
|
$
|
—
|
|
The amortization expense of acquired intangible assets for each of the following five years are expected to be as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
Amortization Expense
|
2017
|
|
$
|
62,206
|
|
2018
|
|
61,984
|
|
2019
|
|
59,157
|
|
2020
|
|
51,376
|
|
2021
|
|
51,376
|
|
Note 6 – Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Land
|
$
|
17,410
|
|
|
$
|
17,409
|
|
Buildings and leasehold improvements
|
88,825
|
|
|
85,767
|
|
Furniture and equipment
|
160,546
|
|
|
142,885
|
|
|
266,781
|
|
|
246,061
|
|
Accumulated depreciation
|
(108,425
|
)
|
|
(87,086
|
)
|
|
158,356
|
|
|
158,975
|
|
Construction in progress
|
80,048
|
|
|
20,639
|
|
|
$
|
238,404
|
|
|
$
|
179,614
|
|
At
December 31, 2016
and
2015
, property, plant and equipment carrying a net book value of
$65.1 million
and
$52.6 million
, respectively, was located outside the United States. The increased investment in 2016 was principally the result of the continued spend to achieve U.S. FDA compliance at our India facility and increased serialization spend to further the process of compliance with the DSCSA, both of which are reflected in construction in progress.
Depreciation expense was
$22.2 million
,
$19.9 million
and
$14.2 million
for the years ended
December 31, 2016
,
2015
and 2014, respectively.
Note 7 — Financing Arrangements
Term Loans
Concurrent with the closing of its acquisition of Hi-Tech (the “Hi-Tech Acquisition”), Akorn, Inc. and its wholly-owned domestic subsidiaries (the "Akorn Loan Parties") entered into a
$600.0 million
Term Facility (the “Existing Term Facility”) pursuant to a Loan Agreement dated April 17, 2014 (the “Existing Term Loan Agreement”) between Akorn Loan Parties as borrowers, certain other lenders and JPMorgan Chase Bank, N.A. ("JPMorgan") acting as administrative agent. The Company may increase the loan amount up to an additional
$150.0 million
, or more, provided certain financial covenants and other conditions are satisfied. The proceeds received pursuant to the Existing Term Loan Agreement were used to finance the Hi-Tech Acquisition. Additionally and concurrent with the closing of its acquisition of VersaPharm, the Akorn Loan Parties entered into a
$445.0 million
Incremental Facility Joinder Agreement (the “Incremental Term Loan Facility”) pursuant to a Loan Agreement (the “Incremental Term Loan Agreement”) dated August 12, 2014 between Akorn Loan Parties as borrowers and JPMorgan as lender and administrative agent for certain other lenders. The proceeds received pursuant to the Incremental Term Loan Agreement were used to finance the VersaPharm acquisition. The Existing Term Facility and Incremental Term Loan Facility are collectively the “Term Loans” or the “Term Loan Agreements.”
The Term Loans are secured by all of the assets of Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a deposit account control agreement.
Prior to February 16, 2016, the Term Loan Agreements required quarterly principal repayment equal to
0.25%
of the initial aggregate loan amount beginning with the second full quarter following the closing date of the Existing Term Loan Agreement, with a final payment of the remaining principal balance due at maturity
seven years
from the date of closing of the Existing Term Loan Agreement. The Company was also able to prepay all or a portion of the remaining outstanding principal amount under the Term Loan Agreements at any time, or from time to time, subject to prior notice to the lenders and payment of applicable fees. Prepayment of principal was required should the Company incur any indebtedness not permitted under the Term Loan Agreements, or effect the sale, transfer or disposition of any property or asset, other than in the ordinary course of business. On February 16, 2016, the Company made a voluntary prepayment of its Existing Term Facility of
$200.0 million
which settled all future quarterly principal repayments of the Term Loan Agreements as denoted above until the date of the closing of the Term Loan Agreements or April 16, 2021, although future voluntary principal repayments are permitted. Effected for the principal repayment, as of December 31, 2016, outstanding debt under the Term Loans was
$831.9 million
and the Company was in full compliance with all applicable covenants which included customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities.
On May 20, 2015, the Company modified the Term Loan Agreements with JPMorgan and certain other lenders to remedy certain covenant defaults related to the FY 2014 financial restatement by incurring nominal charges affected through a temporary interest rate increase and an upfront payment.
Prior to November 13, 2015, interest accrued based, at the Company’s election, on an adjusted prime/federal funds rate or an adjusted LIBOR (“Eurodollar Loan”) rate, plus a margin of
2.50%
for ABR Loans, and
3.50%
for Eurodollar Loans. Each such margin would decrease by
0.25%
in the event of the Company’s senior debt to EBITDA ratio for any quarter falling to
2.25
:1.00 or below. During an event of default, as defined in the Term Loan Agreements, any interest rate would have been increased by
2.00%
per annum. Per the Term Loan Agreements, the interest rate on LIBOR loans could not fall below
4.50%
.
On November 13, 2015, the Company again modified the Term Loan Agreements with JPMorgan and certain other lenders to remedy certain remaining covenant defaults related to the FY 2014 financial restatement by incurring additional charges affected through a temporary interest rate increase and an upfront payment. Through the May 20, 2015 and November 13, 2015 debt modifications and related amortization, unamortized deferred financing fees were
$26.8 million
as of December 31, 2015. During the twelve months ended
December 31, 2016
, the Company incurred an additional
$5.1 million
of financing costs related to the 2014 restatement process that ended on May 10, 2016. During the year ended
December 31, 2016
, the Company amortized
$10.4 million
of the total Term Loans-related costs, resulting in
$21.5 million
of deferred financing fees remaining at December 31, 2016. During the years ended December 31, 2015 and 2014, the Company amortized
$3.8 million
and
$8.8 million
, respectively, of Term Loans-related costs. The increase in amortization of deferred financing fees in the current year as compared to the previous two years was primarily the result of the deferred financing fee amortization associated with the voluntary principal repayment. The Company will amortize the remaining deferred financing fees using the effective interest method over the life of the Term Loan Agreement.
Subsequent to November 13, 2015, interest accrues based, at the Company’s election, on an adjusted prime/federal funds rate (“ABR Loan”) or an adjusted LIBOR (“Eurodollar Loan”) rate, plus a margin of
4.00%
for ABR Loans, and
5.00%
for Eurodollar Loans. As of the date of the filing of this Form 10-K until the maturity of the Term Loans, our spread will be based upon the Ratings Level applicable on such date as documented below. As of the period ended
December 31, 2016
, the Company was a Ratings Level I for the Existing Term Loan Facility.
|
|
|
|
|
Ratings Level
|
Index Ratings
(Moody’s/S&P)
|
Eurodollar Spread
|
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 years ended
December 31, 2016
, 2015 and 2014, the Company recorded interest expense of
$43.5 million
,
$47.3 million
and
$27.2 million
, respectively in relation to the Term Loans.
JPMorgan Credit Facility
On April 17, 2014, Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan acting as administrative agent, and Bank of America, N.A., as syndication agent for certain other lenders (at closing, Bank of America, N.A. and Wells Fargo Bank, N. A.) for a
$150.0 million
revolving credit facility (the “JPM Revolving Facility”).
Subject to other conditions in the JPM Credit Agreement, advances under the JPM Revolving Facility will be made in accordance with a borrowing base consisting of the sum of the following:
|
|
(a)
|
85%
of eligible accounts receivable;
|
|
|
a.
|
65%
of the lower of cost or market value of eligible raw materials and work in process inventory, valued on a first in first out basis, and
|
|
|
b.
|
85%
of the orderly liquidation value of eligible raw materials and work in process inventory, valued on a first in first out basis;
|
|
|
a.
|
75%
of the lower of cost or market value of eligible finished goods inventory, valued on a first in first out basis, and
|
|
|
b.
|
85%
of the orderly liquidation value of eligible finished goods inventory, valued on a first in first out basis up to
85%
of the liquidation value of eligible inventory (or
75%
of market value finished goods inventory); and
|
|
|
(d)
|
Less any reserves deemed necessary by the administrative agent, and allowed in its permitted discretion.
|
The total amount available under the JPM Revolving Facility includes a
$10.0 million
letter of credit facility.
Under the terms of the JPM Credit Agreement, if availability under the JPM Revolving Facility falls below
12.5%
of commitments or
$15.0 million
for more than
30
consecutive days, the Company may be subject to cash dominion, additional reporting requirements, and additional covenants and restrictions. The Company may seek additional commitments to increase the maximum amount of the JPM Revolving Facility to
$200.0 million
.
