NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Business and Basis of Presentation
Business:
Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn,” the “Company,” “we,” “our” or “us”) is a specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals and branded and private-label over-the-counter (“OTC”) consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products in alternative dosage forms. We specialize in difficult-to-manufacture sterile and non-sterile dosage forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays. In previous years, the Company completed numerous mergers, acquisitions, product acquisitions, which resulted in significant growth.
Akorn is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, we relocated our corporate headquarters to the Chicago, Illinois area and currently maintain our principal corporate offices in Lake Forest, Illinois. We operate pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, Himachal Pradesh, India. We operate a central distribution warehouse in Gurnee, Illinois and additional distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers are located in Vernon Hills, Illinois and Cranbury, New Jersey. We maintain other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.
Fresenius Kabi AG:
On April 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fresenius Kabi AG, a German stock corporation (“Parent”), Quercus Acquisition, Inc., a Louisiana corporation and wholly-owned subsidiary of Parent (“Merger Sub”) and, solely for purposes of Article VIII thereof, Fresenius SE & Co. KGaA, a German partnership limited by shares.
On April 22, 2018, Fresenius Kabi AG delivered to Akorn a letter purporting to terminate the Merger Agreement. On April 23, 2018, Akorn filed a verified complaint entitled Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc. and Fresenius SE & Co. KGaA, in the Court of Chancery of the State of Delaware for breach of contract and declaratory judgment. The complaint sought, among other things, a declaration that Fresenius Kabi AG's termination was invalid, an order enjoining the defendants from terminating the Merger Agreement, and an order compelling the defendants to specifically perform their obligations under the Merger Agreement to use reasonable best efforts to consummate and make effective the Merger. On April 30, 2018, the defendants filed a verified counterclaim alleging that, due primarily to purported data integrity deficiencies, the Company had breached representations, warranties and covenants in the Merger Agreement, and that it had experienced a material adverse effect. The verified counterclaim sought, among other things, a declaration that defendants’ purported termination of the Merger Agreement was valid and that defendants were not obligated to consummate the transaction, and damages.
On October 1, 2018, the Court of Chancery issued an opinion (the “Opinion”) denying Akorn’s claims for relief and concluding that Fresenius Kabi AG had validly terminated the Merger Agreement. The Court of Chancery concluded that Akorn had experienced a material adverse effect due to its financial performance following the signing of the Merger Agreement; that Akorn had breached representations and warranties in the Merger Agreement and that those breaches would reasonably be expected to give rise to a material adverse effect; that Akorn had materially breached covenants in the Merger Agreement; and that Fresenius was materially in compliance with its own contractual obligations. On October 17, 2018, the Court of Chancery entered partial final judgment against Akorn on its claims and in favor of the Fresenius parties on their claims for declaratory judgment. The Court of Chancery entered an order holding proceedings on the Fresenius parties’ damages claims in abeyance pending the resolution of any appeal from the partial final judgment.
On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s ruling denying Akorn’s claims for declaratory and injunctive relief and granting Defendants’ counterclaim for a declaration that the termination was valid. On December 27, 2018, the Delaware Supreme Court issued a mandate returning the case to the Court of Chancery for consideration of all remaining issues, including the Fresenius parties’ damages claims.
On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement their counterclaim. The Fresenius parties’ proposed amended and supplemented counterclaim alleges that Akorn fraudulently induced Fresenius to enter into the Merger Agreement and thereafter willfully breached contractual representations and warranties and covenants therein. It seeks damages of approximately
$102 million
. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’ motion for leave to file an amended and supplemented counterclaim to the extent the Fresenius parties sought leave to assert a
cause of action for fraud. On February 27, 2019, the Fresenius parties filed a reply in further support of their motion to file an amended and supplemented counterclaim. On February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and supplemented counterclaim. See
Note 19 – Legal Proceedings.
The Company has considered the accounting and disclosure of events occurring after the balance sheet date of December 31, 2018 through the filing date of this Form 10-K.
