Edgar Filing: AKORN INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-32360

AKORN, INC.

(Exact Name of Registrant as Specified in its Charter)

LOUISIANA		72-0717400
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1925 W. Field Court, Suite 300
Lake Forest, Illinois		60045
(Address of Principal Executive Offices)		(Zip Code)

(847) 279-6100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	x	Accelerated filer	o	Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

At May 11, 2016, there were 119,427,471 shares of common stock, no par value, outstanding.

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EXPLANATORY NOTE

Overview

On May 10, 2016 Akorn, Inc. filed a comprehensive Form 10-K with the Securities and Exchange Commission which included quarterly financial information for the quarter and year to date periods ended June 30, 2014 and 2015. Although not required Akorn, Inc., is filing this Quarterly Report on Form 10-Q for the quarter and year to date period ended June 30, 2015 solely for purposes of bringing Akorn’s Registration Statement on Form S-8 current.

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	Page
PART I. FINANCIAL INFORMATION	4
ITEM 1. Financial Statements (Unaudited)	4
Condensed Consolidated Balance Sheets — June 30, 2015 and December 31, 2014 (as Restated)	4
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and six months ended June 30, 2015 and 2014 (as Restated)	5
Condensed Consolidated Statement of Shareholders’ Equity - Six months ended June 30, 2015	6
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2015 and 2014 (as Restated)	7
Notes to Condensed Consolidated Financial Statements	8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	42
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.	48
ITEM 4. Controls and Procedures.	49
PART II. OTHER INFORMATION	50
ITEM 1. Legal Proceedings.	50
ITEM 1A. Risk Factors.	50
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.	50
ITEM 3. Defaults Upon Senior Securities.	50
ITEM 4. Mine Safety Disclosures.	50
ITEM 5. Other Information.	50
ITEM 6. Exhibits.	50

SIGNATURES	51

EXHIBIT INDEX	52

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AKORN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

	June 30, 2015			December 31, 2014
	(Unaudited)			(As restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	257,090		$	70,679
Trade accounts receivable, net	130,812			187,545
Inventories, net	156,315			135,197
Deferred taxes, current	40,717			38,411
Available for sale security, current	5,632			7,268
Prepaid expenses and other current assets	16,447			37,061
TOTAL CURRENT ASSETS	607,013			476,161
PROPERTY, PLANT AND EQUIPMENT, NET	179,239			144,196
OTHER LONG-TERM ASSETS
Goodwill	285,356			285,283
Product licensing rights, net	674,687			704,791
Other intangibles, net	251,283			255,612
Deferred financing costs, net	22,612			23,704
Deferred taxes, non-current	2,982			2,084
Long-term investments	130			211
Other non-current assets	1,282			1,863
TOTAL OTHER LONG-TERM ASSETS	1,238,332			1,273,548
TOTAL ASSETS	$	2,024,584		$	1,893,905
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	45,536		$	47,317
Purchase consideration payable, current	4,904			10,970
Income taxes payable	3,525			—
Accrued royalties	13,716			13,204
Accrued compensation	11,286			13,467
Current maturities of long-term debt	53,971			10,450
Accrued administrative fees	45,229			40,870
Accrued expenses and other liabilities	20,813			14,576
TOTAL CURRENT LIABILITIES	198,980			150,854
LONG-TERM LIABILITIES
Long-term debt	1,026,713			1,114,481
Deferred tax liability, non-current	256,035			269,428
Lease incentive obligations and other long-term liabilities	6,910			2,836
TOTAL LONG-TERM LIABILITIES	1,289,658			1,386,745
TOTAL LIABILITIES	1,488,638			1,537,599
SHAREHOLDERS’ EQUITY
Common stock, no par value — 150,000,000 shares authorized; 119,199,049 and 111,734,901shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively	449,742			342,252
Retained earnings	99,296			29,250
Accumulated other comprehensive loss	(13,092		)	(15,195		)
TOTAL SHAREHOLDERS’ EQUITY	535,946			356,307
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,024,584		$	1,893,905

See notes to condensed consolidated financial statements

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AKORN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands, Except Share Data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
				(as Restated)						(as Restated)
Revenues	$	220,920		$	133,872		$	448,298		$	224,494
Cost of sales (exclusive of amortization of intangibles included below)	92,513			73,000			189,728			113,967
GROSS PROFIT	128,407			60,871			258,570			110,527

Selling, general and administrative expenses	35,208			21,168			65,194			37,754
Acquisition-related costs	225			20,940			1,482			21,394
Research and development expenses	10,588			9,588			19,864			14,007
Amortization of intangibles	16,284			8,439			32,661			13,196
TOTAL OPERATING EXPENSES	62,305			60,135			119,201			86,351
OPERATING INCOME	66,102			736			139,369			24,176

Amortization of deferred financing costs	(1,026		)	(2,346		)	(2,022		)	(6,597		)
Interest expense, net	(13,235		)	(7,917		)	(26,715		)	(10,076		)
Gain from product divestiture	—			8,490			—			8,490
Bargain purchase gain	—			—			849			—
Other non-operating income (expense), net	(1,483		)	(214		)	(2,795		)	351
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	50,358			(1,251		)	108,686			16,344
Income tax provision (benefit)	17,850			(499		)	38,640			7,602

INCOME (LOSS) FROM CONTINUING OPERATIONS	$	32,508		$	(752	)	$	70,046		$	8,742
(Loss) from discontinued operations, net of tax	$	—		$	(504	)	$	—		$	(504	)
NET INCOME (LOSS)	$	32,508		$	(1,256	)	$	70,046		$	8,238
NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations, basic	$	0.28		$	(0.01	)	$	0.61		$	0.09
(Loss) from discontinued operations, basic	$	—		$	—		$	—		$	(0.01	)
NET INCOME (LOSS), BASIC	$	0.28		$	(0.01	)	$	0.61		$	0.08

Income (loss) from continuing operations, diluted	$	0.27		$	(0.01	)	$	0.57		$	0.07
(Loss) from discontinued operations, diluted	$	—		$	—		$	—		$	—
NET INCOME (LOSS), DILUTED	$	0.27		$	(0.01	)	$	0.57		$	0.07

SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:
BASIC	115,808			103,183			114,587			99,926
DILUTED	125,919			103,183			125,650			117,576

COMPREHENSIVE INCOME (LOSS):
Consolidated net income (loss)	$	32,508		$	(1,256	)	$	70,046		$	8,238
Unrealized holding gain on available-for-sale securities, net of tax of ($53) for the three month period ended June 30, 2015 and ($112) for the six month period ended June 30, 2015.	89			—			190			—
Foreign currency translation (loss) income, net of tax of $49 and $79 for the three month periods ended June 30, 2015 and 2014, respectively and ($984) and ($799) for the six months period ended June 30, 2015 and 2014, respectively.	(95		)	(153		)	1,913			1,552
COMPREHENSIVE INCOME (LOSS)	$	32,502		$	(1,409	)	$	72,149		$	9,790

See notes to condensed consolidated financial statements

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AKORN, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2015

(In Thousands)

(Unaudited)

						Other
				Retained		Comprehensive
	Shares	Amount		Earnings		(Loss)			Total
BALANCES AT DECEMBER 31, 2014 (as Restated)	111,735	$	342,252	$	29,250	$	(15,195	)	$	356,307
Consolidated net income	—	—		70,046		—			70,046
Exercise of stock options	2,514	10,371		—		—			10,371
Employee stock purchase plan issuances	66	1,545		—		—			1,545
Compensation and share issuances related to restricted stock awards	16	1,395		—		—			1,395
Stock-based compensation expense	—	4,667		—		—			4,667
Foreign currency translation adjustment	—	—		—		1,913			1,913
Excess tax benefit — stock compensation	—	47,997		—		—			47,997
Unrealized holding loss on available-for-sale securities	—	—		—		190			190
Convertible note conversions	4,868	41,515		—		—			41,515
BALANCES AT JUNE 30, 2015	119,199	$	449,742	$	99,296	$	(13,092	)	$	535,946

