SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014 |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 001-32360
AKORN, INC.
(Exact Name of Registrant as Specified in its Charter)
LOUISIANA
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72-0717400
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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1925 W. Field Court, Suite 300
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Lake Forest, Illinois
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60045
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(Address of Principal Executive Offices)
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(Zip Code)
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(847) 279-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically 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 þ No o
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 þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
At November 7, 2014, there were 107,830,947 shares of common stock, no par value, outstanding.
Explanatory Note
Overview
Akorn, Inc. (the Company), is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q (the Amendment) to restate and amend the Company’s previously issued, unaudited interim financial statements and related financial information as of September 30, 2014 and for the nine months ended September 30, 2014, which was originally filed with the Securities and Exchange Commission on November 10, 2014. As described below and in Note 1, the restatement adjusts the Company’s accounting for the acquisition of Hi-Tech Pharmacal, Inc (Hi-Tech).
Background
On March 17, 2015, the Company issued a press release announcing that the Audit Committee of the Company’s Board of Directors, upon the recommendation of the Company’s management, concluded that the previously issued financial statements contained in the Company’s Quarterly Reports on Form 10-Q for the periods ended June 30, 2014 and September 30, 2014 should not be relied upon because of an error in the financial statements as of and for the three and six month periods ended June 30, 2014, which then impacted the financial statements as of and for the nine month period ended September 30, 2014, and that those financial statements would be restated to make the necessary accounting adjustments.
On April 17, 2014, the Company completed its acquisition of Hi-Tech for a total purchase price of approximately $650.0 million. During the 2014 year-end audit process, an error was identified in the fair value allocation of assets acquired and liabilities assumed in connection with the acquisition of Hi-Tech, which resulted in an overstated chargeback reserve as of April 17, 2014. The error, which was identified on March 11, 2015, resulted from an overstatement of Hi-Tech’s chargeback reserve in connection with applying the acquisition method of accounting at the closing of the Hi-Tech acquisition.
The overstatement in the chargeback reserve was caused by a manual error made in preparing the data whereby there was a duplication of inventory units held by one customer utilized in the calculation of the reserve amount for Hi-Tech products at the acquisition date. The duplication resulted in an overstatement of chargeback reserves by approximately $8.9 million for the opening balance sheet of Hi-Tech as of April 17, 2014. The chargeback reserve at the end of the quarter ended June 30, 2014 was then calculated correctly, resulting in the earlier overstated reserve amount being included in revenue during the quarter ended June 30, 2014. The correction of the error in the quarter ended June 30, 2014 resulted in a reduction of previously reported revenue by $8.9 million, a reduction of previously reported pre-tax income by $8.9 million and a reduction of previously reported net income, goodwill and retained earnings by $5.6 million, for the Company’s three and six month periods ended June 30, 2014.
The error was limited to the Company’s financial results for the three and six months ended June 30, 2014, but the error did impact the Company’s previously filed results for the nine months ended September 30, 2014 (which were filed in connection with the Company’s Form 10-Q for the quarter ended September 30, 2014) because the second quarter results were included within that period. The impact of this error for the restated nine month period ended September 30, 2014 is to reduce basic and diluted net income per share by approximately $0.06 and $0.05 per share, respectively.
Impact on Internal Control over Financial Reporting
Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework (1992), our management concluded that, as of December 31, 2014, our internal control over financial reporting was not effective because of the identification of an additional material weaknesses described as follows:
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We did not have an adequate process or appropriate controls in place to prevent or detect material errors in the financial statements of acquired subsidiaries. As a result, errors were identified primarily related to gross to net revenue adjustments, expenses, inventory and accrued liabilities in the financial statements at the acquisition date and at year-end. One of the aforementioned errors related to the chargeback reserve of Hi-Tech recognized at the acquisition date and required the restatement of our condensed consolidated financial statements for the quarter and six-months ended June 30, 2014 and the nine months ended September 30, 2014, as disclosed in our Form 8-K dated March 17, 2015.
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Effects of Restatement on Previously Filed September 30, 2014 Form 10-Q
The tables below present the effect of the financial statement adjustments related to the restatement discussed above of the Company’s previously reported financial statements as of and for the nine month period ended September 30, 2014.
The effect of the restatement on the previously filed condensed consolidated balance sheet as of September 30, 2014 is as follows, in thousands:
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As Reported
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Adjustments
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As Restated
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Prepaid expenses and other current assets
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$ |
33,078 |
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$ |
(3 |
) |
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$ |
33,075 |
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TOTAL CURRENT ASSETS
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494,098 |
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(3 |
) |
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494,095 |
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Goodwill
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290,648 |
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(5,568 |
) |
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285,080 |
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TOTAL OTHER LONG-TERM ASSETS
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1,243,363 |
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(5,568 |
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1,237,795 |
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TOTAL ASSETS
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$ |
1,876,833 |
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$ |
(5,571 |
) |
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$ |
1,871,262 |
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Retained earnings
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22,051 |
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(5,571 |
) |
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16,480 |
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TOTAL SHAREHOLDERS’ EQUITY
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320,322 |
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(5,571 |
) |
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314,751 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ |
1,876,833 |
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$ |
(5,571 |
) |
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$ |
1,871,262 |
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The effect of the restatement on the previously filed condensed consolidated income statement for the nine months ended September 30, 2014 is as follows, in thousands except per share amounts:
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As Reported
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Adjustments
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As Restated
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Revenues
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$ |
374,103 |
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$ |
(8,853 |
) |
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$ |
365,250 |
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GROSS PROFIT
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178,061 |
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(8,853 |
) |
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169,208 |
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OPERATING INCOME
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33,661 |
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(8,853 |
) |
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24,808 |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
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11,465 |
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(8,853 |
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2,612 |
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Income tax provision
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4,278 |
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(3,282 |
) |
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996 |
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INCOME FROM CONTINUING OPERATIONS
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$ |
7,187 |
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$ |
(5,571 |
) |
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$ |
1,616 |
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NET INCOME
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$ |
6,684 |
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$ |
(5,571 |
) |
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$ |
1,113 |
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NET INCOME PER SHARE:
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Income from continuing operations, basic
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$ |
0.07 |
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$ |
(0.05 |
) |
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$ |
0.02 |
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NET INCOME, BASIC
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$ |
0.07 |
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$ |
(0.06 |
) |
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$ |
0.01 |
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Income from continuing operations, diluted
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$ |
0.06 |
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$ |
(0.05 |
) |
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$ |
0.01 |
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NET INCOME, DILUTED
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$ |
0.06 |
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$ |
(0.05 |
) |
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$ |
0.01 |
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COMPREHENSIVE INCOME:
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Consolidated net income
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$ |
6,684 |
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$ |
(5,571 |
) |
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$ |
1,113 |
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COMPREHENSIVE INCOME
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$ |
7,840 |
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$ |
(5,571 |
) |
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$ |
2,269 |
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The effect of the restatement on the previously filed condensed consolidated statement of cash flows for the nine months ended September 30, 2014 is as follows, in thousands:
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As Reported
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Adjustments
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As Restated
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Consolidated net income
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$ |
6,684 |
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$ |
(5,571 |
) |
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$ |
1,113 |
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Changes in operating assets and liabilities:
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Trade accounts receivable
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(24,193 |
) |
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8,853 |
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(15,340 |
) |
Prepaid expenses and other current assets
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(11,209 |
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(3,282 |
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(14,491 |
) |
Taken together, these adjustments result in no impact on the Company’s net cash provided by operating activities for the nine months ended September 30, 2014 or the Company’s cash and cash equivalents balance as of September 30, 2014.