Certain prior-period amounts have been reclassified to conform to current-period presentation including cost of sales, selling, general and administrative expenses, research and development expenses, impairment of intangible assets, litigation rulings and settlements and other non-operating (expense) income, net on the consolidated statements of comprehensive (loss) income, as well as Fin 48 reserve and accrued legal fees and contingencies on the consolidated balance sheet.
Note 2 — Summary of Significant Accounting Policies
Consolidation:
The accompanying consolidated financial statements include the accounts of Akorn, Inc. and its wholly-owned domestic and foreign subsidiaries. All inter-company transactions and balances have been eliminated in consolidation, and the financial statements of Akorn India Private Limited (“AIPL”) and Akorn AG have been translated from Indian Rupees to U.S. dollars and Swiss Francs to U.S. dollars, respectively, based on the currency translation rates in effect during the period or as of the date of consolidation, as applicable. The Company has no involvement with variable interest entities.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Significant estimates and assumptions for the Company relate to the allowances for chargebacks, rebates, product returns, coupons, promotions and doubtful accounts, as well as the reserve for slow-moving and obsolete inventories, the carrying value and lives of intangible assets, the useful lives of fixed assets, the carrying value of deferred income tax assets and liabilities, the assumptions underlying share-based compensation, and accrued but unreported employee benefit costs.
Going Concern:
In connection with the preparation of the financial statements for the year ended
December 31, 2018
, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity's ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued, noting that there did not appear to be evidence of substantial doubt of the entity's ability to continue as a going concern.
Revenue Recognition:
Revenue is recognized at a point in time upon the transfer of control of the Company’s products, which occurs upon delivery for substantially all of the Company’s sales. The promises within the contract that are distinct are primarily the Company’s supply of products, which represents a single performance obligation. The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company makes significant estimates for related variable consideration at the point of sale, including chargebacks, rebates, product returns, other discounts and allowances. All sales taxes are excluded from the transaction price. The Company expenses contract fulfillment costs when incurred since the amortization period would have been less than one year. Payment terms are primarily less than
90
days. See
Note 15 – Recently Issued and Adopted Accounting Pronouncements
for the discussion of the adoption of
Accounting Standard Codification ("ASC") Topic 606 Revenue from Contracts with Customers.
Provision for estimated chargebacks, rebates, discounts, managed care rebates, product returns and doubtful accounts is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
Freight:
The Company records shipping and handling expense related to product sales as cost of sales.
Cash and Cash Equivalents:
The Company considers all unrestricted, highly liquid investments with maturity of three months or less when acquired, to be cash and cash equivalents. At
December 31, 2018
and 2017, approximately
$0.9 million
and
$1.8 million
, respectively, of cash held by AIPL was restricted, and was reported within
prepaid expenses and other current assets
.
The following table sets forth the components of the Company’s cash, cash equivalents, and restricted cash as reported in the consolidated statement of cash flows for the years ended
December 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
224,868
|
|
|
$
|
368,119
|
|
Restricted cash
|
926
|
|
|
1,770
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
225,794
|
|
|
$
|
369,889
|
|
Accounts Receivable:
Trade accounts receivable are stated at their net realizable value. The nature of the Company’s business involves, in the ordinary course, significant judgments and estimates relating to chargebacks, coupon redemption, product returns, rebates, discounts given to customers and allowances for doubtful accounts. Certain rebates, chargebacks and other credits are recorded as deductions to the Company’s trade accounts receivable where applicable, based on product and customer specific terms.
Unless otherwise noted, the provisions and allowances for the following customer deductions are reflected in the accompanying consolidated financial statements as reductions of revenues and trade accounts receivable, respectively.