See notes to condensed consolidated financial statements

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AKORN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Six Months Ended June 30, 2015			Six Months Ended June 30, 2014
				(as Restated)
OPERATING ACTIVITIES:
Consolidated net income	$	70,046		$	8,238
Loss from discontinued operations, net of tax	—			504
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization	44,742			18,565
Amortization of deferred financing fees	2,490			6,599
Amortization of favorable (unfavorable) contracts	35			35
Amortization of inventory step-up	4,682			3,559
Non-cash stock compensation expense	6,062			3,275
Non-cash interest expense	1,889			2,655
Non-cash gain on bargain purchase	(849		)	—
Gain from product divestiture	—			(9,329		)
Deferred income taxes, net	(18,288		)	(20,103		)
Excess tax benefit from stock compensation	(47,997		)	(722		)
Loss on extinguishment of debt	1,189			—
Gain on sale of available for sale security	230			—
Changes in operating assets and liabilities:
Trade accounts receivable, net	60,449			(13,716		)
Inventories, net	(21,356		)	(10,227		)
Prepaid expenses and other current assets	21,452			55,636
Trade accounts payable	(3,623		)	11,524
Accrued expenses and other liabilities	59,896			(35,240		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	181,049			21,253
INVESTING ACTIVITIES:
Payments for acquisitions and equity investments, net of cash acquired	(27,136		)	(579,315		)
Proceeds from disposal of assets	2,372			58,721
Payments for other intangible assets	(800		)	(6,300		)
Purchases of property, plant and equipment	(15,600		)	(11,912		)
NET CASH USED IN INVESTING ACTIVITIES	(41,164		)	(538,806		)
FINANCING ACTIVITIES:
Proceeds from issuances of debt	—			600,000
Proceeds under stock option and stock purchase plans	11,916			2,071
Payments of contingent acquisition liabilities	(6,492		)	—
Debt financing costs	(1,714		)	(19,775		)
Proceeds from warrant exercises	—			8,171
Excess tax benefits from stock compensation	47,997			722
Debt payments	(5,225		)	—
NET CASH PROVIDED BY FINANCING ACTIVITIES	46,482			591,189
Effect of changes in exchange rates on cash and cash equivalents	44			102
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	186,411			73,738
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	70,679			34,178
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	257,090		$	107,916
SUPPLEMENTAL DISCLOSURE
Amount paid for interest	$	25,222		$	2,105
Amount paid (refunded) for income taxes, net of refunds received	$	(12,753	)	$	16,449

See notes to condensed consolidated financial statements

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AKORN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 — BUSINESS AND BASIS OF PRESENTATION

Business: Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn”, the “Company”, “we”, “our” or “us”) is a specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals and branded as well as private-label over-the-counter consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products in alternative dosage forms. We 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.

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 distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers are located in Vernon Hills, Illinois; Copiague, New York; and Warminster, Pennsylvania. We also have other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.

For further detail concerning our reportable segments please see Note 10 “Segment Information.”

Our common shares are traded on The NASDAQ Global Select Market under the ticker symbol AKRX.

Basis of Presentation: The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and accordingly do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in these financial statements. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the full year. For further information, refer to the condensed consolidated financial statements and footnotes for the year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K filed on May 10, 2016.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation: The accompanying condensed consolidated financial statements include the accounts of Akorn, Inc. and its wholly owned domestic and foreign subsidiaries. All inter-company transactions and balances have been eliminated in consolidation, and the financial statements of Akorn India Private Limited (“AIPL”) and Akorn AG (formerly “Excelvision AG” or “Hettlingen”) 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.

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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.

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. Revenue 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 acquired, to be cash and cash equivalents.

Accounts Receivable: Trade accounts receivables 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, certain 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 condensed consolidated financial statements as reductions of revenues and trade accounts receivable, respectively.

Chargebacks, Rebates, Discounts and Other Adjustments: 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 service 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. 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. 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 certain wholesaler inventory reports to aid in analyzing the reasonableness of the chargeback allowance and which are additionally monitored to ensure that wholesaler inventory levels by product do not significantly exceed underlying customer demand. The Company assesses the reasonableness of its chargeback allowance by applying the product chargeback percentage based on a combination of historical activity and future price and mix expectations to the quantities of inventory on hand at the wholesaler per wholesaler inventory reports. 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

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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.

Similarly, the Company maintains an allowance for rebates related to contract and other programs with certain customers. Rebate 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 percentage, using both historical trends and actual experience to estimate its rebate allowance. The Company reduces gross sales and increases the rebate allowance by the estimated rebate amount when the Company sells its products to its rebate-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 against actual rebates processed and makes necessary adjustments as appropriate. Actual rebates processed can vary materially from period to period.

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

Sales Returns: Certain of the Company’s products are sold with the customer having the right to return the product within specified periods and guidelines for a variety of reasons, including but not limited to, pending expiration dates. Provisions are made at the time of sale based upon tracked historical experience. Historical factors such as one-time events as well as pending new developments that would 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 balance required, the Company considers actual returns to date that are in process, the expected impact of any product recalls and the wholesaler’s inventory information 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. Actual returns experience and trends are factored into the Company’s estimates each quarter as market conditions change. Actual returns processed can vary materially from period to period.

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 trued up to actual upon receipt of the 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 selling, general and administrative (“SG&A”) expenses. In estimating the allowance for doubtful accounts, the Company considers its historical experience with collections and write-offs, the credit quality of its customers and any recent or anticipated changes thereto, and the outstanding balances and past due amounts from its customers. Note that in the ordinary course of business, and consistent with our peers, we may from time to time offer extended payment terms to our customers as an incentive for new product launches and in other circumstances in accordance with industry

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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 Accounting Standards Codification (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.

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. 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. 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 review of recent sales activity and wholesaler inventory information. The Company also analyzes its raw material and component inventory for slow moving items.

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.

Intangible Assets: Intangible assets consist primarily of goodwill and in-process research and development, which are carried at initial value and subject to evaluation for impairment, and product licensing costs, trademarks and other such costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from one year to thirty years. The Company regularly assesses its intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows. If the Company incurs additional costs to renew or extend the life of an intangible asset, such costs are added to the remaining unamortized cost of the asset, if any, and the sum is amortized over the extended remaining life of the asset.

Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value. The Company models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit.

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 capital lease terms. The amortization of assets under capital leases is included within depreciation expense.

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 are excluded from the computation of diluted net income per share.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities,

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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 recognized deferred 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.

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 trade on the exchange are considered Level 1 assets as of the periods ended June 30, 2015 and December 31, 2014.

· 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.

· 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 subject to a lock-up provision is considered a Level 3 asset as of the periods ended June 30, 2015 and December 31, 2014, respectively. The additional consideration payable as a result of the ECR divestiture on June 20, 2014 and other insignificant contingent amounts are considered Level 3 liabilities as of periods ended June 30, 2015 and December 31, 2014, respectively.