Consistent with the information above, the Company has revised the following items in this Form 10-Q/A:
Part I
Item 1 – Financial Statements (Unaudited) including notes 1,4,7,9,10,11,13 and 14 to the condensed consolidated financial statements
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4 – Controls and Procedures
Additionally, in this Amendment, the Company is including currently dated certifications from the Company’s Principal Executive officer and Principal Financial officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 in Exhibits 31.1 and 31.2 and currently dated certification from the Company’s Principal Executive officer and Principal Financial officer as required by Section 906 of the Sarbanes-Oxley Act of 2002 in exhibit 32.1 and 32.2 and our financial statements formatted in Extensible Business Reporting Language (XBRL) in exhibit 101.
Except to the extent described above and set forth herein, the financial statements and other disclosures in the Form 10-Q initially filed on November 10, 2014 (the initial form 10-Q) are unchanged and this amendment does not reflect any events that have occurred after the initial Form 10-Q was filed. Accordingly, this amendment should be read in conjunction with the Company’s initial Form 10-Q and the Company’s subsequent filings with the United States Securities and Exchange Commission.
In light of the restatement, readers should not rely on the Company’s previously filed financial statements as of and for the three and six month period ended June 30, 2014 and as of and for the nine month period ended September 30, 2014.
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Page
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PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements (Unaudited)
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PART II. OTHER INFORMATION
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SIGNATURES
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EXHIBIT INDEX |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AKORN, INC.
(In Thousands, Except Per Share Data)
(Unaudited)
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September 30,
2014
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December 31,
2013
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ASSETS:
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CURRENT ASSETS:
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Cash and cash equivalents
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$ |
131,466 |
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$ |
34,178 |
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Trade accounts receivable, net
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145,212
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64,998 |
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Inventories, net
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132,830 |
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55,982 |
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Deferred taxes, current
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40,708 |
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7,945 |
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Available for sale security, current
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10,804 |
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|
— |
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Prepaid expenses and other current assets
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|
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5,753 |
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TOTAL CURRENT ASSETS
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168,856 |
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PROPERTY, PLANT AND EQUIPMENT, NET
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139,372 |
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82,108 |
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OTHER LONG-TERM ASSETS:
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Goodwill
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29,831 |
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Product licensing rights, net
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670,757 |
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|
115,900 |
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Other intangible assets, net
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254,685 |
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|
14,605 |
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Deferred financing costs
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22,942 |
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5,676 |
|
Deferred taxes, non-current
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|
1,746
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|
1,643 |
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Long-term investments
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|
208
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|
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|
10,006 |
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Other
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2,377 |
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|
3,180 |
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TOTAL OTHER LONG-TERM ASSETS
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180,841 |
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TOTAL ASSETS
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$ |
|
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$ |
431,805 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY:
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|
|
|
|
|
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CURRENT LIABILITIES:
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|
|
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Trade accounts payable
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$ |
|
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$ |
22,999 |
|
Purchase consideration payable
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|
20,728 |
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|
14,728 |
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Income taxes payable
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|
— |
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|
1,459 |
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Accrued royalties
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|
14,533
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|
6,004 |
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Accrued compensation
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|
12,625
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|
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|
7,692 |
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Current maturities of long-term debt
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|
10,494 |
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|
|
— |
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Accrued expenses and other liabilities
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8,363 |
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TOTAL CURRENT LIABILITIES
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61,245 |
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LONG-TERM LIABILITIES:
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Long-term debt
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1,146,585 |
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|
108,750 |
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Deferred tax liability
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|
|
|
|
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|
— |
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Lease incentive obligation and other long-term liabilities
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1,946 |
|
|
|
1,630 |
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TOTAL LONG-TERM LIABILITIES
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|
|
|
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|
110,380 |
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TOTAL LIABILITIES
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|
|
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171,625 |
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SHAREHOLDERS’ EQUITY:
|
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|
|
|
|
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Common stock, no par value – 150,000,000 shares authorized; 107,330,516 and 96,569,186 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
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309,482
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239,235 |
|
Warrants to acquire common stock
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|
— |
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|
17,946 |
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Retained earnings
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15,366 |
|
Accumulated other comprehensive loss
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(11,211
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) |
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(12,367 |
) |
TOTAL SHAREHOLDERS’ EQUITY
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|
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|
260,180 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ |
|
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$ |
431,805 |
|
See notes to condensed consolidated financial statements.
AKORN, INC.
(In Thousands, Except Per Share Data)
(Unaudited)
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THREE MONTHS ENDED
SEPTEMBER 30,
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NINE MONTHS ENDED
SEPTEMBER 30,
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2014
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2013
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2014
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2013
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Revenues
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$ |
132,732 |
|
|
$ |
81,892 |
|
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$ |
365,250
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$ |
232,758 |
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Cost of sales (exclusive of amortization of intangibles included below)
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80,998 |
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|
38,195 |
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|
196,042 |
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|
107,824 |
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GROSS PROFIT
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|
51,734 |
|
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|
43,697 |
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|
169,208
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|
|
|
124,934 |
|
Selling, general and administrative expenses
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|
27,779 |
|
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|
13,645 |
|
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|
66,341 |
|
|
|
39,093 |
|
Acquisition-related costs
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|
8,062 |
|
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|
1,459 |
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|
29,289 |
|
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|
1,978 |
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Research and development expenses
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|
7,918 |
|
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|
4,837 |
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|
21,389 |
|
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|
15,857 |
|
Amortization of intangible assets
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|
14,017 |
|
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|
1,568 |
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|
27,381 |
|
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|
4,978 |
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TOTAL OPERATING EXPENSES
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|
57,776 |
|
|
|
21,509 |
|
|
|
144,400 |
|
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|
61,906 |
|
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OPERATING INCOME (LOSS)
|
|
|
(6,042 |
) |
|
|
22,188 |
|
|
|
24,808
|
|
|
|
63,028 |
|
Amortization of deferred financing costs
|
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|
(2,509 |
) |
|
|
(211 |
) |
|
|
(11,099 |
) |
|
|
(622 |
) |
Interest expense, net
|
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|
(11,806 |
) |
|
|
(2,155 |
) |
|
|
(21,884 |
) |
|
|
(6,387 |
) |
Gain from product divestiture
|
|
|
839 |
|
|
|
— |
|
|
|
9,807 |
|
|
|
— |
|
Other income, net
|
|
|
979 |
|
|
|
160 |
|
|
|
980 |
|
|
|
202 |
|
|
|
|
|
|
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|
|
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(18,539 |
) |
|
|
19,982 |
|
|
|
2,612
|
|
|
|
56,221 |
|
Income tax provision (benefit)
|
|
|
(6,889
|
) |
|
|
7,777 |
|
|
|
996
|
|
|
|
20,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
$ |
(11,650
|
) |
|
$ |
12,205 |
|
|
$ |
1,616
|
|
|
$ |
35,684 |
|
(Loss) from discontinued operations, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
(503 |
) |
|
|
— |
|
NET INCOME (LOSS)
|
|
$ |
(11,650
|
) |
|
$ |
12,205 |
|
|
$ |
1,113
|
|
|
$ |
35,684 |
|
NET INCOME (LOSS) PER SHARE:
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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Income (loss) from continuing operations, basic
|
|
$ |
(0.11 |
) |
|
$ |
0.13 |
|
|
$ |
0.02
|
|
|
$ |
0.37 |
|
(Loss) from discontinued operations, basic
|
|
|
— |
|
|
|
— |
|
|
|
|
) |
|
|
— |
|
NET INCOME (LOSS), BASIC
|
|
$ |
(0.11 |
) |
|
$ |
0.13 |
|
|
$ |
|
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations, diluted
|
|
|
(0.11 |
) |
|
$ |
0.11 |
|
|
$ |
0.01
|
|
|
$ |
0.32 |
|
(Loss) from discontinued operations, diluted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
NET INCOME (LOSS), DILUTED
|
|
|
(0.11 |
) |
|
$ |
0.11 |
|
|
$ |
0.01
|
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
105,438 |
|
|
|
96,238 |
|
|
|
101,784 |
|
|
|
96,096 |
|
DILUTED
|
|
|
105,438
|
|
|
|
113,717 |
|
|
|
118,535
|
|
|
|
112,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
$ |
(11,650
|
) |
|
$ |
12,205 |
|
|
$ |
1,113
|
|
|
$ |
35,684 |
|
Unrealized holding gain on available-for-sale securities, net of tax
|
|
|
1,070 |
|
|
|
— |
|
|
|
1,070 |
|
|
|
— |
|
Foreign currency translation (loss) income, net of tax
|
|
|
(1,466 |
) |
|
|
(2,603 |
) |
|
|
86 |
|
|
|
(7,224 |
) |
COMPREHENSIVE INCOME (LOSS)
|
|
$ |
(12,046 |
) |
|
$ |
9,602 |
|
|
$ |
2,269
|
|
|
$ |
28,460 |
|
See notes to condensed consolidated financial statements.