Chargebacks:
The Company enters into contractual agreements with certain third parties such as retailers, hospitals, group-purchasing organizations (“GPOs”) and managed care organizations to sell certain products at predetermined prices. Similarly, we maintain an allowance for rebates and discounts related to billbacks, wholesaler fee for service contracts, GPO administrative fees, government programs, prompt payment and other adjustments with certain customers. Most of the parties have elected to have these contracts administered through wholesalers that buy the product from the Company and subsequently sell it to these third parties. As noted elsewhere, these wholesalers represent a significant percentage of the Company’s gross sales. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific contract is charged back to the Company by the wholesaler. This process typically takes four to six weeks, but for some products may extend out to twelve weeks. The Company tracks sales and submitted chargebacks by product number and contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product and records an allowance as a reduction to gross sales when the Company records its sale of the products. The Company reduces the chargeback allowance when a chargeback request from a wholesaler is processed. Actual chargebacks processed by the Company can vary materially from period to period based upon actual sales volume through the wholesalers. However, the Company’s provision for chargebacks is fully reserved for at the time revenues are recognized.
Management obtains product inventory reports from certain wholesalers to aid in analyzing the reasonableness of the chargeback allowance and to monitor whether wholesaler inventory levels do not significantly exceed customer demand. The Company assesses the reasonableness of its chargeback allowance by applying a product chargeback percentage that is based on a combination of historical activity and future price and mix expectations to the quantities of inventory on hand at the wholesalers according to wholesaler inventory reports. In addition, the Company estimates the percent of gross sales generated through direct and indirect sales channels and the percent of contract vs. non-contract revenue in the period, as these each affect the estimated reserve calculation. In accordance with its accounting policy, the Company also estimates the percent of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a trend of such sales through wholesalers. The Company uses this percentage estimate until historical trends indicate that a revision should be made. On an ongoing basis, the Company evaluates its actual chargeback rate experience, and new trends are factored into its estimates each quarter as market conditions change.
For the year ended
December 31, 2018
, the Company incurred a chargeback provision of
$830.0 million
, or
44.0%
of gross sales of
$1,887.9 million
, compared to
$953.3 million
, or
40.5%
of gross sales of
$2,351.1 million
in the prior year. The dollar
decrease
and percent increase in the comparative period was the result of gross sales decreases and a change in contractual terms with a major customer in the first quarter of 2018. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter chargeback rates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences, customer shifts in
buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the chargeback rate depending on the direction and velocity of the change(s).
To better understand the impact of changes in chargeback reserve based on circumstances that are not fully outside of the Company’s control, for instance, the ratio of sales subject to chargeback to indirect sales, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a
140
basis point (“BP”) change in the ratio of sales subject to chargeback to indirect sales would increase the chargeback reserve by
$0.2 million
or decrease the chargeback reserve by
$0.6 million
depending on the change in the direction of the ratio. Fundamentally, the BP change calculation is determined based on the six month trend of the average ratio of sales subject to chargeback to indirect sales. Due to the competitive generic pharmaceutical industry and our recent experience with wholesalers’ strategy and shifts in contracted and non-contracted indirect sales, we believe that the six month trend of the proportion of direct to indirect sales provides a representative basis for sensitivity analysis.
Rebates, Administrative Fees and Others: The Company maintains an allowance for rebates, administrative fees and others, related to contracts and other rebate programs that it has in place with certain customers. Rebates, administrative fees and other percentages vary by product and by volume purchased by each eligible customer. The Company tracks sales by product number for each eligible customer and then applies the applicable rebate, administrative fees and other percentage, using both historical trends and actual experience to estimate its rebates, administrative fees and others allowances. The Company reduces gross sales and increases the rebates, administrative fees and others allowance by the estimated rebates, administrative fees and others amounts when the Company sells its products to eligible customers. The Company reduces the rebate allowance when it processes a customer request for a rebate. At each balance sheet date, the Company analyzes the allowance for rebates, administrative fees and others against actual rebates processed and makes adjustments as appropriate. The amount of actual rebates processed can vary materially from period to period as discussed below.
The allowances for rebates, administrative fees and others further takes into consideration price adjustments which are credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a shelf-stock adjustment credit may be given for product remaining in customer’s inventories at the time of the price reduction and is reserved at the point of sale. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protection are based upon specified terms with customers, estimated changes in market prices, and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available.