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:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	June 30,		Identical Items		Inputs		Inputs
Description	2015		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	257,090	$	257,090	$	—	$	—
Available-for-sale securities	6,173		4,991		—		1,182
Total assets	$	263,263	$	262,081	$	—	$	1,182

Purchase consideration payable	$	4,954	$	—	$	—	$	4,954
Total liabilities	$	4,954	$	—	$	—	$	4,954

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			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	December 31,		Identical Items		Inputs		Inputs
Description	2014		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	70,679	$	70,679	$	—	$	—
Available-for-sale securities	8,391		—		—		8,391
Total assets	$	79,070	$	70,679	$	—	$	8,391

Purchase consideration payable	$	11,101	$	—	$	—	$	11,101
Total liabilities	$	11,101	$	—	$	—	$	11,101

Discontinued Operations: During the three and six month period 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.

Business Combinations: Business combinations are accounted for in accordance with ASC 805 - Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. Fair value determinations are based on discounted cash flow analyses or other valuation techniques. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, the Company may utilize appraisals from third party valuation firms to determine fair values of some or all of the assets acquired and liabilities assumed, or may complete some or all of the valuations internally. In either case, the Company takes full responsibility for the determination of the fair value of the assets acquired and liabilities assumed. The value of goodwill reflects the excess of the fair value of the consideration conveyed to the seller over the fair value of the net assets received. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions.

Acquisition-related costs are costs the Company incurs to effect a business combination. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred.

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

NOTE 3 — STOCK BASED COMPENSATION

At the Company’s 2014 Annual Meeting of Shareholders, which took place May 2, 2014, the Company’s shareholders approved the adoption of the Akorn, Inc. 2014 Stock Option Plan (the “2014 Plan”). The 2014 Plan reserves 7.5 million shares for issuance upon the grant of stock options, restricted stock units, or various other instruments to directors, employers and consultants. The 2014 Plan replaced the 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6, 2013, although previously granted awards remain outstanding under the 2003 Plan.

The Company uses the single-award method for allocating compensation cost related to stock options to each period. The

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following table sets forth the components of the Company’s stock-based compensation expense for the three and six month periods ended June 30, 2015 and 2014 (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
Stock options and employee stock purchase plan	$	2,415	$	1,900	$	4,667	$	3,122
Restricted stock units	742		92		1,464		153
Total stock-based compensation expense	$	3,157	$	1,992	$	6,131	$	3,275

The weighted-average assumptions used in estimating the grant date fair value of the stock options granted under the 2014 Plan and the 2003 Plan during the three and six month periods ended June 30, 2015, and 2014, respectively along with the weighted-average grant date fair values, are set forth in the table below.

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
Expected volatility	44		%	54		%	43		%	54		%
Expected life (in years)	4.77			4.2			4.76			4.2
Risk-free interest rate	1.56		%	1.79		%	1.53		%	1.79		%
Dividend yield	—			—			—			—
Fair value per stock option	$	16.87		$	10.77		$	17.62		$	10.77
Forfeiture rate	8		%	8		%	8		%	8		%

The table below sets forth a summary of activity within the 2014 and 2003 Plans for the six months ended June 30, 2015:

	Number of Options (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands) (1)
Outstanding at December 31, 2014	6,386		$	11.44	2.48	$	158,097
Granted	520		45.88
Exercised	(2,513	)	4.07
Forfeited	(81	)	33.16
Outstanding at June 30, 2015	4,312		$	19.50	3.49	$	104,178
Exercisable at June 30, 2015	2,277		$	10.07	1.55	$	76,480

(1) May include value from potentially anti-dilutive options whose exercise price exceeds the closing stock price.

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 as of the date indicated and the exercise price of the stock options. During the three and six month periods ended June 30, 2015, approximately 290,000 and 2.5 million stock options were exercised resulting in cash payments due to the Company of approximately $1.0 million and $10.2 million, respectively. These stock option exercises generated tax-deductible expenses totaling approximately $12.4 million and $97.3 million, respectively. During the three and six month periods ended June 30, 2014, 182,000 and 238,000 stock options were exercised resulting in cash payments to the Company of approximately $1.1 million and $1.3 million, respectively. These option exercises generated tax-deductible expenses of approximately $3.9 million and $5.0 million, respectively.

From time to time the Company grants restricted stock units to certain employees and members of its Board of Directors (“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 award is recognized as expense ratably over the vesting period of the grants.

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On May 2, 2014, the Company granted a total of 71,582 restricted stock units to senior management which vest at 25% per year on the anniversary date of the grant ending May 2, 2018. Also on May 2, 2014, the Company modified approximately 2.3 million options to extend the option term for grants to certain individuals in senior management. On September 5, 2014, the Company granted a total of 257,416 restricted stock units to senior management and 8,034 shares to a Director to make the individuals who received extended option terms on May 2, 2014 whole given increased tax liabilities. The shares each vest at 25% per year on the anniversary date of the grant ending September 5, 2018. No restricted stock units were issued during the six month period ended June 30, 2015.

The following is a summary of non-vested restricted stock activity:

	Number of Units		Weighted Average
	(in thousands)		Grant Date Fair Value
Non-vested at December 31, 2014	337		$	35.31
Granted	—		—
Forfeited	—		—
Vested	(18	)	24.74
Non-vested at June 30, 2015	319		$	35.90

NOTE 4 — ACCOUNTS RECEIVABLE 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 a natural circumstance of the pharmaceutical industry and is not 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 condensed consolidated statements of comprehensive income. The ending reserve balances are included in trade accounts receivable, net in the Company’s condensed consolidated balance sheets.

Net trade accounts receivable consists of the following (in thousands):

	JUNE 30,			DECEMBER 31,
	2015			2014
				(as Restated)
Gross accounts receivable	$	392,015		$	446,925
Less reserves for:
Chargebacks and rebates	(193,683		)	(198,112		)
Product returns	(51,195		)	(44,646		)
Discounts and allowances	(14,801		)	(15,554		)
Advertising and promotions	(924		)	(758		)
Doubtful accounts	(600		)	(309		)
Trade accounts receivable, net	$	130,812		$	187,545

For the three and six month periods ended June 30, 2015 and 2014, the Company recorded the following adjustments to gross sales (in thousands):

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	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
				(As restated)						(as Restated)
Gross sales	$	607,307		$	278,219		$	1,175,324		$	427,519
Less adjustments for:
Chargebacks and rebates	(363,008		)	(132,854		)	(656,189		)	(184,727		)
Product returns	(5,896		)	(88		)	(11,470		)	(974		)
Discounts and allowances	(11,622		)	(5,462		)	(25,666		)	(7,897		)
Administrative fees	(3,786		)	(3,354		)	(29,910		)	(5,506		)
Advertising, promotions and others	(2,075		)	(2,589		)	(3,791		)	(3,921		)
Revenues, net	$	220,920		$	133,872		$	448,298		$	224,494

NOTE 5 — INVENTORIES, NET

The components of inventories are as follows (in thousands):

	JUNE 30, 2015		DECEMBER 31, 2014
			(as Restated)
Finished goods	$	74,272	$	69,499
Work in process	8,628		4,075
Raw materials and supplies	73,416		61,623
Inventories, net	$	156,315	$	135,197

The Company maintains reserves and records provisions for slow-moving and obsolete inventory as well as inventory with a cost in excess of its net realizable value. Inventory at June 30, 2015 and December 31, 2014 were reported net of these reserves of $20.1 million and $21.4 million, respectively.