Unless cash dominion is exercised by the lenders in connection with the JPM Revolving Facility, the Company will be required to repay the JPM Revolving Facility upon its expiration
five years
from issuance, subject to permitted extension, and will pay interest on the outstanding balance monthly based, at the Company’s election, on an adjusted prime/federal funds rate (“ABR”) or an adjusted LIBOR (“Eurodollar”), plus a margin determined in accordance with the Company’s consolidated fixed charge coverage ratio (EBITDA to fixed charges) as follows:
|
|
|
|
Fixed Charge
Coverage Ratio
|
Revolver ABR
Spread
|
Revolver
Eurodollar
Spread
|
Category 1
> 1.50 to 1.0
|
0.50%
|
1.50%
|
Category 2
> 1.25 to 1.00 but
< 1.50 to 1.00
|
0.75%
|
1.75%
|
Category 3
< 1.25 to 1.00
|
1.00%
|
2.00%
|
In addition to interest on borrowings, the Company will pay an unused line fee of
0.25%
per annum on the unused portion of the JPM Revolving Facility.
During an event of default, as defined in the JPM Credit Agreement, any interest rate will be increased by
2.0%
per annum.
The JPM Revolving Facility is secured by all of the assets of Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a deposit account control agreement. The financial covenants require Akorn Loan Parties to maintain the following on a consolidated basis:
|
|
(a)
|
Minimum Liquidity, as defined in the JPM Credit Agreement, of not less than (a)
$120.0 million
plus (b)
25%
of the JPM Revolving Facility commitments during the three month period preceding the June 1, 2016 maturity date of the Company’s senior convertible notes.
|
|
|
(b)
|
Ratio of EBITDA to fixed charges of no less than
1.00
to
1.00
(measured quarterly for the trailing
4
quarters).
|
As of
December 31, 2016
, the Company was in full compliance with all covenants applicable to the JPM Revolving Facility.
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
December 31, 2016
, there were
no
outstanding borrowings and
one
outstanding letter of credit in the amount of approximately
$2.2 million
under the JPM Revolving Facility. Availability under the facility as of
December 31, 2016
was approximately
$147.8 million
.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries.
Convertible Notes
On June 1, 2011, the Company issued
$120.0 million
aggregate principal amount of
3.50%
Convertible Senior Notes due June 1, 2016 (the “Notes”) which included
$20.0 million
in aggregate principal amount of the Notes issued in connection with the full exercise by the initial purchasers of their over-allotment option. The Notes were governed by the Company’s indenture with Wells Fargo Bank, National Association, as trustee (the “Indenture”). The Notes were offered and sold only to qualified institutional buyers. The net proceeds from the sale of the Notes were approximately
$115.3 million
, after deducting underwriting fees and other related expenses.
The Notes paid interest at an annual rate of
3.50%
semiannually in arrears on June 1 and December 1 of each year, with the first interest payment completed on December 1, 2011. The Notes were convertible into the Company’s common stock, cash or a combination thereof at an initial conversion price of
$8.76
per share, which is equivalent to an initial conversion rate of approximately
114.1553
shares per
$1,000
principal amount of the Notes, subject to adjustment for certain events described in the Indenture.
The Notes became convertible effective April 1, 2012 as a result of the Company’s common stock closing above the required price of
$11.39
per share for
20
of the last
30
consecutive trading days in the quarter ended March 31, 2012. The Notes remained convertible for each successive quarter, up to and including the maturity date of June 1, 2016, as a result of meeting the trading price requirement at the end of each prior quarter. During the years ended December 31, 2015 and 2014,
$44.3 million
and
$32.5 million
of this convertible debt was converted at the holder’s request which resulted in recognition of losses of
$1.2 million
and
$1.0 million
, due to the conversions, respectively. On June 1, 2016, the remaining
$43.2 million
of
debt was converted at the holder's request, resulting in complete conversion of the Notes.
At December 31, 2015, the net carrying amount of the liability component and the remaining unamortized debt discount are shown in the following table (in thousands). Due to the complete conversion of the Notes in 2016, there are no balances in these accounts at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Carrying amount of equity component
|
$
|
—
|
|
|
$
|
7,372
|
|
Carrying amount of the liability component
|
—
|
|
|
42,465
|
|
Unamortized discount of the liability component
|
—
|
|
|
750
|
|
Unamortized debt financing costs
|
—
|
|
|
136
|
|
As a result of the complete conversion on June 1, 2016, during the years ended
December 31, 2016
, 2015 and 2014, the Company recorded the following expenses in relation to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Interest expense at 3.50% coupon rate (1)
|
$
|
687
|
|
|
$
|
2,205
|
|
|
$
|
4,105
|
|
Debt discount amortization
|
750
|
|
|
2,421
|
|
|
4,317
|
|
Deferred financing cost amortization
|
136
|
|
|
438
|
|
|
780
|
|
Loss on conversion
|
—
|
|
|
1,235
|
|
|
990
|
|
|
$
|
1,573
|
|
|
$
|
6,299
|
|
|
$
|
10,192
|
|
|
|
(1)
|
As a result of the restatement of the 2014 financial data and the resultant delays in filings of the 2015 financial statements, the Company was required to remit an additional
0.5%
interest penalty to all holders of the convertible notes from January 1, 2016 to April 5, 2016 and a lump sum payment equal to
0.25%
of the principal balance held by consenting holders of the convertible notes as of April 6, 2016.
|
Aggregate cumulative maturities of long-term obligations (including the incremental and existing term loans and the JPM revolver) as of
December 31, 2016
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
Maturities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
831,938
|
|
Note 8 — Earnings per Common Share
Basic net income per common share is based upon the weighted average common shares outstanding during the period. Diluted net 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 Units ("RSUs"), warrants and the conversion feature of convertible notes using the treasury stock method.
Previously, diluted net income per share assumed the principal amount of the convertible Notes would be cash settled and any conversion spread would be settled using common shares, as the Company has the choice of settling either in cash or shares. The Company had demonstrated a past practice and intent of cash settlement for the principal and stock settlement of the conversion spread. As a result, earnings per share calculations for periods ended prior to and including September 30, 2014 only included the assumption of conversion to common shares for the convertible spread. During the quarter ended December 31, 2014, the Company changed its practice of cash settlement and settled redemptions using common shares for both the principal and conversion spread and accordingly, earnings per share amounts were calculated using the if-converted method. For the years ended December 31, 2016, 2015 and 2014, the earnings per share amounts were calculated using the if-converted method.
The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money, (ii) unvested RSUs, (iii) warrants that are in-the-money, and (iv) shares potentially issuable upon conversion of the Notes.
A reconciliation of the earnings per share data from a basic to a fully diluted basis is detailed below (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Income from continuing operations used for basic earnings per share
|
$
|
184,243
|
|
|
$
|
150,798
|
|
|
$
|
14,388
|
|
Convertible debt income adjustments, net of tax
|
1,049
|
|
|
3,222
|
|
|
—
|
|
Income from continuing operations adjusted for convertible debt as used for diluted earnings per share
|
$
|
185,292
|
|
|
$
|
154,020
|
|
|
$
|
14,388
|
|
Income from continuing operations per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.50
|
|
|
$
|
1.29
|
|
|
$
|
0.14
|
|
Diluted (1)
|
$
|
1.47
|
|
|
$
|
1.22
|
|
|
$
|
0.13
|
|
Loss from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(504
|
)
|
Loss from discontinued operations, net of tax per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
Shares used in computing income (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
122,869
|
|
|
116,980
|
|
|
103,480
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and unvested RSUs
|
914
|
|
|
1,667
|
|
|
4,234
|
|
Stock warrants
|
—
|
|
|
—
|
|
|
1,874
|
|
Shares issuable on conversion of the Notes (2)
|
2,018
|
|
|
7,115
|
|
|
—
|
|
Total dilutive securities
|
2,932
|
|
|
8,782
|
|
|
6,108
|
|
Weighted average diluted shares outstanding
|
125,801
|
|
|
125,762
|
|
|
109,588
|
|
|
|
(1)
|
Due to a change in the expectation that management may settle all future note conversions solely through shares in the year and quarter ended December 31, 2014, the diluted income from continuing operations per share calculation includes the dilutive effect of convertible debt and is offset by the exclusion of interest expense and deferred financing fees related to the convertible debt of
$1.0 million
, after-tax and
$3.2 million
, after-tax for the years ended December 31, 2016 and 2015, respectively.
|
|
|
(2)
|
In the year ended December 31, 2014, the computation of diluted net earnings per share does not include the effect of convertible debt under the if-converted method, consisting of
13.5 million
shares and
$5.8 million
of additional income, as the effect would have been antidilutive.
|
Note 9 — Leasing Arrangements
The Company leases real and personal property in the normal course of business under various operating leases and other insignificant capital leases, including non-cancelable and month-to-month agreements. Rental expense under these leases was
$5.2 million
,
$3.1 million
and
$3.3 million
for the years ended
December 31, 2016
, 2015 and 2014, respectively.