Similar to rebates, the reserve for administrative fees and others represents those amounts processed related to contracts and other fee programs which have been in place with certain entities, but they are settled through cash payment to these entities and accordingly are accounted for as a current liability. Otherwise, administrative fees and others operate similarly to rebates.
For the year ended
December 31, 2018
, the Company incurred rebates, administrative fees and others of
$297.8 million
, or
15.8%
of gross sales of
$1,887.9 million
, compared to
$476.6 million
, or
20.3%
of gross sales of
$2,351.1 million
in the prior year. The dollar and percent
decrease
s from the comparative period were the result of gross sales decreases and product mix shifts to products with lower rebates, administrative fees and others expense percentages. Additionally, a change in contractual terms with a major customer in the first quarter of 2018 resulted in a decrease in rebates, which is also a contributing factor in the variances between the two periods compared. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter rebates, administrative fees and others rates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences, customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the rebate rate depending on the direction and velocity of the change(s).
To better understand the impact of changes in reserves for rebates, administrative fees and others based on circumstances that are not fully outside the Company’s control, for instance, the proportion of direct to indirect sales subject to rebates, administrative fees and others, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a
140
BP change in the ratio of sales subject to rebates, administrative fees and others to indirect sales would increase the reserve for rebates, administrative fees and others by
$0.0 million
or decrease the same reserve by
$0.1 million
depending on the direction of the change in the ratio. Fundamentally, the BP change calculation is determined based on the six month trend of the average ratio of sales subject to rebates, administrative fees and others
to indirect sales. Due to the competitive generic pharmaceutical industry and our recent experience with wholesalers’ strategy and shifts in contracted and non-contracted indirect sales, we believe the six month trend of the average ratio of sales subject to rebates, administrative fees and others to indirect sales provides a representative basis for sensitivity analysis.
Sales Returns:
Certain of the Company’s products are sold with the customer having the right to return the product within specified periods. Provisions are made at the time of sale based upon historical experience. Historical factors such as one-time recall events as well as pending new developments like comparable product approvals or significant pricing movement that may impact the expected level of returns are taken into account to determine the appropriate reserve estimate at each balance sheet date. As part of the evaluation of the reserve required, the Company considers actual returns to date that are in process, the expected impact of any product recalls and the amount of wholesaler’s inventory to assess the magnitude of unconsumed product that may result in sales returns to the Company in the future. The sales returns level can be impacted by factors such as overall market demand and market competition and availability for substitute products which can increase or decrease the pull through for sales of the Company’s products and ultimately impact the level of sales returns.
For the year ended
December 31, 2018
the Company incurred a return provision of
$20.2 million
, or
1.1%
of gross sales of
$1,887.9 million
, compared to
$26.9 million
, or
1.1%
of gross sales of
$2,351.1 million
in the prior year. The dollar decrease in the comparative period was the result of gross sales decreases. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter return rates include: acquisitions and integration activities that consolidate dissimilar contract terms and could increase or decrease the return rate depending on the contracting power of the acquired business; and consumer demand shifts by products, which could either increase or decrease the return rate depending on the product or products specifically demanded and ultimately returned.
To better understand the impact of changes in return reserve based on certain circumstances, the Company performs a sensitivity analysis. Holding all other assumptions constant, for an average
0.7
months change in the lag from the time of sale to the time the product return is processed, this change would result in an increase of
$1.0 million
or a decrease of
$0.9 million
of the return reserve expense if the lag increases or decreases, respectively. The average
0.7
months change in the lag from the time of sale to the time the product return is processed was determined based on the difference between the high and low lag time for the past twelve month historical activities. This sensitivity analysis is a change from prior reported periods which was determined based on the average variances for the last six months of returns activity. The prior method did not give a measurable variance to calculate a sensitivity. Due to the change in the volume and type of products sold by the Company in the recent past, we have determined that the lag calculation provides a reasonable basis for sensitivity analysis.