AKORN, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 (As Restated)
(In Thousands)
(Unaudited)
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
BALANCES AT DECEMBER 31, 2013
|
|
|
96,569 |
|
|
$ |
239,235 |
|
|
$ |
17,946 |
|
|
$ |
15,366 |
|
|
$ |
(12,367 |
) |
|
$ |
260,180 |
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Exercise of stock options
|
|
|
3,480 |
|
|
|
6,038 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,038 |
|
Employee stock purchase plan issuances
|
|
|
73 |
|
|
|
829 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
829 |
|
Compensation and share issuances related to restricted stock awards
|
|
|
16 |
|
|
|
438 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
438 |
|
Stock-based compensation expense
|
|
|
— |
|
|
|
4,555 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,555 |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
86 |
|
|
|
86 |
|
Excess tax benefit – stock compensation
|
|
|
— |
|
|
|
32,270 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,270 |
|
Unrealized holding gain on available-for-sale securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,070
|
|
|
|
1,070
|
|
Conversion of warrants
|
|
|
7,192 |
|
|
|
26,117 |
|
|
|
(17,946 |
) |
|
|
— |
|
|
|
— |
|
|
|
8,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT SEPTEMBER 30, 2014
|
|
|
107,331
|
|
|
|
309,482
|
|
|
|
— |
|
|
|
|
|
|
|
(11,211
|
) |
|
|
|
|
See notes to condensed consolidated financial statements.
AKORN, INC.
(In Thousands)
(Unaudited)
|
|
NINE MONTHS ENDED
SEPTEMBER 30,
|
|
|
|
2014
|
|
|
2013
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Consolidated net income
|
|
$ |
|
|
|
$ |
35,684 |
|
Loss from discontinued operations
|
|
|
503
|
|
|
|
— |
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
37,773
|
|
|
|
9,925 |
|
Amortization of debt financing costs
|
|
|
11,099
|
|
|
|
622 |
|
Amortization of favorable (unfavorable) contracts
|
|
|
53
|
|
|
|
(475 |
) |
Amortization of inventory step-up
|
|
|
9,844
|
|
|
|
— |
|
Non-cash stock compensation expense
|
|
|
4,994
|
|
|
|
5,674 |
|
Non-cash interest expense
|
|
|
3,954
|
|
|
|
3,426 |
|
Gain from product divestiture
|
|
|
(9,807
|
) |
|
|
— |
|
Deferred income taxes, net
|
|
|
|
|
|
|
1,829 |
|
Excess tax benefit from stock compensation
|
|
|
(32,268
|
) |
|
|
(1,192 |
) |
Non-cash settlement of product warranty liability
|
|
|
— |
|
|
|
(1,299 |
) |
Equity in earnings of unconsolidated joint venture
|
|
|
— |
|
|
|
(76 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(15,340
|
) |
|
|
(10,858 |
) |
Inventories, net
|
|
|
|
) |
|
|
(4,575 |
) |
Prepaid expenses and other current assets
|
|
|
|
) |
|
|
867 |
|
Trade accounts payable
|
|
|
|
|
|
|
1,444 |
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
1,414 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
42,410 |
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments for acquisitions and equity investments, net of cash acquired
|
|
|
(929,771
|
) |
|
|
(513 |
) |
Proceeds from disposal of assets
|
|
|
58,750
|
|
|
|
— |
|
Payments for other intangible assets
|
|
|
(8,499
|
) |
|
|
— |
|
Purchases of property, plant and equipment
|
|
|
(19,393
|
) |
|
|
(7,936 |
) |
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(898,913
|
) |
|
|
(8,449 |
) |
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds under stock option and stock purchase plans
|
|
|
6,867
|
|
|
|
2,439 |
|
Debt financing costs
|
|
|
(28,462
|
) |
|
|
(2,557 |
) |
Proceeds under Borrowings
|
|
|
1,045,000
|
|
|
|
— |
|
Proceeds from warrant exercises
|
|
|
8,171
|
|
|
|
— |
|
Debt repayment
|
|
|
(81,813
|
) |
|
|
— |
|
Excess tax benefit from stock compensation
|
|
|
32,268
|
|
|
|
1,192 |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
|
|
|
|
1,074 |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(99
|
) |
|
|
(218 |
) |
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
97,288
|
|
|
|
34,817 |
|
Cash and cash equivalents at beginning of period
|
|
|
34,178
|
|
|
|
40,781 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
131,466
|
|
|
$ |
75,598
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Amount paid for interest
|
|
$ |
8,944
|
|
|
$ |
2,178 |
|
Amount paid for income taxes, net of refunds received
|
|
$ |
6,226 |
|
|
$ |
18,690 |
|
See notes to condensed consolidated financial statements.
AKORN, INC.
(UNAUDITED)
NOTE 1 — BUSINESS AND BASIS OF PRESENTATION
Business: Akorn, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) through its Prescription Pharmaceuticals reportable segment manufactures and markets a full line of diagnostic, therapeutic and disease specific ophthalmic pharmaceuticals, antidotes, anti-allergics, anti-infectives, vaccines, and controlled substances for pain management and anesthesia as well as niche hospital drugs of various dosage forms and injectable pharmaceuticals. In addition, through its Consumer Health reportable segment, the Company manufactures and markets a line of over-the-counter (“OTC”) ophthalmic products for the treatment of dry eye under the TheraTears® brand name, as well as a portfolio of private label OTC ophthalmic products and other consumer health products. As of September 30, 2014, the Company operated pharmaceutical manufacturing plants in the U.S. at Decatur, Illinois, Somerset, New Jersey, and Amityville, New York, and internationally at Paonta Sahib, Himachal Pradesh, India, as well as a central distribution warehouse in Gurnee, Illinois, R&D centers in Vernon Hills, Illinois and Warminster, Pennsylvania, a principal corporate office in Lake Forest, Illinois, and other corporate offices in Marietta, Georgia, Ann Arbor, Michigan, Amityville, New York, and Gurgaon, India. Customers of the Company’s products include group purchasing organizations and their member hospitals, chain drug stores, wholesalers, distributors, physicians, ophthalmologists, optometrists, alternate site providers, and other pharmaceutical companies.