NOTE 6 — PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following (in thousands):

	JUNE 30, 2015			DECEMBER 31, 2014
				(as Restated)
Land and land improvements	$	17,762		$	9,323
Buildings and leasehold improvements	79,954			63,846
Furniture and equipment	132,235			112,552
Sub-total	229,951			185,721
Accumulated depreciation	(76,589		)	(67,937		)
Property, plant and equipment placed in service, net	153,362			117,784
Construction in progress	25,877			26,412
Property, plant and equipment, net	$	179,239		$	144,196

A portion of the Company’s property, plant and equipment is located outside the United States. At June 30, 2015, property, plant and equipment, net, with a net carrying value of $55.9 million, was located outside the United States at the Company’s manufacturing facility and regional corporate office in India and the Company’s manufacturing facility and regional corporate offices in Switzerland. While at December 31, 2014, property, plant and equipment, net, with a net carrying value of $25.6 million, respectively, was located outside the United States at the Company’s manufacturing facility and regional corporate office in India.

The Company recorded depreciation expense of approximately $4.3 million and $3.6 million during the three month periods

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ended June 30, 2015 and 2014, respectively and approximately $9.3 million and $5.5 million during the six month periods ended June 30, 2015 and 2014, respectively.

NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill:

The following table provides a summary of the activity in goodwill by segment for the six months ended June 30, 2015 (in thousands):

	Consumer Health		Prescription Pharmaceuticals		Total
Balances at December 31, 2014 (as Restated)	$	16,717	$	268,566	$	285,283
Currency translation adjustments	—		73		73
Acquisitions	—		—		—
Dispositions	—		—		—
Balances at June 30, 2015	$	16,717	$	268,639	$	285,356

Product Licensing Rights, IPR&D, and Other Intangible Assets:

The following table sets forth information about the net book value of the Company’s other intangible assets as of June 30, 2015 and December 31, 2014, and the weighted average remaining amortization period as of June 30, 2015 and December 31, 2014 (dollar amounts in thousands):

	Gross Amount		Accumulated Amortization			Impairment			Net Balance		Wgtd Avg Remaining Amortization Period
JUNE 30, 2015
Product licensing rights	$	779,234	$	(104,547	)	$	—		$	674,687	13.7
IPR&D	227,559		—			(2,627		)	224,932		N/A - Indefinite lived
Trademarks	16,000		(2,352		)	—			13,648		22.3
Customer relationships	6,424		(3,607		)	—			2,817		12.2
Other Intangibles	11,234		(1,739		)	—			9,495		8.4
Non-compete agreement	2,406		(2,015		)	—			391		0.5
	$	1,042,857	$	(114,260	)	$	(2,627	)	$	925,970

DECEMBER 31, 2014 (as Restated)
Product licensing rights	$	778,734	$	(73,943	)	$	—		$	704,791	12.1
IPR&D	227,259		—			—			227,259		N/A - Indefinite lived
Trademarks	16,000		(1,721		)	—			14,279		18.6
Customer relationships	6,502		(3,467		)	—			3,035		11.0
Other Intangibles	11,235		(879		)	—			10,356		7.5
Non-compete agreement	2,333		(1,650		)	—			683		1.4
	$	1,042,063	$	(81,660	)	$	—		$	960,403

The Company recorded amortization expense of approximately $16.3 million and $8.4 million during the three month periods ended June 30, 2015 and 2014, respectively and approximately $32.7 million and $13.2 million during the six month periods ended June 30, 2015 and 2014, respectively. In the quarter and year to date period ended June 30, 2015 the Company recognized $2.6 million of abandonment of IPR&D (which has been recognized in R&D expense) associated with two IPR&D projects acquired in the VersaPharm acquisition.

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NOTE 8 — FINANCING ARRANGEMENTS

Incremental Term Loan

Concurrent with the closing of its acquisition of VersaPharm Incorporated (“VersaPharm”), Akorn, Inc. and its wholly owned domestic subsidiaries (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 the Akorn Loan Parties as borrowers, certain other lenders, with JPMorgan Chase Bank, N.A. (“JPMorgan”), acting as administrative agent. The proceeds received pursuant to the Incremental Term Loan Agreement were used to finance the acquisition of VersaPharm, a Georgia corporation (“VersaPharm Acquisition”).

The Incremental Term Loan Facility is secured by all of the assets of the Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a deposit account control agreement.

The Incremental Term Loan Facility requires quarterly principal repayment equal to 0.25% of the initial loan amount of $445.0 million beginning with the first full quarter following the closing date of the Incremental 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 may prepay all or a portion of the remaining outstanding principal amount under the Incremental Term Loan Agreement at any time, or from time to time, subject to prior notice requirement to the lenders and payment of applicable fees. Prepayment of principal will be required should the Company incur any indebtedness not permitted under the Incremental Term Loan Agreement, or effect the sale, transfer or disposition of any property or asset, other than in the ordinary course of business. To the extent the Incremental Term Loan Facility is refinanced within the first six (6) months of closing, a 1.00% prepayment fee will be due. As of June 30, 2015 outstanding debt under the Incremental Term Loan Facility was $441.7 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.

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 2.50% for ABR Loans, and 3.50% for Eurodollar Loans. Each such margin will decrease by 0.25% in the event the Company’s senior debt to EBITDA ratio for any quarter falls to 2.25:1.00 or below. During an event of default, as defined in the Existing Term Loan Agreement, any interest rate will be increased by 2.00% per annum. Per the Existing Term Loan Agreement, the interest rate on LIBOR loans cannot fall below 4.50%.

For the three and six month periods ended June 30, 2015, the Company recorded interest expense of $5.0 million and $10.0 million, respectively, in relation to the Incremental Term Loan Agreement.

As of and for the three month periods ended June 30, 2015 and 2014, and in connection with the $445.0 million Incremental Term Loan Agreement entered into in 2014, the Company amortized $0.6 million and $0.5 million, respectively, of deferred financing fees and ticking fees. As of and for the six month periods ended June 30, 2015 and 2014, and in connection with the $445.0 million Incremental Term Loan Agreement entered into in 2014, the Company amortized $0.9 million and $0.5 million, respectively, of deferred financing fees and ticking fees. The remaining balance of unamortized deferred financing fees as of June 30, 2015 is $8.2 million. The Company will amortize the remaining deferred financing fees using the effective interest method over the term of the Incremental Term Loan Agreement.

Subsequent to June 30, 2015 the Company completed several loan modifications as further discussed in the Form 10-K filed on May 10, 2016.

Existing Term Loan

Concurrent with the closing of its acquisition of Hi-Tech (the “Hi-Tech Acquisition”) 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 the Akorn Loan Parties as borrowers, certain other lenders, with JPMorgan, acting as administrative agent. The Company may increase the loan amount up to an additional $150.0 million, or more, provided certain

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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.

The Existing Term Facility is secured by all of the assets of the Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a deposit account control agreement.

The Existing Term Loan Agreement requires quarterly principal repayment equal to 0.25% of the initial loan amount of $600.0 million 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 may prepay all or a portion of the remaining outstanding principal amount under the Existing Term Loan Agreement at any time, or from time to time, subject to prior notice requirement to the lenders and payment of applicable fees. Prepayment of principal will be required should the Company incur any indebtedness not permitted under the Existing Term Loan Agreement, or effect the sale, transfer or disposition of any property or asset, other than in the ordinary course of business. As of June 30, 2015 outstanding debt under the term loan facility was $595.5 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.

Interest accrues based, at the Company’s election, on an adjusted prime/federal funds rate or an adjusted LIBOR rate, plus a margin of 2.50% for ABR Loans, and 3.50% for Eurodollar Loans. Each such margin will decrease by 0.25% in the event Akorn’s senior debt to EBITDA ratio for any quarter falls to 2.25:1.00 or below. During an event of default, as defined in the Existing Term Loan Agreement, any interest rate will be increased by 2.00% per annum. Per the Existing Term Loan Agreement, the interest rate on LIBOR loans cannot fall below 4.50%.