Allowance for Coupons, Advertising, Promotions and Co-Pay Discount Cards:
The Company issues coupons from time to time that are redeemable against certain of our Consumer Health products. In addition to couponing, from time to time the Company authorizes various retailers to run in-store promotional sales and co-pay discount of its products. At the point of sale, the Company records an estimate of the dollar value of coupons expected to be redeemed, the dollar amount owed back to the retailer and co-pay discount as variable consideration since the Company intends to continuously issue coupons, advertising promotion and co-pay discount from time to time. This coupon estimate is based on historical experience and is adjusted as needed based on actual redemptions. Upon receiving confirmation that an advertising promotion was run, the Company adjusts the estimate of the dollar amount expected to be owed back to the retailer as needed. This estimate is then adjusted to actual upon receipt of an invoice from the retailer. Additionally, the Company provides consumer co-pay discount cards, administered through outside agents to provide discounted products when redeemed. The Company records an estimate of the dollar value of co-pay discounts expected to be utilized based on historical experience and is adjusted as needed based on actual experience.
Doubtful Accounts:
Provisions for doubtful accounts, which reflect trade receivable balances owed to the Company that are believed to be uncollectible, are recorded as a component of selling, general and administrative ("SG&A") expenses. In estimating the allowance for doubtful accounts, the Company considers its historical experience with collections and write-offs, the credit quality of its customers and any recent or anticipated changes thereto, and the outstanding balances and past due amounts from its customers. Note that in the ordinary course of business, and consistent with our peers, we may from time to time offer extended payment terms to our customers as an incentive for new product launches or in other circumstances in accordance with standard industry practices. These extended payment terms do not represent a significant risk to the collectability of accounts receivable as of the period-end. Accounts are considered past due when they remain uncollected beyond the due date specified in the applicable contract or on the applicable invoice, whichever is deemed to take precedence.
As of
December 31, 2018
, the Company had a total of
$33.4 million
of past due gross accounts receivable and
$5.9 million
aged over 60 days. The Company performs monthly a detailed analysis of the receivables due from its customers and provides
a specific reserve against known uncollectible items. The Company also includes in the allowance for doubtful accounts an amount that it estimates to be uncollectible for all other customers, based on a percentage of the past due receivables. The percentage reserved increases as the age of the receivables increases. Accounts are written off once all reasonable collection efforts have been exhausted and/or when facts or circumstances regarding the customer (i.e. bankruptcy filing) indicate that the chance of collection is remote.
Inventories:
Inventories are stated at the lower of cost and net realizable value ("NRV") (see Note 4 — “Inventories”). The Company maintains an allowance for slow-moving and obsolete inventory as well as inventory where the cost is in excess of its NRV. For finished goods inventory, the Company estimates the amount of inventory that may not be sold prior to its expiration or is slow-moving based upon recent sales activity by unit and wholesaler inventory information. The Company also analyzes its raw material and component inventory for slow-moving items and NRV. For the years ended
December 31, 2018
, 2017 and 2016, the Company recorded a provision for inventory obsolescence and NRV of
$27.3 million
,
$21.4 million
, and
$32.1 million
, respectively. The allowances for inventory obsolescence were
$46.5 million
and
$34.4 million
as of
December 31, 2018
and 2017, respectively.
The Company capitalizes inventory costs associated with its products prior to regulatory approval when, based on management judgment, future commercialization is considered probable and future economic benefit is expected to be realized. The Company assesses the regulatory approval process and where the product stands in relation to that approval process including any known constraints or impediments to approval. The Company also considers the shelf life of the product in relation to the product timeline for approval.
At
December 31, 2018
, the Company established a reserve of
$4.0 million
related to R&D raw materials that are not expected to be utilized prior to expiration while at the prior year end, the Company had approximately
$1.5 million
in reserves for R&D raw materials.