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 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 nine month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2013, included in the Company’s Annual Report on Form 10-K filed March 14, 2014.
The Company has considered the accounting and disclosure of events occurring after the balance sheet date through the original filing date of this Form 10-Q.
Restatement
Akorn, Inc. (the Company), is filing this Amendment No. 1 to its Quarterly Report on form 10-Q (the Amendment) to restate and amend the Company’s previously issued and unaudited interim financial statements and related financial information as of September 30, 2014 and for the nine months ended September 30, 2014, which was originally filed with the Securities and Exchange Commission on November 10, 2014. As described below, the restatement adjusts the Company’s accounting for the acquisition of Hi-Tech Pharmacal, Inc (Hi-Tech).
Background
On March 17, 2015, the Company issued a press release announcing that the Audit Committee of the Company’s Board of Directors, upon the recommendation of management, concluded that the previously issued financial statements contained in the Company’s Quarterly Reports on Form 10-Q for the periods ended June 30, 2014 and September 30, 2014 should not be relied upon because of an error in the financial statements as of and for the three and six month periods ended June 30, 2014 and as of and for the nine month period ended September 30, 2014, and that those financial statements would be restated to make the necessary accounting adjustments.
On April 17, 2014, the Company completed its acquisition of Hi-Tech for a total purchase price of approximately $650.0 million. During the 2014 year-end audit process, an error was identified in the fair value allocation of assets acquired and liabilities assumed in connection with the acquisition of Hi-Tech, which resulted in an overstated chargeback reserve as of April 17, 2014. The error, which was identified on March 11, 2015, resulted from an overstatement of Hi-Tech’s chargeback reserve in connection with applying the acquisition method of accounting at the closing of the Hi-Tech acquisition.
The overstatement in the chargeback reserve was caused by a manual error made in preparing the data whereby there was a duplication of inventory units held by one customer utilized in the calculation of the reserve amount for Hi-Tech products at the acquisition date. The duplication resulted in an overstatement of chargeback reserves by approximately $8.9 million for the opening balance sheet of Hi-Tech as of April 17, 2014. The chargeback reserve at the end of the quarter ended June 30, 2014 was then calculated correctly, resulting in the earlier overstated reserve amount being included in revenue during the quarter ended June 30, 2014. The correction of the error in the quarter ended June 30, 2014 resulted in a reduction of previously reported revenue by $8.9 million, a reduction of previously reported pre-tax income by $8.9 million and a reduction of previously reported net income, goodwill and retained earnings by $5.6 million, for the Company’s three and six month periods ended June 30, 2014.
The error was limited to the Company’s financial results for the three and six months ended June 30, 2014, but the error did impact the Company’s previously filed results for the nine months ended September 30, 2014 (which were filed in connection with the Company’s Form 10-Q for the quarter ended September 30, 2014) because the second quarter results were included within that period. The impact of this error for the restated nine month period ended September 30, 2014 is to reduce basic and diluted net income per share by approximately $0.06 and $0.05 per share, respectively.
Effects of Restatement on Previously Filed September 30, 2014 Form 10-Q
The tables below present the effect of the financial statement adjustments related to the restatement discussed above of the Company’s previously reported financial statements as of and for the nine month period ended September 30, 2014.
The effect of the restatement on the previously filed condensed consolidated balance sheet as of September 30, 2014 is as follows, in thousands:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Prepaid expenses and other current assets
|
|
$ |
33,078 |
|
|
$ |
(3 |
) |
|
$ |
33,075 |
|
TOTAL CURRENT ASSETS
|
|
|
494,098 |
|
|
|
(3 |
) |
|
|
494,095 |
|
Goodwill
|
|
|
290,648 |
|
|
|
(5,568 |
) |
|
|
285,080 |
|
TOTAL OTHER LONG-TERM ASSETS
|
|
|
1,243,363 |
|
|
|
(5,568 |
) |
|
|
1,237,795 |
|
TOTAL ASSETS
|
|
$ |
1,876,833 |
|
|
$ |
(5,571 |
) |
|
$ |
1,871,262 |
|
Retained earnings
|
|
|
22,051 |
|
|
|
(5,571 |
) |
|
|
16,480 |
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
320,322 |
|
|
|
(5,571 |
) |
|
|
314,751 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
1,876,833 |
|
|
$ |
(5,571 |
) |
|
$ |
1,871,262 |
|
The effect of the restatement on the previously filed condensed consolidated income statement for the nine months ended September 30, 2014 is as follows, in thousands except per share amounts:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Revenues
|
|
$ |
374,103 |
|
|
$ |
(8,853 |
) |
|
$ |
365,250 |
|
GROSS PROFIT
|
|
|
178,061 |
|
|
|
(8,853 |
) |
|
|
169,208 |
|
OPERATING INCOME
|
|
|
33,661 |
|
|
|
(8,853 |
) |
|
|
24,808 |
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
11,465 |
|
|
|
(8,853 |
) |
|
|
2,612 |
|
Income tax provision
|
|
|
4,278 |
|
|
|
(3,282 |
) |
|
|
996 |
|
INCOME FROM CONTINUING OPERATIONS
|
|
$ |
7,187 |
|
|
$ |
(5,571 |
) |
|
$ |
1,616 |
|
NET INCOME
|
|
$ |
6,684 |
|
|
$ |
(5,571 |
) |
|
$ |
1,113 |
|
NET INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, basic
|
|
$ |
0.07 |
|
|
$ |
(0.05 |
) |
|
$ |
0.02 |
|
NET INCOME, BASIC
|
|
$ |
0.07 |
|
|
$ |
(0.06 |
) |
|
$ |
0.01 |
|
Income from continuing operations, diluted
|
|
$ |
0.06 |
|
|
$ |
(0.05 |
) |
|
$ |
0.01 |
|
NET INCOME, DILUTED
|
|
$ |
0.06 |
|
|
$ |
(0.05 |
) |
|
$ |
0.01 |
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$ |
6,684 |
|
|
$ |
(5,571 |
) |
|
$ |
1,113 |
|
COMPREHENSIVE INCOME
|
|
$ |
7,840 |
|
|
$ |
(5,571 |
) |
|
$ |
2,269 |
|
The effect of the restatement on the previously filed condensed consolidated statement of cash flows for the nine months ended September 30, 2014 is as follows, in thousands:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Consolidated net income
|
|
$ |
6,684 |
|
|
$ |
(5,571 |
) |
|
$ |
1,113 |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(24,193 |
) |
|
|
8,853 |
|
|
|
(15,340 |
) |
Prepaid expenses and other current assets
|
|
|
(11,209 |
) |
|
|
(3,282 |
) |
|
|
(14,491 |
) |
Taken together, these adjustments result in no impact on the Company’s net cash provided by operating activities for the nine months ended September 30, 2014 or the Company’s cash and cash equivalents balance as of September 30, 2014.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The accompanying condensed consolidated financial statements include the accounts of the Company. All inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Significant estimates and assumptions for the Company relate to the allowances for chargebacks, rebates, product returns, coupons, promotions and doubtful accounts, as well as the reserve for slow-moving and obsolete inventories, the carrying value and lives of intangible assets, the useful lives of fixed assets, the carrying value of deferred income tax assets and liabilities, the assumptions underlying share-based compensation, accrued but unreported employee benefit costs and assumptions underlying the accounting for business combinations.