Landlord incentives are recorded as deferred rent and amortized on a straight-line basis over the lease term. Rent escalations are recorded on a straight-line basis over the lease term. The following is a schedule, by year, of future minimum rental payments required under non-cancelable operating leases in place as of
December 31, 2016
(in thousands):
|
|
|
|
|
Year ending December 31,
|
|
2017
|
$
|
3,760
|
|
2018
|
2,755
|
|
2019
|
2,640
|
|
2020
|
2,596
|
|
2021
|
2,399
|
|
2022 and thereafter
|
9,528
|
|
Total
|
$
|
23,678
|
|
Note 10 — Stock Options, Employee Stock Purchase Plan and Restricted Stock
Stock Option 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. The active plan from which new awards may be granted is the 2014 Stock Option Plan (the “2014 Plan”). The adoption of the 2014 Plan was approved by the Company’s shareholders at the 2014 Annual Meeting of Shareholders. The 2014 Plan was subsequently amended and restated by vote of the Company’s shareholders on December 16, 2016, with the approved amendments imposing limits on the number of shares, other equity awards or cash that may be granted in a calendar year to various recipients, and clarifying the terms and conditions related to the Company’s issuance of RSUs under the plan. The 2014 Plan reserved
7.5 million
shares for issuance upon the grant of stock options, RSUs, or various other instruments, to directors, employees and consultants. Under the 2014 Plan,
4.6 million
options have been granted to employees and directors,
0.1 million
options have been exercised,
0.4 million
options have been canceled and
4.1 million
remain outstanding as of December 31, 2016. Options granted under the 2014 Stock Option Plan have exercise prices equivalent to the market value of the Company’s common stock on the date of grant and expire from
five
to
ten
years from date of issuance depending on the option grant date. Options vest contingent on the terms of their grant consistent with the plan.
On March 29, 2005, the Company’s Board of Directors approved the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “Amended 2003 Plan”), effective as of April 1, 2005, and this was subsequently approved by its stockholders on May 27, 2005. The Amended 2003 Plan was an amendment and restatement of the Akorn Inc. 2003 Stock Option Plan and provided the Company with the ability to grant other types of equity awards to eligible participants beside stock options. The aggregate number of shares of the Company’s common stock initially approved for issuance pursuant to awards granted under the Amended 2003 Plan was
5.0 million
. On August 7, 2009, the Company’s stockholders voted to increase this figure to
11.0 million
at the recommendation of the Company’s Board of Directors, and on December 31, 2011 voted to increase the available shares by another
8.0 million
, to a final total of
19.0 million
shares. The Amended 2003 Plan expired on November 6, 2013. Accordingly, no additional awards were issued under the Amended 2003 Plan beyond that date. However, any awards outstanding as of November 6, 2013 issued under the Amended 2003 Plan remained outstanding in accordance with their terms. Under the Amended 2003 Plan,
15.8 million
options were granted to employees and directors,
10.8 million
options have been exercised,
4.4 million
options have been canceled, and
0.7 million
remain outstanding as of
December 31, 2016
. Options granted under the Amended 2003 Plan have exercise prices equivalent to the market value of the Company’s common stock on the date of grant and expire
five years
from date of issuance. All options granted in 2013 under the Amended 2003 plan vest one quarter per year on each of the first
four
anniversaries of their grant dates. Options granted in earlier years generally had a
three
-year vesting period.
The Company accounts for stock-based compensation in accordance with
ASC Topic 718 - Compensation — Stock Compensation
. Accordingly, stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, as necessary, if actual forfeitures differ from those estimates.
The Company recorded stock-based compensation expense of approximately
$15.4 million
,
$13.1 million
and
$7.8 million
during the years ended
December 31, 2016
, 2015 and 2014, respectively. The Company uses the single-award method for allocating the compensation cost to each period.
Stock Option awards
From time to time the Company grants stock option awards to certain employees and directors. The assumptions used in estimating the fair value of the stock options granted during the period, along with the weighted-average grant date fair values, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected volatility
|
46%
|
—
|
50%
|
|
42%
|
—
|
47%
|
|
40%
|
—
|
71%
|
Expected life (in years)
|
|
4.7
|
|
|
|
4.8
|
|
|
|
4.1
|
|
Risk-free interest rate
|
0.9%
|
—
|
1.8%
|
|
1.5%
|
—
|
1.6%
|
|
0.9%
|
—
|
2.2%
|
Dividend yield
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Fair value per stock option
|
|
$11.13
|
|
|
|
$14.59
|
|
|
|
$12.89
|
|
A summary of stock option activity within the Company’s stock-based compensation plans for the years ended
December 31, 2016
, 2015 and 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
(in thousands) (1)
|
Outstanding at December 31, 2013
|
|
9,228
|
|
|
$
|
4.45
|
|
|
|
|
|
|
Granted
|
|
1,475
|
|
|
28.59
|
|
|
|
|
|
|
Exercised
|
|
(4,226
|
)
|
|
1.91
|
|
|
|
|
|
|
Forfeited or expired
|
|
(91
|
)
|
|
22.56
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
6,386
|
|
|
$
|
11.44
|
|
|
|
|
|
|
Granted
|
|
1,016
|
|
|
37.60
|
|
|
|
|
|
|
Exercised
|
|
(2,519
|
)
|
|
4.09
|
|
|
|
|
|
|
Forfeited or expired
|
|
(121
|
)
|
|
34.78
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
4,762
|
|
|
$
|
20.33
|
|
|
|
|
|
|
Granted
|
|
2,089
|
|
|
26.61
|
|
|
|
|
|
|
Exercised
|
|
(1,794
|
)
|
|
7.78
|
|
|
|
|
|
|
Forfeited or expired
|
|
(292
|
)
|
|
28.96
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
4,766
|
|
|
$
|
27.27
|
|
|
5.03
|
|
$
|
5,714
|
|
Exercisable at December 31, 2016
|
|
1,495
|
|
|
$
|
23.51
|
|
|
3.10
|
|
$
|
5,272
|
|
|
|
(1)
|
Includes only those options that were in-the-money as of December 31, 2016. 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.
|
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock at the end of the period and the exercise price of stock options. The total intrinsic value of stock options exercised during the years ended
December 31, 2016
, 2015 and 2014 was approximately
$40.3 million
,
$97.4 million
and
$141.7 million
, respectively. As a result of the stock options exercised, the Company received cash and recorded additional paid-in-capital of approximately
$14.0 million
,
$10.2 million
and
$8.1 million
during the years ended
December 31, 2016
, 2015 and 2014, respectively.
As of
December 31, 2016
, the total amount of unrecognized compensation cost related to non-vested stock options was approximately
$28.1 million
which is expected to be recognized as expense over a weighted-average period of
2.8
years.
Restricted Stock Unit awards
From time to time the Company grants restricted stock units to certain employees and directors. Restricted stock units 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 are recognized as expense ratably over the vesting period of the grants.
The following is a summary of non-vested restricted stock activity:
|
|
|
|
|
|
|
|
|
Number of Shares
(in thousands)
|
|
Weighted Average Per Share
Grant Date Fair Value
|
Nonvested at December 31, 2013
|
16
|
|
|
$
|
15.36
|
|
Granted
|
337
|
|
|
35.31
|
|
Vested
|
(16
|
)
|
|
15.36
|
|
Canceled
|
—
|
|
|
—
|
|
Nonvested at December 31, 2014
|
337
|
|
|
$
|
35.31
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(84
|
)
|
|
35.31
|
|
Canceled
|
—
|
|
|
—
|
|
Nonvested at December 31, 2015
|
253
|
|
|
$
|
35.31
|
|
Granted
|
302
|
|
|
29.50
|
|
Vested
|
(118
|
)
|
|
34.95
|
|
Canceled
|
(21
|
)
|
|
28.85
|
|
Nonvested at December 31, 2016
|
416
|
|
|
$
|
31.52
|
|
As of December 31, 2016, the total amount of unrecognized compensation cost related to restricted stock awards was approximately
$10.2 million
which is expected to be recognized as expense over a weighted-average period of
2.8
years.