Property, Plant and Equipment:
Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method in amounts considered sufficient to amortize the cost of the assets to operations over their estimated useful lives or lease terms. Depreciation expense was
$29.3 million
,
$23.7 million
and
$22.2 million
for the years ended
December 31, 2018
, 2017 and 2016, respectively. The following table sets forth the average estimated useful lives at acquisition of the Company’s property, plant and equipment, by asset category:
|
|
|
|
Asset category
|
|
Depreciable Life (years)
|
Buildings
|
|
30 - 50
|
Building and leasehold improvements
|
|
10 - 20
|
Furniture and equipment
|
|
7 - 20
|
Automobiles
|
|
5 - 7
|
Computer hardware and software
|
|
3 - 5
|
Intangible Assets:
Intangible assets consist primarily of goodwill, which is carried at its initial value, subject to impairment testing, In-Process Research and Development ("IPR&D"), which is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other such costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from
one year
to
thirty years
. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows. If the Company incurs additional costs to renew or extend the life of an intangible asset, such costs are added to the remaining unamortized cost of the asset, if any, and the sum is amortized over the extended remaining life of the asset. Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. The Company models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. Impairments are recorded within the impairment of intangible assets line in the Consolidated Statements of Comprehensive Income.
Net (Loss) Income Per Common Share:
Basic net (loss) income per common share is based upon weighted average common shares outstanding. Diluted net (loss) income per common share is based upon the weighted average number of
common shares outstanding, including the dilutive effect, if any, of stock options and convertible securities using the treasury stock and if converted methods. Anti-dilutive shares excluded from the computation of diluted net (loss) income per share for 2018, 2017 and 2016 include
3.7 million
,
3.2 million
and
3.6 million
shares, respectively, related to options.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21%, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities and reassessing the net realizability of our deferred tax assets and liabilities. The Company’s foreign subsidiaries do not have accumulated earnings that can be distributed; therefore, the provisions of the Tax Act related to the repatriation of foreign earnings are not applicable to the Company at December 31, 2018. See
Note 11 — Income Taxes
for more information.
Fair Value of Financial Instruments:
The Company applies
ASC 820 - Fair Value Measurement
, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework.
ASC 820 - Fair Value Measurement
defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in
ASC 820
- Fair Value Measurement
generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability, and are to be developed based on the best information available in the circumstances.
The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:
|
|
-
|
Level 1
—Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities. The carrying value of the Company's cash and cash equivalents are considered Level 1 assets.
|
|
|
-
|
Level 2
—Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company has no Level 2 assets or liabilities in any of the periods presented.
|
|
|
-
|
Level 3
—Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities. The portion of the fair valuation of the available-for-sale investment held in shares of Nicox stock that is subject to a lock-up provision is considered a Level 3 asset. The additional consideration payable as a result of prior years' acquisitions and other insignificant contingent amounts are considered Level 3 liabilities.
|
The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
Description
|
December 31,
2018
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Cash and cash equivalents
|
$
|
224,868
|
|
|
$
|
224,868
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Nicox stock with lockup provisions
|
18
|
|
|
—
|
|
|
—
|
|
|
18
|
|
Total assets
|
$
|
224,886
|
|
|
$
|
224,868
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
December 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Cash and cash equivalents
|
$
|
368,119
|
|
|
$
|
368,119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Nicox stock with lockup provisions
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Total assets
|
$
|
368,154
|
|
|
$
|
368,119
|
|
|
$
|
—
|
|
|
$
|
35
|
|
Purchase consideration payable
|
3,901
|
|
|
—
|
|
|
—
|
|
|
3,901
|
|
Total liabilities
|
$
|
3,901
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,901
|
|
In accordance with
ASC 820 - Fair Value Measurement
, the Company records unrealized holding gains and losses on available-for-sale securities in the “Accumulated other comprehensive income” caption in the Consolidated Balance Sheet. As of
December 31, 2018
, the Company maintained rights to receive a small number of shares of Nicox stock held in an expense escrow. The unrealized holding loss on these shares was a negligible dollar amount as of December 31, 2018. The escrow shares are not expected to be released within one year, and accordingly, the original cost basis of less than
$0.1 million
on these shares is included within other non-current assets on the Company’s Consolidated Balance Sheet as of December 31, 2018. The fair value of the investment is estimated using observable and unobservable inputs to discount for lack of marketability.