For the three month periods ended June 30, 2015 and 2014, the Company recorded interest expense of $6.8 million and $5.5 million, respectively, in relation to the Existing Term Loan, while for the six month periods ended June 30, 2015 and 2014, the Company recorded interest expense of $13.5 million and $5.5 million, respectively, in relation to the Existing Term Loan.

As of and for the three month periods ended June 30, 2015 and 2014, and in connection with the $600.0 million Existing Term Loan Agreement entered into in 2014, the Company amortized $0.3 million and $1.1 million, respectively, of deferred financing fees and ticking fees. As of and for the six month periods ended June 30, 2015 and 2014, and in connection with the $600.0 million Existing Term Loan Agreement entered into in 2014, the Company amortized $0.8 million and $5.2 million, respectively, of deferred financing fees and ticking fees. The remaining balance of unamortized deferred financing fees as of June 30, 2015 is $13.6 million. The Company will amortize the remaining deferred financing fees using the effective interest method over the term of the Existing Term Loan Agreement.

Subsequent to June 30, 2015 the Company completed several loan modifications as further discussed in the Form 10-K filed on May 10, 2016.

JPMorgan Credit Facility

On April 17, 2014, the Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan as administrative agent, 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”). Upon entering into the JPM Credit Agreement, the Company terminated its prior $60.0 million revolving credit facility with Bank of America, N.A., as further described below.

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;

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(b) The lesser of:

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 (5) 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 2.00% per annum.

The JPM Revolving Facility is secured by all of the assets of the Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a Deposit Account Control Agreement. The financial covenants require the 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 $120.0 million of 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 June 30, 2015 the Company was in full compliance with all covenants applicable to the JPM Revolving Facility.

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The Company intends to 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, and to otherwise replace letters of credit that were outstanding upon the termination of the Company’s prior revolving credit facility with Bank of America, N.A. At June 30 2015, there were no outstanding borrowings and one outstanding letter of credit in the amount of approximately $1.2 million under the JPM Revolving Facility. Availability under the facility as of June 30, 2015 was approximately $148.8 million.

The JPM Credit Agreement contains representations, warranties and affirmative and negative covenants customary for financings of this type. The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of the 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 closed on an offering of $120.0 million aggregate principal amount of 3.50% Convertible Senior Notes due 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 are governed by the Company’s indenture with Wells Fargo Bank, N.A., 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 have a maturity date of June 1, 2016 and pay interest at an annual rate of 3.50% semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2011. The Notes are 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 Notes. The conversion price is subject to adjustment for certain events described in the Indenture, including certain corporate transactions which will increase the conversion rate and decrease the conversion price for a holder that elects to convert its Notes in connection with such corporate transaction.

The Notes may be converted at any time prior to the close of business on the business day immediately preceding December 1, 2015 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2011, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price in effect on each applicable trading day; (2) during the five consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes per $1,000 principal amount of Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; or (3) upon the occurrence of specified corporate events. On or after December 1, 2015 until the close of business on the business day immediately preceding the stated maturity date, holders may surrender all or any portion of their Notes for conversion at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, at the Company’s option, cash, shares of the Company’s common stock, or a combination thereof. If a fundamental change (as defined in the Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or a portion of their Notes.

The Notes became convertible for the quarter ending on June 30, 2012 as a result of the Company’s stock trading at or above the required price of $11.39 per share for 20 of the last 30 trading days in the quarter ended March 31, 2012. The Notes have remained convertible for each successive quarter as a result of meeting the trading price requirement at the end of each prior quarter. During the year ended December 31, 2014, approximately $32.5 million of this convertible debt was converted at the holder’s request which resulted in an additional $1.0 million of expense recognized due to the conversions. During the six months ended June 30, 2015, approximately $42.3 million of the remaining convertible debt was converted at the holder’s request which resulted in an additional $1.2 million of expense recognized due to the conversions.

The Notes are not listed on any securities exchange or on any automated dealer quotation system, but are traded on a secondary

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market made by the initial purchasers. The initial purchasers of the Notes advised the Company of their intent to make a market in the Notes following the offering, though they are not obligated to do so and may discontinue any market making at any time.

As of June 30, 2015, the face value of the notes was $45.2 million, but due to recent inactivity in the trading of the convertible notes as a result of recent conversions, bid and ask spreads, which would be used to calculate the trading value of the outstanding notes were not available accordingly, we have not calculated the trading value of the convertible notes as of and for the year to date period ended June 30, 2015. The actual conversion value of the Notes is based on the product of the conversion rate and the market price of the Company’s common stock at conversion, as defined in the Indenture. As of June 30, 2015, the Company’s common stock closed at $43.66 per share, resulting in a pro forma conversion value for the Notes of approximately $225.4 million. Increases in the market value of the Company’s common stock increase the Company’s obligation accordingly. There is no upper limit placed on the possible conversion value of the Notes.

The Notes are accounted for in accordance with ASC 470-20, Debt with Conversion and Other Options. Under ASC 470-20, issuers of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components. The application of ASC 470-20 resulted in the recognition of $21.3 million as the value for the equity component. This amount was offset by $0.8 million of equity issuance costs, as described below, and both were affected by the aggregate conversion of $74.8 million of notes as documented above. At the dates indicated, the net carrying amount of the liability component and the remaining unamortized debt discount were as follows (in thousands):

	June 30, 2015		December 31, 2014
			(as Restated)
Carrying amount of equity component	$	7,713	$	14,930
Carrying amount of the liability component	43,521		82,543
Unamortized discount of the liability component	1,695		4,982
Unamortized debt financing costs	306		901

The Company incurred debt issuance costs of $4.7 million related to its issuance of the Notes. In accordance with ASC 470-20, the Company allocated this debt issuance cost ratably between the liability and equity components of the Notes, resulting in $3.9 million of debt issuance costs allocated to the liability component and $0.8 million allocated to the equity component. The portion allocated to the liability component was classified as deferred financing costs and is being amortized by the effective interest method through the earlier of the maturity date of the Notes or the date of conversion, while the portion allocated to the equity component was recorded as an offset to additional paid-in capital upon issuance of the Notes.

For the three and six month periods ended June 30, 2015 and 2014, the Company recorded the following expenses in relation to the Notes (in thousands):

	Three months ended June 30,				Six months ended June 30,
Expense Description	2015		2014		2015		2014
			(as Restated)				(as Restated)
Interest expense at 3.5% coupon rate	$	643	$	1,050	$	1,404	$	2,100
Debt discount amortization	695		1,095		1,531		2,170
Amortization of deferred financing costs	126		198		277		392
Loss on conversion	1,126		—		1,198		—
	$	2,590	$	2,343	$	4,410	$	4,662

Upon issuing the Notes, the Company established a deferred tax liability of $8.6 million related to the debt discount of $21.3 million, with an offsetting debit of $8.6 million to common stock. The deferred tax liability was established because the amortization of the debt discount generates non-cash interest expense that is not deductible for income tax purposes. Since the Company’s net deferred tax assets were fully reserved by valuation allowance at the time the Notes were issued, the Company

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reduced its valuation allowance by $8.6 million upon recording the deferred tax liability related to the debt discount with an offsetting credit of $8.6 million to common stock. As a result, the net impact of these entries was a debit of $8.6 million to the valuation reserve against the Company’s deferred tax assets and a credit of $8.6 million to deferred tax liability. The deferred tax liability is being amortized monthly as the Company records non-cash interest from its amortization of the debt discount on the Notes.