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.
Chargebacks and Rebates: The Company enters into contractual agreements with certain third parties such as hospitals, group-purchasing and managed care organizations to sell certain products at predetermined prices. 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. The Company assesses the reasonableness of its chargeback allowance by applying the product chargeback percentage based on historical activity to the quantities of inventory on hand at the wholesaler per the 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 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.
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 end-user 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.
Advertising and Promotional Allowances to Customers: The Company routinely sells its consumer health products to major retail drug chains. From time to time, the Company may arrange for these retailers to run in-store promotional sales of the Company’s products. The Company reserves an estimate of the dollar amount owed back to the retailer, recording this amount as a reduction to revenue at the later of the date on which the revenue is recognized or the date the sales incentive is offered. When the actual invoice for the sales promotion is received from the retailer, the Company adjusts its estimate accordingly. Advertising and promotional expenses paid to customers are expensed as incurred in accordance with ASC 605-50, Customer Payments and Incentives.
Inventories: Inventories are stated at the lower of cost (average cost method) or market (see Note 5 — “Inventories”). The Company maintains an allowance for slow-moving and obsolete inventory as well as inventory where the cost is in excess of its net realizable value (“NRV”). For finished goods inventory, the Company estimates the amount of inventory that may not be sold prior to its expiration or is slow moving based upon 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, ranging from one (1) year to thirty (30) 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.
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, 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 Topic 820, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC Topic 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 Topic 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 are considered Level 1 assets.
|
|
-
|
Level 2—Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The market value of the Company’s forward contracts to hedge against changes in currency translation rates between U.S. dollars and Indian rupees is a Level 2 asset.
|
|
-
|
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 additional consideration payable related to the Company’s acquisition of three branded, injectable drug products from the U.S. subsidiary of H. Lundbeck A/S (the “Lundbeck Acquisition”) on December 22, 2011 is a Level 3 liability, as is the additional consideration payable to Santen Pharmaceutical Co. Ltd. (“Santen”) in relation to the Company’s acquisition of the U.S. New Drug Application (“NDA”) rights to Betimol® on January 2, 2014, and the fair valuation of the available for sale investment held in shares of Nicox S.A is a Level 3 asset.
|
The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (amounts in thousands):
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
131,466 |
|
|
$ |
131,466
|
|
|
$ |
— |
|
|
$ |
— |
|
Available-for-sale securities
|
|
|
12,458 |
|
|
|
— |
|
|
|
— |
|
|
|
12,458 |
|
Foreign currency forward contracts
|
|
|
279 |
|
|
|
— |
|
|
|
279 |
|
|
|
— |
|
Total assets
|
|
$ |
144,203
|
|
|
$ |
131,466
|
|
|
$ |
279 |
|
|
$ |
12,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase consideration payable
|
|
$ |
20,860 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20,860 |
|
Total liabilities
|
|
$ |
20,860 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20,860 |
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
34,178 |
|
|
$ |
34,178 |
|
|
$ |
— |
|
|
$ |
— |
|
Foreign currency forward contracts
|
|
|
208 |
|
|
|
— |
|
|
|
208 |
|
|
|
— |
|
Total assets
|
|
$ |
34,386 |
|
|
$ |
34,178 |
|
|
$ |
208 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase consideration payable
|
|
$ |
14,728 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
14,728 |
|
Total liabilities
|
|
$ |
14,728 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
14,728 |
|
The carrying amount of the purchase consideration payable was initially determined based on the terms of the underlying contracts and the Company’s subjective evaluation of the likelihood of the additional purchase consideration becoming payable. The purchase consideration payable is principally related to the Company’s obligation to pay additional consideration related to the acquisition of selected assets from H. Lundbeck A/S (“Lundbeck”) on December 22, 2011. The underlying obligation was long-term in nature, and therefore was discounted to present value based on an assumed discount rate. The additional consideration of $15.0 million, contingently payable to Lundbeck on December 22, 2014, was initially discounted to $11.3 million based on a discount rate of 10.0%, and subsequently adjusted in final acquisition accounting to $11.6 million based on applying a 9.0% discount rate. The Company performed evaluations of the fair value of this liability at September 30, 2014 and December 31, 2013 based on utilizing significant unobservable inputs to derive discount rates of 3.06% and 1.85%, respectively. As of September 30, 2014, the Company determined the fair value of this liability to be $14.9 million. The increase in fair value of approximately $0.2 million from December 31, 2013 to September 30, 2014 was recorded as non-cash interest expense within the Company’s condensed consolidated statement of comprehensive income for the nine months ended September 30, 2014.
The fair value of the contingent consideration payable to Lundbeck is based upon the likelihood of achieving the underlying revenue targets and a derived cost of debt based on the remaining term. The Company initially determined that there was a 100% likelihood of the purchase consideration ultimately becoming payable, and reaffirmed this determination as of September 30, 2014 and December 31, 2013. Should subjective and objective evidence lead the Company to change this assessment, an adjustment to the carrying value of the liability would be recorded as “other income” in the Company’s condensed consolidated statements of comprehensive income.
As of September 30, 2014 and December 31, 2013, the purchase consideration payable to Lundbeck was classified as a current liability on the Company’s condensed consolidated balance sheets as of those dates, since the additional consideration of $15.0 million is due to be paid on December 22, 2014.
The carrying amount at September 30, 2014 of purchase consideration payable also includes estimated consideration due to Santen related to the Company’s acquisition of U.S. NDA rights to Betimol® on January 2, 2014. The liability was initially discounted based on the Company’s assumed discount rate and revalued at September 30, 2014 using this same discount rate. The Company identified no events that would cause its calculated assumed discount rate to change between the acquisition date and September 30, 2014. The additional consideration contingently payable to Santen on January 2, 2015, was initially estimated at $4.5 million discounted to $4.0 million based on a discount rate of 12.6%. The Company performed evaluations of the fair value of this liability at September 30, 2014 based on utilizing significant unobservable inputs and determined the fair value of this liability to be $4.6 million, discounted to $4.5 million. The increase in fair value during the nine months ended September 30, 2014 of approximately $0.5 million has been recorded as non-cash interest expense within the Company’s condensed consolidated statement of comprehensive income for the nine months ended September 30, 2014. The change in fair value of the additional consideration is sensitive to the passage of time and to changes in observable and unobservable inputs, such as the Company’s calculated discount rate.