Employee Stock Purchase Plan
The 2016 Akorn, Inc. Employee Stock Purchase Plan (the “2016 ESPP”) permits eligible employees to acquire shares of the Company’s common stock through payroll deductions. The 2016 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 base wages toward the purchase of stock. Shares are purchased at a
15%
discount off the lesser of the market price at the beginning or the ending of the applicable offering period. The 2016 ESPP has 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 either plan, but 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 2016 ESPP. Employees are further limited to purchasing no more than
15,000
shares of stock per year. A total of
2.0 million
shares of the Company’s stock have been set aside for issuance under the 2016 ESPP. The 2016 ESPP was approved by vote of the Company’s shareholders on December 16, 2016. Accordingly, the initial offering period under the 2016 ESPP began in January 2017.
In 2014 and prior years, the Company had maintained an Amended and Restated Akorn, Inc. Employee Stock Purchase Plan (the “Prior ESPP”) structured very similar to the 2016 ESPP except that it did not place a limit on the number of shares that could be purchased in one year by a participant. In January 2016, the Company elected to terminate the Prior ESPP since shares could not be issued due to the ongoing financial restatement process. In January 2016, the Company refunded all contributions made in 2015 by participants in the Prior ESPP, and paid an additional amount to compensate participants for their lost
15%
discount.
A maximum of
2.0 million
shares of the Company’s common stock were set aside for issuance under the Prior ESPP. A total of
1.4 million
shares were issued under the Prior ESPP before its termination in January 2016. Due to the termination of the Prior ESPP,
no
shares were issued under this plan in either 2016 or 2015. The Company issued approximately
67 thousand
shares of stock in 2014 related to employee participation in the Prior ESPP.
For the years ended
December 31, 2016
, 2015 and 2014, the Company recorded compensation expense of approximately
$(0.3) million
,
$0.6 million
and
$0.4 million
, respectively, related to the Prior ESPP. The
$(0.3) million
net credit to compensation expense in 2016 was related to reversing expenses that had been recorded during 2015 after the decision was made in January 2016 to terminate the Prior ESPP.
Note 11 — Income Taxes from Continuing Operations
The income tax provision (benefit) from continuing operations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Deferred
|
|
Total
|
Year ended December 31, 2016
|
|
|
|
|
|
Federal
|
$
|
107,818
|
|
|
$
|
(26,377
|
)
|
|
$
|
81,441
|
|
State
|
11,247
|
|
|
(4,325
|
)
|
|
6,922
|
|
Foreign
|
|
|
|
(1,306
|
)
|
|
(1,306
|
)
|
|
$
|
119,065
|
|
|
$
|
(32,008
|
)
|
|
$
|
87,057
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
Federal
|
$
|
116,375
|
|
|
$
|
(41,477
|
)
|
|
$
|
74,898
|
|
State
|
11,113
|
|
|
(2,620
|
)
|
|
8,493
|
|
Foreign
|
—
|
|
|
(2,033
|
)
|
|
(2,033
|
)
|
|
$
|
127,488
|
|
|
$
|
(46,130
|
)
|
|
$
|
81,358
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
Federal
|
$
|
26,114
|
|
|
$
|
(14,222
|
)
|
|
$
|
11,892
|
|
State
|
2,347
|
|
|
(2,090
|
)
|
|
257
|
|
Foreign
|
4
|
|
|
(1,199
|
)
|
|
(1,195
|
)
|
|
$
|
28,465
|
|
|
$
|
(17,511
|
)
|
|
$
|
10,954
|
|
The income tax provision differs from the “expected” tax expense computed by applying the U.S. Federal corporate income tax rates of
35%
to income from continuing operations before income taxes, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Computed “expected” tax provision
|
$
|
94,955
|
|
|
$
|
81,255
|
|
|
$
|
8,870
|
|
Change in income taxes resulting from:
|
|
|
|
|
|
State income taxes, net of Federal income tax
|
4,501
|
|
|
5,520
|
|
|
167
|
|
Foreign income tax provision (benefit)
|
1,580
|
|
|
(1,130
|
)
|
|
482
|
|
Deduction for domestic production activities
|
(7,280
|
)
|
|
(6,882
|
)
|
|
(1,323
|
)
|
Stock compensation
|
(11,395
|
)
|
|
—
|
|
|
—
|
|
R&D tax credits
|
(825
|
)
|
|
(677
|
)
|
|
(508
|
)
|
Nondeductible acquisition fees
|
39
|
|
|
165
|
|
|
2,823
|
|
Other expense (benefit), net
|
2,564
|
|
|
682
|
|
|
(673
|
)
|
Valuation allowance change
|
2,918
|
|
|
2,425
|
|
|
1,116
|
|
Income tax provision
|
$
|
87,057
|
|
|
$
|
81,358
|
|
|
$
|
10,954
|
|
The geographic allocation of the Company’s income from continuing operations before income taxes between U.S. and foreign operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Pre-tax income from continuing U.S. operations
|
$
|
287,880
|
|
|
$
|
241,665
|
|
|
$
|
33,320
|
|
Pre-tax loss from continuing foreign operations
|
(16,580
|
)
|
|
(9,509
|
)
|
|
(7,978
|
)
|
Total pre-tax income from continuing operations
|
$
|
271,300
|
|
|
$
|
232,156
|
|
|
$
|
25,342
|
|
Net deferred income taxes at
December 31, 2016
and
2015
include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
$
|
554
|
|
|
$
|
25,103
|
|
|
$
|
982
|
|
|
$
|
22,356
|
|
Stock-based compensation
|
—
|
|
|
8,922
|
|
|
—
|
|
|
9,032
|
|
Chargeback reserves
|
—
|
|
|
—
|
|
|
83
|
|
|
—
|
|
Reserve for product returns
|
16,208
|
|
|
—
|
|
|
17,932
|
|
|
—
|
|
Inventory valuation reserve
|
11,503
|
|
|
—
|
|
|
7,819
|
|
|
—
|
|
Long-term debt
|
—
|
|
|
6,383
|
|
|
—
|
|
|
9,448
|
|
Other
|
16,957
|
|
|
1,851
|
|
|
19,085
|
|
|
1,236
|
|
Total deferred tax assets
|
$
|
45,222
|
|
|
$
|
42,259
|
|
|
$
|
45,901
|
|
|
$
|
42,072
|
|
Valuation allowance
|
—
|
|
|
(9,856
|
)
|
|
—
|
|
|
(8,807
|
)
|
Net deferred tax assets
|
$
|
45,222
|
|
|
$
|
32,403
|
|
|
$
|
45,901
|
|
|
$
|
33,265
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
$
|
(3,091
|
)
|
|
$
|
—
|
|
|
$
|
(2,877
|
)
|
|
$
|
—
|
|
Inventory step-up
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unamortized discount – convertible notes
|
—
|
|
|
—
|
|
|
—
|
|
|
(267
|
)
|
Depreciation & amortization – tax over book
|
—
|
|
|
(226,855
|
)
|
|
—
|
|
|
(260,622
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Total deferred tax liabilities
|
$
|
(3,091
|
)
|
|
$
|
(226,855
|
)
|
|
$
|
(2,877
|
)
|
|
$
|
(260,890
|
)
|
Net deferred income tax asset (liability)
|
$
|
42,131
|
|
|
$
|
(194,452
|
)
|
|
$
|
43,024
|
|
|
$
|
(227,625
|
)
|
The Company records a valuation allowance to reduce net deferred income tax assets to the amount that is more likely than not to be realized. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was necessary, the Company evaluated the data and determined that as of December 31, 2014 it could not conclude that it was more likely than not that certain of the net operating losses of its Indian and Swiss subsidiaries would be realized. Accordingly, the Company established a valuation allowance of
$9.9 million
,
$8.8 million
and
$1.1 million
against its deferred tax assets as of
December 31, 2016
,
2015
and 2014, respectively.
The deferred tax balances have been reflected gross on the balance sheet and are netted only if they are in the same jurisdiction.