Bank of America Credit Facility

On October 7, 2011, the Company and its domestic subsidiaries (the “Borrowers”) entered into a Loan and Security Agreement (the “B of A Credit Agreement”) with Bank of America, N.A. (the “Agent”) and other financial institutions (collectively with the Agent, the “B of A Lenders”) through which it obtained a $20.0 million revolving line of credit, which included a $2.0 million letter of credit facility. On April 17, 2014, concurrent with the Company entering into the JPM Credit Agreement, the Company and Bank of America, N.A. agreed to early terminate the B of A Credit Agreement, without penalty.

Aggregate cumulative maturities of long-term obligations (including the incremental and existing term loans, convertible debt and the JPM revolver) commencing after the year to date period ended June 30, 2015 are:

(In thousands)	2015		2016		2017		2018		Thereafter
Maturities (1)	$	5,225	$	55,666	$	10,450	$	10,450	$	1,000,588

(1) On February 16, 2016 the Company voluntarily prepaid $200.0 million of existing and incremental term loan principal which eliminated any further interim principal repayment obligations. The Company has not altered the schedule above for the subsequent event as of and for the year to date period ended June 30, 2015.

NOTE 9 — EARNINGS PER SHARE

Basic net income per common share is based upon the weighted average number of 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 potentially dilutive securities 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.

The Company’s potentially dilutive securities consist of: (i) vested and unvested stock options that are in-the-money, (ii) warrants that are in-the-money, (iii) unvested restricted stock units (“RSUs”), and (iv) shares issuable on conversion of convertible notes. Information about the computation of basic and diluted earnings per share is detailed below (in thousands, except per share data):

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	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2014			2015		2014
			(as Restated) (1)					(as Restated)
Income from continuing operations used for basic earnings per share	$	32,508	$	(752	)	$	70,046	$	8,742
Convertible debt income adjustments, net of tax (2)	927		—			2,034		—
Income from continuing operations adjusted for convertible debt as used for diluted earnings per share	$	33,435	$	(752	)	$	72,080	$	8,742
Income from continuing operations per share:
Basic	$	0.28	$	(0.01	)	$	0.61	$	0.09
Diluted	$	0.27	$	(0.01	)	$	0.57	$	0.07
(Loss) from discontinued operations, net of tax	$	—	$	(504	)	$	—	$	(504	)
(Loss) from discontinued operations per share:
Basic	$	—	$	—		$	—	$	(0.01	)
Diluted	$	—	$	—		$	—	$	—

Shares used in computing net income (loss) per share:
Weighted average basic shares outstanding	115,808		103,183			114,587		99,926
Dilutive securities:
Stock option and unvested RSUs	1,655		—			1,869		5,008
Stock warrants	—		—			—		3,779
Shares issuable upon conversion of convertible notes (2)	8,456		—			9,194		8,863
Total dilutive securities	10,111		—			11,063		17,650

Weighted average diluted shares outstanding	125,919		103,183			125,650		117,576

Shares subject to stock options omitted from the calculation of income per share as their effect would have been anti-dilutive	874		—			724		336

(1) As a result of the loss from continuing operations in the three months ended June 30, 2014, the effect of potentially dilutive securities would be anti-dilutive and have been omitted from the calculation of diluted earnings per share consistent with GAAP.

(2) As of the three and six month period ended June 30, 2014 the number of shares issuable upon conversion of the Notes is based on the assumption that the Company would repay the principal of the Notes in cash and pay any incremental value in shares of common stock. Due to a change in the expectation that management may settle all future note conversions solely through shares in the 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 $0.9 million, after-tax and $2.0 million, after-tax for the three and six month periods ended June 30, 2015. This also alters the dilutive share effect of the convertible notes as the Company is now using the if-converted method for debt conversion obligations.

Stock Warrant Exercise

On April 10, 2014, the Company’s chairman, John N. Kapoor, Ph.D., exercised all of his 7.2 million outstanding stock warrants for cash. These warrants were issued at various dates in 2009 and were scheduled to expire in 2014. The Company received cash proceeds of approximately $8.2 million from the warrant exercise during the six month period ended June 30, 2014.

NOTE 10 — SEGMENT INFORMATION

During the three and six month periods ended June 30, 2015, the Company reported results for the following two reportable segments:

· Prescription Pharmaceuticals

· Consumer Health

Prior to the three months ended June 30, 2014 the Company managed the business as three distinct reporting segments; Ophthalmics, Hospital Drugs and Injectables, and Contract Services, which were realigned as a result of the Hi-Tech acquisition to more closely align our reporting structure with the operations and management of the business.

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

Selected financial information by reportable segment is presented below (in thousands). The Company has recasted prior periods such as the three month periods ended March 31, 2014 included in the six months ended June 30, 2014, to reflect the new segment reporting.

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
				(as Restated)						(as Restated)
Revenues:
Prescription Pharmaceuticals	$	206,062		$	119,481		$	416,616		$	201,327
Consumer Health	14,858			14,391			31,682			23,167

Total revenues	220,920			133,872			448,298			224,494

Gross Profit:
Prescription Pharmaceuticals	120,929			52,335			242,088			97,619
Consumer Health	7,478			8,536			16,482			12,908

Total gross profit	128,407			60,871			258,570			110,527

Operating expenses	62,305			60,135			119,201			86,351

Operating income	66,102			736			139,369			24,176
Other (expense)	(15,744		)	(1,987		)	(30,683		)	(7,832		)
Income (loss) from continuing operations before income taxes	$	50,358		$	(1,251	)	$	108,686		$	16,344

The Company manages its reportable segments to the gross profit level and manages its operating and other costs on a company-wide basis. Inter-segment activity at the revenue and gross profit level has been minimal. The Company does not identify total assets by segment for internal purposes, as the Company’s CODM does not assess performance, make strategic decisions, or allocate resources based on assets.

NOTE 11 — BUSINESS COMBINATIONS, DISPOSITIONS AND OTHER STRATEGIC INVESTMENTS

Akorn AG (formerly 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 (“Swiss Francs”), 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 three and six month period ended June 30, 2015, the Company recorded approximately $0.1 million and $0.2

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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 statement 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 are preliminary and subject to review of the facts and assumptions used to determine the fair values of the acquired assets developed utilizing an income approach and 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 net income for the six month period ended June 30, 2015.

During the three and six month period ended June 30, 2015, the Company recorded net revenue of approximately $8.8 million and $15.3 million, respectively related to sales from the Akorn AG location subsequent to acquisition.

Lloyd Animal Health Products

On October 2, 2014, Akorn Animal Health, Inc., a wholly owned subsidiary of the Company entered into a definitive Product acquisition agreement with Lloyd, Inc., to acquire certain rights and inventory related to a suite of animal health injectable products (the “Lloyd Products”) used in pain management and anesthesia. The Company acquired the products for $16.1 million, funded through available cash paid at closing, and a contingent payment of $2.0 million, discounted to $1.9 million using a 4.5% discount rate and other unobservable inputs, which was paid in 2015. The Company’s acquisition of the Lloyd Products is being accounted for as a business combination in accordance with ASC 805 - Business Combinations. The purpose of the acquisition is to expand the Company’s animal health product portfolio.

The following table sets forth the consideration paid for the Lloyd Acquisition and the fair values of the acquired assets and assumed liabilities (in millions) as of the acquisition date adjusted in accordance with GAAP. The figures below may differ from historical financial results of the Lloyd Products.