The Company entered into three non-deliverable forward contracts in October 2013 to protect against unfavorable trends with regard to currency translation rates between U.S. dollars (“USD”) and Indian rupees (“INR”) for planned capital expenditures at Akorn India Private Limited (“AIPL”), of which two of the forward contracts matured and were redeemed during the nine months ended September 30, 2014. The remaining forward contract was based on current and future anticipated investment of USD $3.3 million on September 30, 2014 in AIPL, the Company’s subsidiary in India. This forward contract includes projected currency translation rates between INR and USD. Any difference between the actual and projected foreign currency translations rates on the respective settlement dates will result in payment from the counterparty to the Company, or vice versa, as the case may be. As of September 30, 2014 and December 31, 2013, the Company was provided with reports of the fair market value of the one (1) and three (3) forward contracts, respectively from the counterparty. Due to continued strengthening of the Indian rupee against the U.S. dollar, the contracts had positive fair values to the Company of $0.3 million and $0.2 million as of September 30, 2014 and December 31, 2013, respectively. The Company recorded the $0.1 million gain in fair value during the nine months ended September 30, 2014 as “other income” in its consolidated statements of comprehensive income and has included the asset value within “prepaid expenses and other current assets” in its condensed consolidated balance sheets.
As of September 30, 2014, the Company was carrying available for sale investments in shares of Nicox S.A. valued at $12.5 million discounted to reflect certain lockup provisions preventing immediate conversion of underlying shares received for the Company’s investment in an available for sale security. The fair value of the cost basis investments is estimated using observable and unobservable inputs to discount for lack of marketability. (see Note 11 – Business Combinations, Dispositions and Other Strategic Investments)
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.
Discontinued Operations: During the nine month period ended September 30, 2014 and subsequent to the Hi-Tech Pharmacal Co. Inc. (“Hi-Tech”) acquisition the Company divested the ECR Pharmaceuticals subsidiary (see Note 11 – Business Combinations, Dispositions and Other Strategic Investments). 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 Topic 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.” As the ECR Pharmaceuticals subsidiary had not previously been reported within the condensed and consolidated balance sheets as of December 31, 2013 no reclassification of amounts previously reported in the condensed consolidated balance sheets have been made. Unless noted otherwise, discussion in these notes to the financial statements pertain to our continuing operations.
NOTE 3 — 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, if necessary, if actual forfeitures differ from initial estimates.
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 shares, 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 following table sets forth the components of the Company’s stock-based compensation expense for the three and nine month periods ended September 30, 2014 and 2013 (in thousands):
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Stock options and employee stock purchase plan
|
|
$ |
1,380 |
|
|
$ |
1,326 |
|
|
$ |
4,555 |
|
|
$ |
5,156 |
|
Restricted stock awards
|
|
|
285 |
|
|
|
104 |
|
|
|
438 |
|
|
|
518 |
|
Total stock-based compensation expense
|
|
$ |
1,665 |
|
|
$ |
1,430 |
|
|
$ |
4,993 |
|
|
$ |
5,674 |
|
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 nine month periods ended September 30, 2014, and 2013, respectively along with the weighted-average grant date fair values, are set forth in the table below.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Expected volatility
|
|
|
70 |
% |
|
|
N/A |
|
|
|
58 |
% |
|
|
59 |
% |
Expected life (in years)
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
4.2 |
|
|
|
4.0 |
|
Risk-free interest rate
|
|
|
2.16 |
% |
|
|
N/A |
|
|
|
1.88 |
% |
|
|
0.74 |
% |
Dividend yield
|
|
|
— |
% |
|
|
N/A |
|
|
|
— |
% |
|
|
— |
% |
Fair value per stock option
|
|
$ |
18.34 |
|
|
|
N/A |
|
|
$ |
12.54 |
|
|
$ |
6.77 |
|
Forfeiture rate
|
|
|
8 |
% |
|
|
N/A |
|
|
|
8 |
% |
|
|
8 |
% |
The table below sets forth a summary of activity within the 2014 and 2003 Plans for the nine months ended September 30, 2014:
|
|
Number of
Options
(in thousands)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at December 31, 2013
|
|
|
9,228
|
|
|
$
|
4.45
|
|
|
|
1.61
|
|
|
$
|
186,169
|
|
Granted
|
|
|
1,295
|
|
|
|
26.92
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,481)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(43)
|
|
|
|
19.66
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2014
|
|
|
6,999
|
|
|
$
|
9.86
|
|
|
|
3.02
|
|
|
$
|
184,869
|
|
Exercisable at September 30, 2014
|
|
|
4,998
|
|
|
$
|
4.92
|
|
|
|
1.97
|
|
|
$
|
156,650
|
|
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 nine month periods ended September 30, 2014, approximately 3,242,000 and 3,481,000 stock options were exercised resulting in cash payments due to the Company of approximately $4.8 million and $6.0 million, respectively. These stock option exercises generated tax-deductions totaling approximately $108.8 million and $113.8 million, respectively. During the three and nine month periods ended September 30, 2013, approximately 145,000 and 415,000 stock options were exercised resulting in cash payments to the Company of approximately $1.2 million and $1.9 million, respectively. These option exercises generated tax-deductions of approximately $1.4 million and $4.5 million, respectively.
From time to time the Company grants restricted stock awards to certain employees and members of its Board of Directors (“Directors”). Restricted stock awards 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. On May 4, 2013, the Company granted a total of 31,899 restricted shares to its Directors, of which 15,946 shares vested immediately upon issuance and the remaining 15,953 shares vested on May 4, 2014. On May 2, 2014, the Company granted a total of 71,582 restricted shares 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 of certain individuals in Senior Management. On September 5, 2014, the Company granted a total of 257,416 restricted shares 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 options each vest at 25% per year on the anniversary date of the grant ending September 5, 2018.
The following is a summary of non-vested restricted stock activity:
|
|
Number of Shares
(in thousands)
|
|
Weighted Average
Grant Date Fair Value
|
Non-vested at December 31, 2013
|
|
|
16
|
|
|
$
|
15.36
|
|
Granted
|
|
|
337
|
|
|
|
27.54
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(16)
|
|
|
|
15.36
|
|
Non-vested at September 30, 2014
|
|
|
337
|
|
|
$
|
27.54
|
|
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):
|
|
|
|
|
|
|
Gross accounts receivable
|
|
$
|
|
|
|
$
|
88,165
|
|
Less reserves for:
|
|
|
|
|
|
|
|
|
Chargebacks and rebates
|
|
|
(77,387
|
) |
|
|
(12,882
|
)
|
Product returns
|
|
|
(36,454
|
) |
|
|
(8,164
|
)
|
Discounts and allowances
|
|
|
(20,024
|
) |
|
|
(1,644
|
)
|
Advertising and promotions
|
|
|
(1,031
|
) |
|
|
(452
|
)
|
Doubtful accounts
|
|
|
(132
|
) |
|
|
(25
|
)
|
Trade accounts receivable, net
|
|
$
|
|
|
|
$
|
64,998
|
|
The current period increases in gross accounts receivable, chargebacks and rebates and cash discounts were primarily related to the acquisitions of Hi-Tech and VersaPharm Inc. (“VersaPharm”) during the nine month period ended September 30, 2014, which acquisitions are further described in Note 11 – Business Combinations, Dispositions and Other Strategic Investments.