On May 31, 2017, the Company gained the right to receive additional Nicox stock fair valued at
$3.0 million
as a milestone payment. The Company received the additional shares of Nicox stock in early June 2017 and subsequently sold them later that month for net cash proceeds of
$2.6 million
. Both the
$3.0 million
milestone payment and the subsequent loss of
$0.4 million
on the sale of the Nicox shares were reported within other non-operating income (expense), net in the Company's Condensed Consolidated Statement of Comprehensive (Loss) Income for the year ended December 31, 2017.
Stock-Based Compensation:
Stock-based compensation cost is estimated at grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions to be used in the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its common stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities of similar term in effect during the quarter in which the options were granted. The dividend yield reflects the Company’s historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises the estimate in subsequent periods, as necessary, if actual forfeitures differ from initial estimates.
Note 3 — Accounts Receivable, Sales and Allowances
The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is typical of the pharmaceutical industry and is not necessarily specific to the Company. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the terms of the respective agreement with the end-user customer (which in turn depends on the specific end-user customer, each having its own pricing arrangement that entitles it to a particular
deduction). This process can lead to partial payments to the Company against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.
With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying consolidated statements of comprehensive (loss) income. Additionally, with the exception of administrative fees and others, which is included as a current liability, the ending reserve balances are included in trade accounts receivable, net in the Company’s consolidated balance sheets.
Trade accounts receivable, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Gross accounts receivable (1)
|
$
|
308,305
|
|
|
$
|
378,759
|
|
Less reserves for:
|
|
|
|
Chargebacks (2)
|
(55,312
|
)
|
|
(73,984
|
)
|
Rebates (2)
|
(55,963
|
)
|
|
(111,945
|
)
|
Product returns
|
(35,146
|
)
|
|
(41,687
|
)
|
Discounts and allowances
|
(6,561
|
)
|
|
(7,779
|
)
|
Advertising and promotions
|
(1,574
|
)
|
|
(1,301
|
)
|
Doubtful accounts
|
(623
|
)
|
|
(680
|
)
|
Trade accounts receivable, net
|
$
|
153,126
|
|
|
$
|
141,383
|
|
(1) The reduction in the Gross accounts receivable balance as of
December 31, 2018
when compared to the
December 31, 2017
balance is due to the decline in Gross sales in the fourth quarter of 2018 compared to the fourth quarter of 2017.
(2) The reductions in the reserve for chargebacks and in the reserve for rebates as of
December 31, 2018
compared to
December 31, 2017
is primarily due to payment timing, product mix, customer mix and lower wholesaler inventory. Additionally, a change in contractual terms with a major customer in the first quarter of 2018 resulted in an increase in chargebacks and a decrease in rebates, which is also a contributing factor in the comparability between the two periods compared.
For the years ended
December 31, 2018
,
2017
and
2016
, the Company recorded the following adjustments to gross sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Gross sales
|
$
|
1,887,862
|
|
|
$
|
2,351,071
|
|
|
$
|
2,891,267
|
|
Less adjustments for:
|
|
|
|
|
|
Chargebacks (1)
|
(830,038
|
)
|
|
(953,326
|
)
|
|
(1,218,560
|
)
|
Rebates, administrative fees and others (1)
|
(297,802
|
)
|
|
(476,601
|
)
|
|
(463,724
|
)
|
Product returns
|
(20,162
|
)
|
|
(26,874
|
)
|
|
(28,285
|
)
|
Discounts and allowances
|
(36,933
|
)
|
|
(45,292
|
)
|
|
(55,494
|
)
|
Advertising, promotions, and others
|
(8,909
|
)
|
|
(7,933
|
)
|
|
(8,361
|
)
|
Revenues, net
|
$
|
694,018
|
|
|
$
|
841,045
|
|
|
$
|
1,116,843
|
|
(1) The decreases in chargebacks and rebates, administrative and other fees for the twelve month period ended
December 31, 2018
compared to the same period in
2017
, were primarily due to product mix, customer mix, volume declines, and price erosion due to increased industry pricing pressure and the competitive nature of our business. Additionally, a change in contractual terms with a major customer in the first quarter of 2018 resulted in an increase in chargebacks and a decrease in rebates, which is also a contributing factor in the variances between the two periods compared.