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Consideration:
Amount of cash paid	$	16.1
Fair value of contingent payment	1.9
Total consideration at closing	$	18.0

Recognized amounts of identifiable assets acquired:
Accounts receivable	0.1
Inventory	2.5
Product licensing rights	10.0
IPR&D	5.5
Accounts payable assumed	(0.1		)
Fair value of assets acquired	$	18.0

IPR&D assets represent ongoing in-process research and development projects obtained through the acquisition. Weighted average remaining amortization period of intangible assets acquired through the Lloyd acquisition as of the closing date was 10.7 years. The rights to Lloyd Products are included within product licensing rights, net on the Company’s condensed consolidated balance sheet as of June 30, 2015 and December 31, 2014.

The Company has not provided pro forma revenue and earnings of the Company as if the Lloyd Products Acquisition was completed as of January 1, 2014 because to do so would be impracticable. The acquired Lloyd Product rights were not managed as a discrete business by the previous owner. Accordingly, determining the pro forma revenue and earnings of the Company including the Lloyd Products acquisition would require significant estimates of amounts, and it is impossible to distinguish objectively information about such estimates that provides evidence of circumstances that existed on the dates at which those amounts would be recognized and measured, and would have been available when the financial statements for that prior period were issued.

Xopenex Inhalation Solutions

On October 1, 2014, the Company entered into a definitive product acquisition agreement with Sunovion Pharmaceuticals Inc., to acquire certain rights and inventory related to the branded product, Xopenex® Inhalation Solution (levalbuterol hydrochloride) (the “Xopenex Product”) for $45 million, funded through available cash paid at closing, less certain liabilities for product return reserves, rebates, and chargeback reserves, which were assumed by Oak Pharmaceuticals, Inc. (“Oak”), a subsidiary of Akorn, subject to a cap. The total cash paid at closing was $41.5 million, which was net of certain liabilities for product return reserves, rebates, and chargeback reserves assumed by the Company.

Xopenex® is indicated for the treatment or prevention of bronchospasm in adults, adolescents, and children 6 years of age and older with reversible obstructive airway disease. The Company’s acquisition of Xopenex® (the “Xopenex Acquisition”) is being accounted for as a business combination in accordance with ASC 805 - Business Combinations. The purpose of the Xopenex Acquisition is to expand the Company’s product portfolio of prescription pharmaceuticals.

Pursuant to the purchase agreement, certain trademarks and patents related to the Xopenex Product will be licensed to Oak by Sunovion. Further, in connection with closing the Xopenex acquisition, the Company and Sunovion entered into a customary transition services agreement. Additionally, the Company assumed a distribution agreement for authorized generic of the product and assumed certain open purchase orders placed in ordinary course for active pharmaceutical ingredients.

The following table sets forth the consideration paid for the Xopenex Acquisition and the fair values of the acquired assets and assumed liabilities (in millions) as of the acquisition date adjusted in accordance with GAAP. The figures below may differ from historical financial results of the Xopenex Product.

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Consideration:
Amount of cash paid	$	41.5
Product returns and reserves assumed	3.5
Total consideration at closing	$	45.0

Recognized amounts of identifiable assets acquired:
Accounts Receivable, net (product returns and reserves assumed)	(3.5		)
Inventory	6.3
Product licensing rights	38.7
Fair value of net assets acquired	$	41.5

Weighted average remaining amortization period of the intangible asset acquired as of the closing date was 10 years. The rights to Xopenex® are included within product licensing rights, net on the Company’s condensed consolidated balance sheet as of June 30, 2015 and December 31, 2014. During the three and six month period June 30, 2015 the Company recorded approximately $0.0 million and $0.1 million, respectively, in acquisition related expenses in connection with the Xopenex acquisition.

VPI Holdings Corp. Inc.

On August 12, 2014, the Company completed its acquisition of VersaPharm, for a total purchase price of approximately $433.0 million, subject to net working capital adjustments. This purchase price was based on acquiring all outstanding equity interests of VPI Holdings Corp. (“VPI”), the parent company of VersaPharm and was equal to $440.0 million, net of various post-closing adjustments related to working capital, cash, and transaction expenses of approximately $7.0 million.

On May 9, 2014, the Company entered into an Agreement and Plan of Merger (the “VP Merger Agreement”) to acquire VPI. Upon consummation of the merger, each share of VPI’s common stock and preferred stock issued and outstanding immediately prior to such time, other than those shares held in treasury by VersaPharm, owned by Akorn, Akorn Enterprises II, Inc., or VPI or any other subsidiary of VPI (each of which were cancelled) and to which dissenters’ rights have been properly exercised, were cancelled and converted into the right to receive its per share right to the aggregate merger consideration, subject to various post-closing adjustments related to working capital, cash, transaction expenses and funded indebtedness. In addition, all stock options of VPI held immediately prior to the consummation of the merger became fully vested and were cancelled upon consummation of the merger with the right to receive payment on the terms set forth in the VP Merger Agreement.

The acquisition was approved by the Federal Trade Commission (“FTC”) on August 4, 2014 following review pursuant to provisions of Hart-Scott Rodino Act (“HSR”). In connection with the VersaPharm acquisition, the Company entered into an agreement (the “Rifampin Divestment Agreement”) with Watson, a wholly owned subsidiary of Allergan, Inc. (formerly Actavis plc), to divest certain rights and assets to the Company’s Rifampin injectable pending ANDA. Under the terms of the disposition the Company received $1.0 million for the pending product rights and recorded a gain of $0.8 million in Other non-operating income, net in the year ended December 31, 2014 related to the divestment.

VersaPharm was a developer and marketer of multi-source prescription pharmaceuticals. We believe the acquisition complements and expands our product portfolio by diversifying our offering to niche dermatology markets. VersaPharm’s product portfolio, pipeline and development capabilities were complimentary to the Hi-Tech Pharmacal Co., Inc. (“Hi-Tech”) acquisition, described below, through which we acquired manufacturing capabilities needed for many of VersaPharm’s current and pipeline products. The VersaPharm Acquisition also enhanced our new product pipeline as VersaPharm had significant R&D experience and knowledge and numerous in-process research and development (“IPR&D”) products which were under active development.

The VersaPharm Acquisition was principally funded through a $445.0 million Incremental Term Loan Facility entered into concurrent with completing the acquisition, and through available Akorn cash. For further details on the term loan financing,

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please refer to the description in Note 8 — Financing Arrangements.

During the three month periods ended June 30, 2015 and 2014, the Company recorded approximately $0.0 million and $1.0 million, respectively, in acquisition-related expenses in connection with the VersaPharm acquisition, while in the six month periods ended June 30, 2015 and 2014, the Company recorded approximately $0.4 million and $1.0 million, respectively, in acquisition-related expenses in connection with the VersaPharm 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 consolidated statement of comprehensive income in the applicable periods.

The following table sets forth the consideration paid for the VersaPharm Acquisition and the fair values of the acquired assets and assumed liabilities (in millions) as of the acquisition date adjusted in accordance with GAAP. The figures below may differ from historical financial results of VersaPharm.