The Company’s net operating loss (“NOL”) carry-forwards as of
December 31, 2016
consist of four component pieces: (i) U.S. Federal NOL carry-forwards valued at
$6.5 million
, (ii) Illinois NOL carry-forwards valued at
$0.2 million
, (iii) foreign (Indian) NOLs of
$14.7 million
and (iv) foreign (Swiss) NOLs of
$4.3 million
. The U.S. Federal NOL carry-forwards were obtained through the Merck Acquisition completed in the fourth quarter of 2013. The Illinois NOL carry-forwards relate to the Company’s tax losses in the decade of the 2000s and have not yet been fully utilized due to the State of Illinois’s suspension of the use of NOLs for the years 2011, 2012 and 2013. These NOLs would be due to expire from 2021 to 2025, and are expected to be utilized well before their expiration dates. The Indian NOL carry-forwards relate to operating losses by the Company’s subsidiary in India, which was acquired in 2012. Of the
$14.7 million
Indian NOL,
$5.6 million
expires beginning in 2022; the Company has established a valuation allowance against this entire amount. The remaining
$9.1 million
of the Indian NOLs can be carried forward indefinitely, and the Company has concluded that they are more likely than not to be utilized and therefore has not established a valuation allowance against them. The Swiss NOL was obtained through the Hettlingen Acquisition completed in the first quarter of 2015. It begins to expire in 2016 and, accordingly, the Company has established a valuation allowance against the entire amount.
The Company is currently undergoing an examination of its Federal income tax return for the year ended December 31, 2013 by the Internal Revenue Service. Additionally, the Company is undergoing examinations by Illinois and Massachusetts for various tax years. The Company’s U.S. Federal income tax returns filed for years 2013 through 2015 are open for examination by the Internal Revenue Service. The majority of the Company’s state and local income tax returns filed for years 2013 through 2015 remain open for examination as well.
In accordance with
ASC 740-10-25 - Income Taxes — Recognition
, the Company performs reviews of its tax positions to determine whether it is “more likely than not” that its tax positions will be sustained upon examination, and if any tax positions are deemed to fall short of that standard, the Company reserves based on the financial exposure and the likelihood of its tax positions not being sustained. Based on its review as of
December 31, 2016
, the Company determined that it would not recognize tax benefits as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2013
|
$
|
845
|
|
Additions relating to 2014
|
709
|
|
Additions relating to acquired entities
|
456
|
|
Balance at December 31, 2014
|
$
|
2,010
|
|
Additions relating to 2015
|
356
|
|
Payments of amounts relating to prior years
|
(81
|
)
|
Balance at December 31, 2015
|
$
|
2,285
|
|
Additions relating to 2016
|
303
|
|
Terminations of exposures relating to prior years
|
(1,287
|
)
|
Balance at December 31, 2016
|
$
|
1,301
|
|
If recognized,
$1.1 million
of the above positions will impact the Company’s effective rate, while the remaining
$0.2 million
will result in a reduction of the Company’s goodwill. Due to the uncertainty of both timing and resolution of potential income tax examinations, the Company is unable to determine whether any amounts included in the
December 31, 2016
balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve months. The Company accounts for interest and penalties as income tax expense.
Note 12 — Segment Information
During the year ended December 31, 2014, the Company acquired Hi-Tech and as a result, underwent a change in the organizational and reporting structure of the Company’s reportable segments, establishing
two
reporting segments that each report to the Chief Operating Decision Maker (“CODM”), as defined in
ASC Topic 280 - Segment Reporting
, and CEO. Our performance will is assessed and resources allocated by the CODM based on the following
two
reportable segments:
|
|
•
|
Prescription Pharmaceuticals
|
The Company’s Prescription Pharmaceutical 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 a suite of products for the treatment of dry eye sold under the TheraTears® brand name.
Financial information about each of the Company’s reportable segments is based upon internal financial reports that aggregate certain operating information. The Company’s 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 reporting segment is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
REVENUES, NET:
|
|
|
|
|
|
Prescription Pharmaceuticals
|
$
|
1,053,579
|
|
|
$
|
924,472
|
|
|
$
|
504,688
|
|
Consumer Health
|
63,264
|
|
|
60,604
|
|
|
50,360
|
|
Total revenues, net
|
$
|
1,116,843
|
|
|
$
|
985,076
|
|
|
$
|
555,048
|
|
GROSS PROFIT:
|
|
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
$
|
645,078
|
|
|
$
|
566,298
|
|
|
$
|
233,833
|
|
Consumer Health
|
29,193
|
|
|
29,714
|
|
|
27,527
|
|
Total gross profit
|
$
|
674,271
|
|
|
$
|
596,012
|
|
|
$
|
261,360
|
|
The Company manages its reportable 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.
During the years ended
December 31, 2016
,
2015
and
2014
, approximately
$26.3 million
,
$37.0 million
and
$16.6 million
of the Company’s net revenue, respectively, was from customers located in foreign countries. All of the net revenue is related to our Prescription Pharmaceutical segment.
Goodwill from the Company’s acquisition of Advanced Vision Research, Inc. in May 2011, the acquisition of selected assets of Kilitch Drugs (India) Limited in February 2012, the acquisition of Hi-Tech and subsequent disposal of the Watson assets on April 17, 2014, the disposal of the ECR component on June 20, 2014 and the acquisition of VersaPharm on August 12, 2014, have been allocated to the appropriate reportable segment and reporting unit. The carrying amounts of goodwill by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
|
Consumer Health
|
|
Total
|
December 31, 2014
|
$
|
268,566
|
|
|
$
|
16,717
|
|
|
$
|
285,283
|
|
Acquisitions and other adjustments
|
—
|
|
|
—
|
|
|
—
|
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translations
|
(573
|
)
|
|
—
|
|
|
(573
|
)
|
December 31, 2015
|
$
|
267,993
|
|
|
$
|
16,717
|
|
|
$
|
284,710
|
|
Acquisitions and other adjustments
|
—
|
|
|
—
|
|
|
—
|
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translations
|
(417
|
)
|
|
—
|
|
|
(417
|
)
|
December 31, 2016
|
$
|
267,576
|
|
|
$
|
16,717
|
|
|
$
|
284,293
|
|
Note 13 — Commitments and Contingencies
The Company has entered into strategic business agreements for the development and marketing of finished dosage form pharmaceutical products with various pharmaceutical development companies.
Each strategic business agreement includes a future payment schedule for contingent milestone payments and in certain strategic business agreements, minimum royalty payments. The Company will be responsible for contingent milestone payments and minimum royalty payments to these strategic business partners based upon the occurrence of future events. Each strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development progress timelines, successful product testing and validation, successful clinical studies, various FDA and other regulatory
approvals and other factors as negotiated in each agreement. None of the contingent milestone payments or minimum royalty payments is individually material to the Company.
The Company is engaged in various supply agreements with third parties which obligate the Company to purchase various API or finished products at contractual minimum levels. None of these agreements are individually or in aggregate material to the Company. Further, the Company does not believe at this time that any of the purchase obligations represent levels above that of normal business demands.
The table below summarizes contingent, potential milestone payments due to strategic partners in the years 2017 and beyond, assuming all such contingencies occur (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
Milestone Payments
|
2017
|
|
$
|
9,462
|
|
2018
|
|
3,788
|
|
2019
|
|
250
|
|
2020
|
|
—
|
|
Total
|
|
$
|
13,500
|
|
The Company is a party in legal proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, management of the Company believes that the ultimate disposition of such proceedings and exposures will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company. Legal proceedings which may have a material effect on the Company have been further disclosed in Note 20 - “
Legal Proceedings
” and are herein incorporated by reference.
Note 14 — Supplemental Cash Flow Information (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Amount paid for interest
|
$
|
44,063
|
|
|
$
|
54,763
|
|
|
$
|
31,413
|
|
Amount paid for income taxes, net
|
132,695
|
|
|
34,404
|
|
|
6,294
|
|
Non-cash conversion of convertible notes to common shares
|
43,215
|
|
|
44,310
|
|
|
32,475
|
|
Capital expenditures
|
12,391
|
|
|
5,074
|
|
|
1,737
|
|
Note 15 – Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which addresses classification and presentation of changes in restricted
cash on the statement of cash flows. The standard requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. The ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes that interim period. Entities should apply this ASU using a retrospective transition method to each period presented.
The Company is currently evaluating the impact that
ASU 2016-18
will have on its statement of financial position or financial statement disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows.
ASU 2016-15
is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The Company is currently evaluating the impact that
ASU 2016-15
will have on its statement of financial position or financial statement disclosures.