For the three and nine month periods ended September 30, 2014 and 2013, the Company recorded the following adjustments to gross sales (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Gross sales
|
|
$ |
391,256
|
|
|
$ |
137,235
|
|
|
$ |
824,397
|
|
|
$ |
387,165
|
|
Less adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks and rebates
|
|
|
(231,324
|
) |
|
|
(49,373
|
) |
|
|
(408,895
|
) |
|
|
(136,102
|
) |
Product returns
|
|
|
(6,458
|
) |
|
|
(719
|
) |
|
|
(9,662
|
) |
|
|
(2,432
|
) |
Discounts and allowances
|
|
|
(9,424
|
) |
|
|
(2,228
|
) |
|
|
(17,559
|
) |
|
|
(6,150
|
) |
Admin fees
|
|
|
(9,491
|
) |
|
|
(2,035
|
) |
|
|
(17,037
|
) |
|
|
(6,355
|
) |
Advertising and promotions
|
|
|
(1,827
|
) |
|
|
(988
|
) |
|
|
(5,994
|
) |
|
|
(3,368
|
) |
Revenues, net
|
|
$ |
132,732 |
|
|
$ |
81,892 |
|
|
$ |
365,250
|
|
|
$ |
232,758 |
|
The increase, year over year, in the provisions for chargebacks and rebates, product returns, discounts and allowances, admin fees, and advertising and promotion were largely related to the 185.1% and 112.9% increase in gross sales in the three and nine month periods ended September 30, 2014, respectively compared to the corresponding prior year quarter and year to date period.
NOTE 5 — INVENTORIES
The components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
Finished goods
|
|
$
|
66,876
|
|
|
$
|
22,886
|
|
Work in process
|
|
|
4,316
|
|
|
|
3,883
|
|
Raw materials and supplies
|
|
|
61,638
|
|
|
|
29,213
|
|
Inventories, net
|
|
$
|
132,830
|
|
|
$
|
55,982
|
|
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. Finished goods inventory at September 30, 2014 and December 31, 2013 was reported net of these reserves of $5.2 million and $2.9 million, respectively.
The current period increases in finished goods, work in process, raw materials and supplies were primarily related to the acquisitions of Hi-Tech and VersaPharm during the nine month period ended September 30, 2014.
NOTE 6 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
9,395
|
|
|
$
|
2,606
|
|
Buildings and leasehold improvements
|
|
|
61,430
|
|
|
|
46,281
|
|
Furniture and equipment
|
|
|
112,282
|
|
|
|
76,536
|
|
Sub-total
|
|
|
183,107
|
|
|
|
125,423
|
|
Accumulated depreciation
|
|
|
(64,767)
|
|
|
|
(54,470
|
)
|
Property, plant and equipment placed in service, net
|
|
|
118,340
|
|
|
|
70,953
|
|
Construction in progress
|
|
|
21,032
|
|
|
|
11,155
|
|
Property, plant and equipment, net
|
|
$
|
139,372
|
|
|
$
|
82,108
|
|
Property, plant, and equipment, net increased $57.3 million principally as a result of the acquisitions of Hi-Tech and VersaPharm during the nine month period ended September 30, 2014.
A portion of the Company’s property, plant and equipment is located outside the United States. At September 30, 2014 and December 31, 2013, property, plant and equipment, net, with a net carrying value of $22.1 million and $21.1 million, respectively, was located outside the United States at the Company’s manufacturing facility and regional corporate offices in India.
The Company recorded depreciation expense of approximately $4.9 million and $1.7 million during the three month periods ended September 30, 2014 and 2013, respectively and approximately $10.4 million and $4.9 million during the nine month periods ended September 30, 2014 and 2013, respectively.
NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill:
The following table provides a summary of the activity in goodwill by segment for the nine months ended September 30, 2014 (in thousands):
|
|
Consumer
Health
|
|
|
Prescription
Pharmaceuticals
|
|
|
Total
|
|
Balances at December 31, 2013
|
|
$ |
11,863 |
|
|
$ |
17,968 |
|
|
$ |
29,831 |
|
Currency translation adjustments
|
|
|
─
|
|
|
|
85
|
|
|
|
85
|
|
Acquisitions
|
|
|
4,854 |
|
|
|
|
|
|
|
|
|
Dispositions
|
|
|
─
|
|
|
|
(11,454 |
) |
|
|
(11,454 |
) |
Balances at September 30, 2014
|
|
$ |
16,717 |
|
|
$ |
|
|
|
$ |
|
|
Goodwill acquired in the three and nine month period ended September 30, 2014 is wholly related to the acquisitions of Hi-Tech and VersaPharm, while Goodwill dispositions in the period are the result of the Watson product disposition and ECR divestiture as further discussed in Note 11 — Business Combinations, Dispositions and Other Strategic Investments.
Goodwill acquired prior to April 1, 2014 attributed to the Consumer Health segment was due to the Company’s acquisition of Advanced Vision Research, Inc. in May 2011, while Goodwill attributed to the Prescription Pharmaceuticals segment relates to the Company’s acquisition of selected assets of Kilitch Drugs (India) Limited (“KDIL”) in February 2012, principally KDIL’s manufacturing facility in Paonta Sahib, India.
Product Licensing Rights, In-Process Research and Development (“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 September 30, 2014 and December 31, 2013, and the weighted average remaining amortization period as of September 30, 2014 and December 31, 2013 (dollar amounts in thousands):
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
|
Wgtd Avg Remaining
Amortization Period
|
|
SEPTEMBER 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licensing rights
|
|
$ |
729,629 |
|
|
$ |
(58,872 |
) |
|
$ |
670,757 |
|
|
12.6 |
|
IPR&D
|
|
|
225,300 |
|
|
─
|
|
|
|
225,300 |
|
|
N/A - Indefinite lived
|
|
Trademarks
|
|
|
16,000 |
|
|
|
(1,406 |
) |
|
|
14,594 |
|
|
18.6 |
|
Customer relationships
|
|
|
6,502 |
|
|
|
(3,327 |
) |
|
|
3,175 |
|
|
11.0 |
|
Other Intangibles
|
|
|
11,200 |
|
|
|
(445 |
) |
|
|
10,755 |
|
|
7.6 |
|
Non-compete agreement
|
|
|
2,490 |
|
|
|
(1,629 |
) |
|
|
861 |
|
|
1.4 |
|
|
|
$ |
991,121 |
|
|
$ |
(65,679 |
) |
|
$ |
925,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licensing rights
|
|
$ |
151,504 |
|
|
$ |
(35,604 |
) |
|
$ |
115,900 |
|
|
9.8 |
|
IPR&D
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Trademarks
|
|
|
9,500 |
|
|
|
(844 |
) |
|
|
8,656 |
|
|
27.4 |
|
Customer relationships
|
|
|
6,166 |
|
|
|
(1,528 |
) |
|
|
4,638 |
|
|
9.8 |
|
Other Intangibles
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
Non-compete agreement
|
|
|
2,428 |
|
|
|
(1,117 |
) |
|
|
1,311 |
|
|
2.2 |
|
|
|
$ |
169,598 |
|
|
$ |
(39,093 |
) |
|
$ |
130,505 |
|
|
|
|
Intangible assets other than goodwill, gross increased $821.5 million as a result of the acquisitions of Hi-Tech and VersaPharm, the acquisition of Zioptan® and the acquisition of Betimol, partially offset by the disposal of previously acquired assets to Watson and the divestiture of ECR during the nine month period ended September 30, 2014.
The Company recorded amortization expense of approximately $14.0 million and $1.6 million during the three month periods ended September 30, 2014 and 2013, respectively and approximately $27.4 million and $5.0 million during the nine month periods ended September 30, 2014 and 2013, respectively.
NOTE 8 — FINANCING ARRANGEMENTS
Incremental Term Loan
Concurrent with the closing of its acquisition of 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, and JPMorgan Chase Bank, N.A. (“JPMorgan”), as lender and as administrative agent for certain other lenders. The proceeds received pursuant to the Incremental Term Loan Agreement were used to finance the VersaPharm Acquisition, as further described below in Note 11, Business Combinations, Dispositions and Other Strategic Investments.