	Fair Valuation
Consideration:
Amount of cash paid to VersaPharm stockholders	$	322.7
Amount of cash paid to vested VersaPharm option holders	14.2
Amounts paid to escrow accounts	10.3
Transaction expenses paid for previous owners of VersaPharm	3.4
Total consideration paid at closing	350.6
VersaPharm debt paid off through closing cash	82.4
Total cash paid at closing	$	433.0
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	$	0.1
Accounts receivable	3.1
Inventory	21.0
Other current assets	2.8
Property and equipment	1.5
Trademarks	1.0
Product licensing rights	250.8
Intangibles, other	5.2
IPR&D	212.3
Goodwill	100.0
Total assets acquired	$	597.8
Assumed current liabilities	(12.2		)
Assumed non-current liabilities	(81.8		)
Deferred tax liabilities	(153.2		)
Total liabilities assumed	$	(247.2	)
	$	350.6

Goodwill represents expected synergies resulting from the combination of the entities and other intangible assets that do not qualify for separate recognition, while IPR&D assets represent ongoing projects obtained through the acquisition. The Company does not anticipate being able to deduct any of the associated incremental value of goodwill and other intangible assets for income tax purposes, but expects to be able to deduct approximately $43.2 million of value associated with pre-existing VersaPharm goodwill and other intangible assets for income tax purposes in future periods.

During the three and six month periods ended June 30, 2015 the Company recorded net revenue of approximately $10.4

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million and $23.6 million, respectively related to sales of the VersaPharm currently marketed products subsequent to acquisition.

Weighted average remaining amortization period of intangible assets acquired other than goodwill and IPR&D through the VersaPharm acquisition as of the closing date was 11.4 years in aggregate, 11.4 years for product licensing rights, 11.0 years for other intangibles, and 3 years for trademarks.

Hi-Tech Pharmacal Co., Inc.

On April 17, 2014, the Company completed its acquisition of Hi-Tech for a total purchase price of approximately $650.0 million. This purchase price was based on acquiring all outstanding shares of Hi-Tech common stock for $43.50 per share, buying out the intrinsic value of Hi-Tech’s stock options, and paying the single-trigger separation payments to various Hi-Tech executives due upon change in control. The total consideration paid is net of Hi-Tech’s cash acquired subsequent to Hi-Tech’s payment of $44.6 million of stock options and single-trigger separation payments as of April 17, 2014.

On August 27, 2013, the Company entered into an Agreement and Plan of Merger (the “HT Merger Agreement”) to acquire Hi-Tech. Subject to the terms and conditions of the HT Merger Agreement, upon completion of the merger on April 17, 2014, each share of Hi-Tech’s common stock, par value $0.01 per share, issued and outstanding and held by non-interested parties at the time of the merger (the “Hi-Tech Shares”), was cancelled and converted into the right to receive $43.50 in cash, without interest, less any applicable withholding taxes, upon surrender of the outstanding Hi-Tech shares.

In connection with the Hi-Tech acquisition, the Company entered into an agreement (the “Divestment Agreement”) with Watson Laboratories, Inc., a wholly owned subsidiary of Allergan, Inc. (formerly Actavis plc), to divest certain rights and assets, as further discussed below.

Hi-Tech was a specialty pharmaceutical company which developed, manufactured and marketed generic and branded prescription and OTC drug products. Hi-Tech specialized in liquid and semi-solid dosage forms and produced and marketed a range of oral solutions and suspensions, topical ointments and creams, nasal sprays, otics, sterile ophthalmics and sterile ointment and gel products. Hi-Tech’s Health Care Products division was a developer and marketer of OTC products, and their ECR subsidiary marketed branded prescription products. ECR was divested during the three and six month period ended June 30, 2014.

The Hi-Tech Acquisition complemented and expanded our manufacturing capabilities and product portfolio by diversifying our offerings to our retail customers beyond ophthalmics to other niche dosage forms such as oral liquids, topical creams and ointments, nasal sprays and otics. The Hi-Tech Acquisition also enhanced our new product pipeline. Further, the Hi-Tech Acquisition added branded OTC products in the categories of cough and cold, nasal sprays and topicals to our TheraTears® brand of eye care products.

The Hi-Tech Acquisition was principally funded through a $600.0 million term loan entered into concurrent with completing the acquisition, and through Hi-Tech cash assumed through the acquisition.

During the three month periods ended June 30, 2015 and 2014, the Company recorded approximately $0.2 million and $19.7 million, respectively, in acquisition-related expenses in connection with the Hi-Tech acquisition, while in the six month periods ended June 30, 2015 and 2014, the Company recorded approximately $0.8 million and $20.0 million, respectively, in acquisition-related expenses in connection with the Hi-Tech 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 consolidated statement of comprehensive income in the applicable periods.

The following table sets forth the consideration paid for the Hi-Tech Acquisition and the fair values of the acquired assets and assumed liabilities (in millions) as of the acquisition date adjusted in accordance with GAAP. The figures below may differ from historical financial results of Hi-Tech.

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Consideration:	Fair Valuation
Amount of cash paid to Hi-Tech shareholders	$	605.0
Amount of cash paid to vested Hi-Tech option holders	40.5
Amount of cash paid to key executives under single-trigger separation payments upon change-in-control	4.1
	$	649.6

Recognized amounts of identifiable assets acquired and liabilities assumed:	Fair Valuation
Cash and cash equivalents	$	89.7
Accounts receivable	48.6
Inventory	52.4
Other current assets	34.0
Property and equipment	45.2
Product licensing rights	339.6
IPR&D	9.4
Customer Relationships	0.3
Trademarks	5.5
Goodwill	171.3
Other non-current assets	0.6
Total assets acquired	$	796.6
Assumed current liabilities	(22.6		)
Assumed non-current liabilities	(3.3		)
Deferred tax liabilities	(121.1		)
Total liabilities assumed	$	(147.0	)
	$	649.6

Goodwill represents expected synergies resulting from the combination of the entities and other intangible assets that do not qualify for separate recognition, while IPR&D assets represent ongoing in-process research and development projects obtained through the acquisition. The Company does not anticipate being able to deduct any of the associated incremental value of goodwill and other intangible assets for income tax purposes, but expects to be able to deduct approximately $18.9 million of value associated with pre-existing Hi-Tech goodwill and other intangible assets for income tax purposes in future periods.

During the three periods ended June 30, 2015 and 2014 the Company recorded net revenue of approximately $75.3 million and $40.3 million, respectively, related to the sales of the Hi-Tech currently marketed products subsequent to acquisition, while during the six month periods ended June 30, 2015 and 2014, the Company recorded net revenue of approximately $163.5 million and $40.3 million, respectively, related to sales of the Hi-Tech currently marketed products subsequent to acquisition.

Weighted average amortization period of intangible assets acquired other than goodwill and IPR&D through the Hi-Tech acquisitions as of the closing date was 15.6 years in aggregate, 15.7 years for product licensing rights, 1.0 year for customer relationships and 9 years for trademarks.

Watson Product Disposition

In connection with the Hi-Tech acquisition, Akorn entered into an agreement (the “Disposition Agreement”) with Watson to dispose of certain rights and assets related to three Hi-Tech products marketed under Abbreviated New Drug Applications

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(“ANDAs”) — Ciprofloxacin Hydrochloride Ophthalmic Solution, Levofloxacin Ophthalmic Solution and Lidocaine Hydrochloride Jelly — and one Akorn product marketed under a New Drug Application: Lidocaine/Prilocaine Topical Cream, collectively “the products.” The Disposition Agreement further included one product under development. Net revenues for the Akorn products: Lidocaine/Prilocaine Topical Cream were approximately $1.5 million and $6.8 million in the years ended December 31, 2014 and 2013, respectively. This disposition was required pursuant to a proposed consent order accepted by vote of the FTC on April 11, 2014. The closing of the disposition agreement, which was contingent upon the consummation of the Company’s acquisition of 50% or more of the voting securities of Hi-Tech, took place on April 17, 2014. Under the terms of the disposition the Company received $16.8 million for the intangible product rights, associated goodwill, and saleable inventory of the products denoted above. The Company recorded a gain of $8.5 million in Other (expen