In February 2016, the FASB issued ASU 2016-02 - Leases which establishes a comprehensive new lease accounting model. The new standard clarifies the definition of a lease and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than one year. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. Upon adoption, the operating leases reporting in Note 9 - Leasing Arrangements, will be reported on the statement of financial position as gross-up assets and liabilities. The Company is currently evaluating the impact that ASU 2016-02 will have on its statement of financial position or financial statement disclosures.
In July 2015, the FASB issued ASU 2015-11 - Inventory. ASU 2015-11 simplifies the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company has evaluated that ASU 2015-11 will have no material impact on its consolidated financial statements or financial statement disclosures upon adoption.
Revenue Recognition Related ASUs:
In December 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this ASU affect narrow aspects of the guidance in ASU 2014-09, which is not yet effective. The amendments in this ASU address loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production-type contracts, and various disclosures. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year.
In May 2016, the FASB issued ASU 2016-12 - Narrow-Scope Improvements and Practical Expedients. This standard amends the guidance in ASU 2014-09 to specifically provide a practical expedient for reflecting contract modifications at transition. The effective date for ASU 2016-12 is the same as the effective date for ASU 2014-09, ASU 2015-14, ASU 2016-08 and ASU 2016-10.
In April 2016, the FASB issued ASU 2016-10 - Revenue from Contracts with Customers (Topic 606) — Identifying Performance Obligations and Licensing. This standard amends the guidance in ASU 2014-09 and ASU 2016-08 specifically related to identifying performance obligations and accounting for licenses of intellectual property. The effective date for ASU 2016-10 is the same as the effective date for ASU 2014-09, ASU 2015-14 and ASU 2016-08.
In March 2016, the FASB issued ASU 2016-08 - Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments of this standard are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for ASU 2016-08 is the same as the effective date for ASU 2014-09 and ASU 2015-14.
In August 2015, the FASB issued ASU No. 2015-14 - Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.
In May 2014, FASB issued ASU 2014-09 - Revenue from Contracts with Customers, which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in ASC 605 -
Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in ASC 605-35 - Revenue Recognition-Construction-Type and Production-Type Contracts. The standard’s core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The ASU defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company may adopt the new standard under the full retrospective approach or the modified retrospective approach, as permitted under the standard. Early adoption of the standard is not permitted. This ASU and related updates are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
We have completed an initial review of the contracts for our three largest customers to determine the impact that ASU 2014-09 and its subsequent updates through December 31, 2016 will have on the Company's consolidated financial statements or financial statement disclosures upon adoption. Based on our preliminary review, we believe that the timing and measurement of revenue for these customers will be similar to our current revenue recognition. However, this view is preliminary and could change based on the detailed analysis associated with the conversion and implementation phases of our ASU 2014-09 project. We will complete our assessment during 2017, and will include other significant wholesale and retail customers as part of the review.
Recently Adopted Accounting Pronouncements
In August 2014, the FASB issued ASU 2014-15 - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for financial statements issued for fiscal years ending after December 15, 2016, and interim periods thereafter. ASU 2014-15 - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern was adopted by the Company for the year ending December 31, 2016. In connection with the preparation of the financial statements for the year ended
December 31, 2016
, 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, noting that there did not appear to be evidence of substantial doubt of the entity's ability to continue as a going concern.
In March 2016, the FASB issued ASU 2016-09 - Compensation - Stock Compensation, which simplifies the accounting for the tax effects related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified, amongst other items. ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years with early adoption permitted. ASU 2016-09 was early adopted by the Company for the year beginning January 1, 2016 and resulted in various effects, most notably a reduction in income tax expense of
$11.4 million
due to stock option exercises in the year ended December 31, 2016.
In November 2015, the FASB issued ASU 2015-17 - Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred income taxes. ASU 2015-17 - Balance Sheet Classification of Deferred Taxes requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 - Balance Sheet Classification of Deferred Taxes is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. ASU 2015-17 - Balance Sheet Classification of Deferred Taxes was early adopted by the Company for the year beginning January 1, 2016 resulting in the reclassification of the current portion of deferred tax assets to non-current deferred tax assets for the years ended December 31, 2016 and 2015.
In September 2015, the FASB issued ASU 2015-16 - Business Combinations. ASU 2015-16 - Business Combinations simplifies the accounting for measurement-period adjustments by requiring adjustments to provisional amounts in a business combination to be recognized in the reporting period in which the adjustment amounts are determined and eliminates the requirement to retrospectively account for those adjustments. ASU 2015-16 - Business Combinations requires an entity to present separately on the face of the income statement or disclose in the notes the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 - Business Combinations was adopted by the Company for the year beginning January 1, 2016 and did not have a material impact on the Company's condensed consolidated financial statements or financial statement disclosures.
In April 2015, the FASB issued ASU 2015-03 - Interest - Imputation of Interest, which simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU 2015-03 was adopted by the Company for the year beginning January 1, 2016 resulting in the reclassification of the deferred financing fees to the respective face value of debt outstanding for the years ended December 31, 2016 and 2015.
In April 2014, the FASB issued
ASU No. 2014-08 - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
, which changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Pursuant to
ASU 2014-08
, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, which were not expected to have continuing cash flows should be presented as a discontinued operation. If the disposal does qualify as a discontinued operation under
ASU 2014-08
, the entity will be required to provide expanded disclosures.
ASU 2014-08
was adopted by the Company for the year beginning January 1, 2015 and did not have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued
ASU 2013-11 - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11
was issued to eliminate the diversity in practice in presentation of unrecognized tax benefits, and amends
ASC 740 - Income Taxes,
to provide clarification of the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. According to the new guidance, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforward that would be utilized, rather than only being netted against carryforwards that are created by the unrecognized tax benefits. The revised guidance was adopted by the Company for the year beginning January 1, 2014 and did not have a material impact on the Company’s consolidated financial statements.
Note 16 – Business Combinations and Other Strategic Investments
Excelvision AG
On July 22, 2014, Akorn International S.à r.l., a wholly owned subsidiary of Akorn, Inc. entered into a share purchase agreement with Fareva SA, a private company headquartered in France to acquire all of the issued and outstanding shares of capital stock of its wholly owned subsidiary, Excelvision AG for
21.7 million
CHF, net of certain working capital and inventory amounts. Excelvision AG was a contract manufacturer located in Hettlingen, Switzerland specializing in ophthalmic products. On April 1, 2016 the name of Excelvision AG was changed to Akorn AG.
On January 2, 2015, the Company acquired all of the outstanding shares of capital stock of Excelvision AG for
$28.4 million
U.S. dollars (“USD”) funded through available cash on hand including other net working capital and inventory amounts. The Company’s acquisition of Akorn AG is being accounted for as a business combination in accordance with
ASC 805 - Business Combinations
. The purpose of the acquisition was to expand the Company’s manufacturing capacity.
During the years ended
December 31, 2016
,
2015
and
2014
, the Company recorded approximately
$0.1 million
,
$0.2 million
and
$0.3 million
, respectively, in acquisition-related expenses in connection with the Akorn AG Acquisition. These expenses principally consisted of various legal fees and other acquisition costs which have been recorded within “acquisition related costs” as part of operating expenses in the Company’s condensed and consolidated statements of comprehensive income.
The following table sets forth the consideration paid for the Akorn AG acquisition and the fair values of the acquired assets and assumed liabilities (in millions of USD) as of the acquisition date adjusted in accordance with GAAP. The figures below may differ from historical financial results of Akorn AG.
|
|
|
|
|
Consideration:
|
|
Amount of cash paid
|
$
|
25.9
|
|
Outstanding amount payable to Fareva
|
|
2.5
|
|
Total consideration at closing
|
$
|
28.4
|
|
|
|
|
Recognized amounts of identifiable assets acquired:
|
|
|
Cash and cash equivalents
|
$
|
1.2
|
|
Accounts receivable
|
|
3.4
|
|
Inventory
|
|
4.2
|
|
Other current assets
|
|
0.9
|
|
Property and equipment
|
|
26.6
|
|
Total assets acquired
|
|
36.3
|
|
Assumed current liabilities
|
|
(1.7)
|
|
Assumed non-current liabilities
|
|
(3.9)
|
|
Deferred tax liabilities
|
|
(1.4)
|
|
Total liabilities assumed
|
|
(7.0)
|
|
Bargain purchase gain
|
|
(0.9
|
)
|
Fair value of assets acquired
|
$
|
28.4
|
|
Through its acquisition of Akorn AG the Company recognized a bargain purchase gain of
$0.9 million
which was largely derived from the difference between the fair value and the book value of the property and equipment acquired through the acquisition. Bargain purchase gain has been recognized within consolidated net income for the year ended December 31, 2015.