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 (7) years from the date of closing of the Existing Term Loan Agreement or April 16, 2021. 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 September 30, 2014 outstanding debt under the Incremental Term Loan Facility was $445.0 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 nine month periods ended September 30, 2014, the Company recorded interest expense of $2.7 million in relation to the Incremental Term Loan Agreement.
As of September 30, 2014, in connection with entering into the $445.0 million Incremental Term Loan Agreement with JPMorgan, the Company capitalized $10.9 million in deferred financing fees. Approximately $1.8 million of this total represented loan commitment fees which were amortized to expense during the three and nine month periods ended September 30, 2014. The $1.8 million of loan commitment fees amortized in the three and nine month period ended September 30, 2014 consisted of $1.7 million in commitment fee amortization and $0.1 million in ticking fees. The Company will amortize the remaining deferred financing fees using the effective interest method over the term of the Incremental Term Loan Agreement.
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, and JPMorgan, as lender and as administrative agent for certain other lenders. The Company may increase the loan amount up to an additional $150.0 million, or more, provided certain financial covenants and other conditions are satisfied. The proceeds received pursuant to the Existing Term Loan Agreement were used to finance the Hi-Tech Acquisition, as further described below in Note 11, Business Combinations, Dispositions and Other Strategic Investments.
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 (7) years from the date of closing of the Existing Term Loan Agreement or April 16, 2021. 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. To the extent the Existing Term Facility is refinanced within the first six (6) months of closing, a 1.00% prepayment fee will be due. As of September 30, 2014 outstanding debt under the term loan facility was $600.0 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 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 and nine month periods ended September 30, 2014, the Company recorded interest expense of $6.9 million and $12.5 million, respectively in relation to the Existing Term Loan.
As of June 30, 2014, in connection with entering into the $600.0 million Existing Term Loan with JPMorgan, the Company capitalized $20.3 million in deferred financing fees. Approximately $7.4 million of this total represented loan commitment fees, of which $0.3 million and $7.4 million was amortized to expense during the three and nine month periods ended September 30, 2014, respectively. The $7.4 million of loan commitment fees amortized in the nine month period ended September 30, 2014 consisted of $5.0 million in ticking fees and $2.4 million in commitment fee amortization. The Company will amortize the remaining deferred financing fees using the effective interest method over the term of the Existing Term Loan Agreement.
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;
|
|
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 0.250% 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 September 30, 2014 the Company was in full compliance with all covenants applicable to the JPM Revolving Facility.
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 September 30, 2014, there were no outstanding borrowings and one (1) outstanding letter of credit in the amount of approximately $1.2 million under the JPM Revolving Facility. Availability under the facility as of September 30, 2014 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 issued $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, National Association, as trustee (the “Indenture”). The Notes were offered and sold only to qualified institutional buyers. The net proceeds from the sale of the Notes were approximately $115.3 million, after deducting underwriting fees and other related expenses.
The Notes 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, with the first interest payment completed on December 1, 2011. The Notes are convertible into shares of 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 would increase the conversion rate and decrease the conversion price for a holder that elects to convert their Notes in connection with such corporate transaction.
The Notes are not listed on any securities exchange or on any automated dealer quotation system, but are traded on a secondary 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 September 30, 2014, the Notes were trading at approximately 414% of their face value, resulting in a total market value of $496.4 million compared to their face value of $120.0 million. 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. On September 30, 2014, the Company’s common stock closed at $36.27 per share, resulting in a pro forma conversion value for the Notes of approximately $496.8 million. Increases in the market value of the Company’s common stock increase the fair value of the Company’s obligation accordingly. There is no upper limit placed on the possible conversion value of the Notes.
The Notes may be converted at any time at the option of the holders prior to the close of business on the business day immediately preceding December 1, 2015 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 effective April 1, 2012 as a result of the Company’s common stock closing above the required price of $11.39 per share for 20 of the last 30 consecutive trading days in the quarter ended March 31, 2012. In each subsequent quarterly period, this trading price requirement has also been met. Accordingly, the Notes have remained convertible and will continue to be convertible at least through December 31, 2014.
The Notes are being accounted for in accordance with ASC 470-20. 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 $20.5 million as the value for the equity component. At September 30, 2014 and December 31, 2013, the net carrying amount of the liability component and the remaining unamortized debt discount were as follows (in thousands):
|
|
|
|
|
|
|
Carrying amount of equity component
|
|
$ |
20,470 |
|
|
$ |
20,470 |
|
Carrying amount of the liability component
|
|
|
112,035 |
|
|
|
108,750 |
|
Unamortized discount of the liability component
|
|
|
7,965 |
|
|
|
11,250 |
|
Unamortized deferred financing costs
|
|
|
1,440 |
|
|
|
2,034 |
|
For the three and nine month periods ended September 30, 2014 and 2013, the Company recorded the following expenses in relation to the Notes (in thousands):
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Expense Description
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense at 3.5% coupon rate (1)
|
|
$ |
1,050 |
|
|
$ |
1,050 |
|
|
$ |
3,150 |
|
|
$ |
3,150 |
|
Debt discount amortization (1)
|
|
|
1,115 |
|
|
|
1,037 |
|
|
|
3,285 |
|
|
|
3,057 |
|
Amortization of deferred financing costs
|
|
|
201 |
|
|
|
188 |
|
|
|
594 |
|
|
|
553 |
|
|
|
$ |
2,366 |
|
|
$ |
2,275 |
|
|
$ |
7,029 |
|
|
$ |
6,760 |
|
|
(1)
|
Included within “Interest expense, net” on the Condensed Consolidated Statements of Comprehensive Income.
|
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.
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.
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 awards (“RSAs”), 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):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Income (loss) from continuing operations
|
|
$ |
|
) |
|
$ |
12,205 |
|
|
$ |
|
|
|
$ |
35,684 |
|
Income (loss) from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.11 |
) |
|
$ |
0.13 |
|
|
$ |
0.02
|
|
|
$ |
0.37 |
|
Diluted
|
|
$ |
(0.11 |
) |
|
$ |
0.11 |
|
|
$ |
0.01
|
|
|
$ |
0.32 |
|
(Loss) from discontinued operations, net of tax
|
|
|
─ |
|
|
|
─ |
|
|
$ |
(503 |
) |
|
|
─ |
|
(Loss) from discontinued operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
─ |
|
|
|
─ |
|
|
$ |
|
) |
|
|
─ |
|
Diluted
|
|
|
─ |
|
|
|
─ |
|
|
|
─
|
|
|
|
─ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
105,438 |
|
|
|
96,238 |
|
|
|
101,784 |
|
|
|
96,096 |
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option and unvested RSAs
|
|
|
|
|
|
|
4,510 |
|
|
|
|
|
|
|
4,408 |
|
Stock warrants
|
|
|
─ |
|
|
|
6,687 |
|
|
|
2,505
|
|
|
|
6,635 |
|
Shares issuable upon conversion of convertible notes (2)
|
|
|
─
|
|
|
|
6,282 |
|
|
|
9,498
|
|
|
|
5,505 |
|
Total dilutive securities
|
|
|
|
|
|
|
17,479 |
|
|
|
|
|
|
|
16,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
|
|
|
|
113,717 |
|
|
|
|