During the years ended
December 31, 2016
and
2015
, the Company recorded net revenue of approximately
$18.8 million
and
$27.5 million
related to sales from the Akorn AG location subsequent to acquisition.
Other Individually Insignificant Product Acquisitions
During the years ended
December 31, 2016
and
2015
, the Company paid
$3.9 million
and
$3.8 million
, respectively, for the acquisition of drug product licensing rights (NDA, ANDA and ANADA rights) which were not individually significant. No assets were acquired other than the drug rights, and no liabilities were assumed.
Other Strategic Investments
On August 1, 2011, the Company entered into a Series A-2 Preferred Stock Purchase Agreement to acquire a minority ownership interest in Aciex Therapeutics Inc. (“Aciex”), a private ophthalmic development pharmaceutical company based in Westborough, MA, for
$8.0 million
in cash. Subsequently, on September 30, 2011, the Company entered into Amendment No. 1 to Series A-2 Preferred Stock Purchase Agreement to acquire additional shares of Series A-2 Preferred Stock in Aciex for approximately
$2.0 million
in cash. On April 17, 2014, the Company entered into a Secured Note and Warrant Purchase Agreement to acquire secured, convertible promissory notes of Aciex for approximately
$0.4 million
in cash. On June 27, 2014, the Company entered into a second Secured Note and Warrant Purchase Agreement to acquire additional secured, convertible promissory notes of Aciex for an additional amount of approximately
$0.4 million
. The Company’s aggregate investment in Aciex was
$10.8 million
at cost. Aciex was an ophthalmic drug development company focused on developing novel therapeutics to treat ocular diseases. Aciex’s pipeline consisted of both clinical stage assets and pre-Investigational new drug stage assets. The investments detailed above provided the Company with an ownership interest in Aciex of below
20%
. The Aciex Agreement and Aciex Amendment contained certain customary rights and preferences over the common stock of Aciex and further provided that the Company shall have had the right to a seat on the Aciex board of directors.
On July 2, 2014, Nicox S.A. (“Nicox”), an international company, entered into an arrangement to acquire all of the outstanding equity of Aciex (the “Aciex Acquisition”).
On October 22, 2014, Nicox shareholders voted at the Nicox General Meeting to approve the Aciex Acquisition. The transaction was consummated on October 24, 2014, following the completion of certain legal conditions and formalities. As consideration for its carried investment in Aciex, the Company received from the Aciex Acquisition pro-rata shares of Nicox which are publically traded on the Euronext Paris exchange. Through the closing, the Company received approximately
4.3
million
shares of Nicox which were subject to certain lockup provisions preventing immediate sale of the underlying shares received.
Through the years ended December 31, 2015 and 2014, the Company sold
1.1 million
and
0.2 million
unrestricted shares for
$2.6 million
and
$0.6 million
, realizing a loss of
$0.2 million
and an immaterial gain on the sale of shares, respectively. For the year ended December 31, 2016, the Company sold
0.5 million
shares of the available-for-sale securities for
$6.0 million
, realizing an immaterial loss.
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 income” caption in the Consolidated Balance Sheet. As of December 31, 2016, the Company recognized an unrealized holding loss of
$0.4 million
as calculated based on the discounted value of the investment given the contractual lockup provisions. The Company has determined that all of the
$1.1 million
of unrealized fair value associated with the investment is available to be converted to cash within one year from the balance sheet date and has been classified as a current asset.
Note 17 — Customer, Supplier and Product Concentration
Customer Concentration
In the years ended
December 31, 2016
,
2015
and
2014
, a significant portion of the Company’s gross and net sales reported were through
three
large wholesale drug distributors, and a significant portion of the Company’s accounts receivable as of
December 31, 2016
,
2015
and
2014
were due from these wholesale drug distributors as well. AmerisourceBergen Health Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. Aside from these
three
wholesale drug distributors, no other customers accounted for more than
10%
of gross sales, net revenues or gross trade receivables for the indicated dates and periods.
The following table sets forth the percentage of the Company’s gross and net sales and gross accounts receivable attributable to these
three
distributors for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Gross
Sales
|
|
Net
Revenue
|
|
Gross
Accounts
Receivable
|
|
Gross
Sales
|
|
Net
Revenue
|
|
Gross
Accounts
Receivable
|
|
Gross
Sales
|
|
Net
Revenue
|
|
Gross
Accounts
Receivable
|
Amerisource
|
29.5%
|
|
23.3%
|
|
35.6%
|
|
28.0%
|
|
23.2%
|
|
28.8%
|
|
38.3%
|
|
29.2%
|
|
45.4%
|
Cardinal
|
15.4%
|
|
16.3%
|
|
15.1%
|
|
19.7%
|
|
19.5%
|
|
26.1%
|
|
15.9%
|
|
13.6%
|
|
16.9%
|
McKesson
|
32.5%
|
|
24.2%
|
|
33.2%
|
|
30.1%
|
|
27.3%
|
|
27.9%
|
|
22.7%
|
|
19.1%
|
|
22.7%
|
Combined Total
|
77.4%
|
|
63.8%
|
|
83.9%
|
|
77.8%
|
|
70.0%
|
|
82.8%
|
|
76.9%
|
|
61.9%
|
|
85.0%
|
If sales to Amerisource, Cardinal or McKesson were to diminish or cease, the Company believes that the end users of its products would find little difficulty obtaining the Company’s products from another distributor. Further, the Company is subject to credit risk from its accounts receivable, more heavily weighted to Amerisource, Cardinal and McKesson, but as of and for the years ended
December 31, 2016
,
2015
and
2014
, the Company has not experienced significant losses with respect to its collection of these gross accounts receivable balances.
Supplier Concentration
The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical products for its own use and for third parties with which it has contracted. The principal components of the Company’s products are active and inactive pharmaceutical ingredients and certain packaging materials. Certain of these ingredients and components are available from only a single source and, in the case of many of our products, only one supplier of raw materials has been identified and qualified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if such active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay the Company’s development and marketing efforts. In addition, certain of the pharmaceutical products marketed by the Company are manufactured by a third party manufacturer that serves as the Company’s sole source of that finished product. If for any reason the Company is unable to obtain sufficient quantities of any of the raw materials or
components required to produce and package its products, it may not be able to manufacture its products as planned, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Likewise, if the Company’s manufacturing partners experience any similar difficulties in obtaining raw materials or in manufacturing the finished product, the Company’s results of operations would be negatively impacted.
No
individual supplier represented
10%
or more of the Company’s purchases in any of the years ended
December 31, 2016
,
2015
and
2014
.
Product Concentration
In the year ended
December 31, 2016
,
one
unapproved Prescription Pharmaceutical product represented approximately
20%
of the Company’s total net sales revenue, while in the years ended December 31,
2015
and
2014
,
none
of the Company’s products represented
10%
or more of net revenue. The Company attempts to minimize the risk associated with product concentration by continuing to acquire and develop new products to add to its portfolio.
Note 18 — Related Party Transactions
During the years ended
December 31, 2016
,
2015
and
2014
, the Company obtained legal services totaling
$1.3 million
,
$1.7 million
and
$2.1 million
, respectively, of which
$0.0 million
and
$0.4 million
was payable as of
December 31, 2016
and
2015
, respectively, from Polsinelli PC, a law firm for which the spouse of the Company’s Executive Vice President, General Counsel and Secretary is an attorney and shareholder.
The Company also obtained and paid legal services totaling
$0.1 million
during the year ended December 31, 2016 from Segal McCambridge Singer & Mahone, a firm for which the brother in law of the Company's Executive Vice President, General Counsel and Secretary is a partner.
Note 19 – Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
(In thousands, except per share amounts)
|
Revenues
|
|
Gross
Profit
|
|
Operating
Income
|
|
Amount
|
|
Per Basic
Share
|
|
Per Diluted
Share
|
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter
|
$
|
283,667
|
|
|
$
|
169,254
|
|
|
$
|
60,796
|
|
|
$
|
32,455
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
3rd Quarter
|
284,095
|
|
|
170,227
|
|
|
86,828
|
|
|
47,909
|
|
|
0.38
|
|
|
0.38
|
|
2nd Quarter
|
280,734
|
|
|
171,773
|
|
|
92,368
|
|
|
61,993
|
|
|
0.51
|
|
|
0.50
|
|
1st Quarter
|
268,347
|
|
|
163,017
|
|
|
87,579
|
|
|
41,886
|
|
|
0.35
|
|
|
0.34
|
|
Year Ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter
|
$
|
279,977
|
|
|
$
|
174,430
|
|
|
$
|
64,475
|
|
|
$
|
32,785
|
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
3rd Quarter
|
256,801
|
|
|
163,012
|
|
|
90,767
|
|
|
47,967
|
|
|
0.40
|
|
|
0.39
|
|
2nd Quarter
|
220,920
|
|
|
128,407
|
|
|
66,102
|
|
|
32,508
|
|
|
0.28
|
|
|
0.27
|
|
1st Quarter
|
227,378
|
|
|
130,163
|
|
|
73,267
|
|
|
37,538
|
|
|
0.33
|
|
|
0.31
|
|
Note 20 – Legal Proceedings.
Shareholder and Derivative Litigation
.
On March 4, 2015, a purported class action complaint was filed entitled
Yeung v. Akorn, Inc., et al.
, in the federal district court of Northern District of Illinois, No. 15-cv-1944. The complaint alleged that the Company and three of its officers violated the federal securities laws in connection with matters related to its accounting and financial reporting in the wake of its acquisitions of Hi-Tech Pharmaceutical Co., Inc. and VersaPharm, Inc. A second, related case entitled
Sarzynski v. Akorn, Inc., et al.
, No. 15-cv-3921, was filed on May 4, 2015 making similar allegations. On August 24, 2015, the two cases were consolidated and a lead plaintiff appointed in
In re Akorn, Inc. Securities Litigation.
On July 5, 2016, the lead plaintiff group filed a consolidated amended complaint making similar allegations against the Company and an officer and former officer of the Company. The consolidated amended complaint seeks damages on behalf of the putative class. On August 9, 2016, the defendants filed a motion to dismiss the case. The motion has been fully briefed and is pending with the court.
The Company’s Board of Directors also received shareholder demand letters and four shareholder derivative lawsuits have been filed alleging breaches of fiduciary duty in connection with the Company’s accounting for its acquisition and the restatement of its financials. The demands request that legal action be taken against certain of the Company’s directors and officers or former officers and other actions. The Company’s Board of Directors formed a special committee to conduct an inquiry into the demand allegations and to provide its conclusions and recommendations to the Board. The Board has completed that process and concluded that it would not be in the best interest of the Company to pursue such claims.
Two of the derivative lawsuits,
Safriet v. Rai, et al., No. 15-cv-7275,
and
Glaubach v. Rai, et al
., No. 15- 11129, were filed in the Northern District of Illinois. These cases have been stayed pending anticipated rulings on the defendants’ motion to dismiss in In re Akorn, Inc. Securities Litigation. A third lawsuit,
Kogut v. Akorn, Inc., et al
., No. 646174, was filed in Louisiana state court in the Parish of East Baton Rouge, on March 8, 2016. On June 10, 2016, the plaintiff filed an amended complaint asserting shareholder derivative claims similar to the others asserted in the other derivative lawsuits. On September 23, 2016, the Company filed a motion to dismiss the case. Briefing on that motion is not yet complete. A fourth lawsuit,
Miller v. Rai, et al.
, No. 16 CH 1363, was filed on September 8, 2016 in Illinois state court in the Circuit Court of Lake County. On October 17, 2016, defendants filed a motion to dismiss the case. Briefing on that motion is not yet complete.
Fera Pharmaceuticals, LLC v. Akorn Inc., Sean Brynjelsen, and Michael Stehn
, in the United States District Court for the Southern District of New York, Case No. 12-cv-07692-LLS. Fera Pharmaceuticals, LLC (“Fera”) filed this action on September 12, 2012. The defendants in the case are the Company, one former employee of the Company, Sean Brynjelsen and a current employee of the Company, Michael Stehn. The amended complaint generally alleges that the Company breached certain terms of a contract manufacturing supply agreement by, among other things, failing to manufacture Fera’s products, raising the manufacturing cost, and impermissibly terminating the contract. In addition, Fera alleges that the Company misappropriated Fera’s trade secrets in order to manufacture Erythromycin and Bacitracin for its own benefit. The counts in the amended complaint are for (1) breach of contract, (2) misappropriation of trade secrets, (3) fraudulent inducement, and (4) declaratory and injunctive relief. Fera seeks
$135 million
in compensatory damages, an additional, unspecified amount in punitive damages, and injunctive relief restraining the Company from selling the products at issue in the case. The Company filed a counterclaim against Fera and certain affiliates, as well as Perrigo Company of Tennessee and Perrigo Company plc, asserting violations of Sections 1 and 2 of the Sherman Act and tortious interference with business relations. The case is still in the discovery phase, and no trial date has been scheduled.
State of Louisiana v. Abbott Laboratories, Inc., et al.
The Louisiana Attorney General filed suit, Number 624,522, Nineteenth Judicial District Court, Parish of East Baton Rouge, including Hi-Tech Pharmacal and other defendants, in Louisiana state court. Louisiana’s complaint alleges that the defendants violated Louisiana state laws in connection with Medicaid reimbursement for certain vitamins, dietary supplements, and DESI products that were allegedly ineligible for reimbursement. The defendants filed exceptions of no cause of action and no right of action in response to Louisiana’s amended complaint. In a judgment entered on October 2, 2015, the trial court sustained the defendants’ exception of no right of action, which dismissed all of Louisiana’s claims. Louisiana sought appellate review of the court’s decision by filing an application for supervisory writs, as well as an appeal pending in the First Circuit Court of Appeal in Louisiana. On October 21, 2016, the First Circuit Court of Appeal affirmed the trial court’s judgment in part, reversed it in part, and remanded the case for further proceedings. Specifically, the First Circuit affirmed the dismissal of four of the six causes of action pled in Louisiana’s amended complaint, but reversed the dismissal with respect to the two remaining statutory claims. On November 4, 2016, Louisiana filed an application for rehearing with respect to the First Circuit’s affirmance. On December 22, 2016, the First Circuit denied Louisiana’s application. On January 20, 2017, Louisiana filed an application for certiorari in the Louisiana Supreme Court as to the portion of the First Circuit’s decision affirming the trial court’s judgment. On January 23, 2017, the defendants filed an application for certiorari in the Louisiana Supreme Court as to the portion of the First Circuit’s decision reversing the trial court’s judgment. Both applications remain pending.
Former Hi-Tech director and employee Reuben Seltzer delivered to the Company a demand letter in August 2014 alleging that the Company breached his employment agreement and improperly terminated Mr. Seltzer’s employment. In the fourth quarter of 2016, the Company and Mr. Seltzer entered into a confidential settlement agreement and release agreement resolving all matters in dispute.
In addition to the foregoing matters, Akorn has received shareholder demands for legal action to be taken against certain of the Company’s directors and officers based on alleged breaches of fiduciary duties and other misconduct in connection with the Company’s restatement of financial results and other matters. Akorn’s Board of Directors formed a special committee that conducted an inquiry into the demand allegations and provided its conclusions and recommendations to the Board.
Other Matters
The Chicago Regional Office of the Securities and Exchange Commission (SEC) is conducting an investigation regarding the previously disclosed restatement, internal controls and other related matters. Additionally, the United States Attorney’s Office for the Southern District of New York (USAO) has requested information regarding these matters. Akorn has been furnishing requested information and is fully cooperating with the SEC and USAO.
The legal matters discussed above could result in losses, including damages, fines and civil penalties, and criminal charges, which could be substantial. We record accruals for these contingencies to the extent that we conclude that a loss is both probable and reasonably estimable. As of the date of this filing, although the Company has determined that liabilities associated with these legal matters is reasonably possible, they cannot be reasonably estimated. Given the nature of the litigation and investigations discussed above and the complexities involved, the Company is unable to reasonably estimate a possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation or investigation. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid.
Note 21 – 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.
During the three months and year ended
December 31, 2016
, the Company repurchased
0.9 million
and
1.8 million
shares at an average price of
$22.06
and
$24.89
, respectively. In aggregate, over the life of the Stock Repurchase Program the Company has repurchased
1.8 million
shares at an average purchase price of
$24.89
. As of
December 31, 2016
, the Company had
$155.0 million
remaining under the repurchase authorization.
Companies incorporated under Louisiana law are subject to the Louisiana Business Corporation Act ("LBCA"). Provisions of the LBCA eliminate the concept of treasury stock. As a result, all stock repurchases are presented as a reduction to issued shares of common stock, the stated value of common stock and retained earnings.