The annual activity in the Company’s allowance for customer deductions accounts for the three years ended
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns
|
|
Chargebacks
|
|
Rebates (1)
|
|
Discounts
|
|
Doubtful Accounts
|
|
Advertising & Promotions
|
|
Total
|
Balance at December 31, 2015
|
$
|
48,333
|
|
|
$
|
91,844
|
|
|
$
|
162,596
|
|
|
$
|
10,079
|
|
|
$
|
1,579
|
|
|
$
|
1,518
|
|
|
$
|
315,949
|
|
Provision
|
28,285
|
|
|
1,218,560
|
|
|
384,074
|
|
|
55,494
|
|
|
—
|
|
|
8,361
|
|
|
1,694,774
|
|
Charges processed
|
(32,929
|
)
|
|
(1,230,044
|
)
|
|
(448,735
|
)
|
|
(53,184
|
)
|
|
(619
|
)
|
|
(9,191
|
)
|
|
(1,774,702
|
)
|
Balance at December 31, 2016
|
$
|
43,689
|
|
|
$
|
80,360
|
|
|
$
|
97,935
|
|
|
$
|
12,389
|
|
|
$
|
960
|
|
|
$
|
688
|
|
|
$
|
236,021
|
|
Provision
|
26,874
|
|
|
953,326
|
|
|
416,125
|
|
|
45,292
|
|
|
—
|
|
|
7,933
|
|
|
1,449,550
|
|
Charges processed
|
(28,876
|
)
|
|
(959,702
|
)
|
|
(402,115
|
)
|
|
(49,902
|
)
|
|
(280
|
)
|
|
(7,320
|
)
|
|
(1,448,195
|
)
|
Balance at December 31, 2017
|
$
|
41,687
|
|
|
$
|
73,984
|
|
|
$
|
111,945
|
|
|
$
|
7,779
|
|
|
$
|
680
|
|
|
$
|
1,301
|
|
|
$
|
237,376
|
|
Provision
|
20,162
|
|
|
830,038
|
|
|
257,417
|
|
|
36,933
|
|
|
—
|
|
|
8,909
|
|
|
1,153,459
|
|
Charges processed
|
(26,703
|
)
|
|
(848,710
|
)
|
|
(313,399
|
)
|
|
(38,151
|
)
|
|
(57
|
)
|
|
(8,636
|
)
|
|
(1,235,656
|
)
|
Balance at December 31, 2018
|
$
|
35,146
|
|
|
$
|
55,312
|
|
|
$
|
55,963
|
|
|
$
|
6,561
|
|
|
$
|
623
|
|
|
$
|
1,574
|
|
|
$
|
155,179
|
|
(1) As provisions for rebates, administrative fees and others represent both contra-receivables and current liabilities, depending on the method of settlement, the cumulative provision relating to rebates, administrative fees and others is bifurcated as applicable based on the associated consolidated balance sheet classification. Accordingly, for the years ended
December 31, 2018
,
2017
and
2016
, an additional
$40.4 million
,
$60.5 million
and
$79.7 million
, respectively, of provision was associated with administrative fees and others.
Provisions and utilizations of provisions activity in the current period which relate to prior period revenues are not provided because to do so would be impracticable. Our current systems and processes do not capture the chargeback and rebate settlements by the period in which the original sales transaction was recorded. Chargeback and rebate claims are not submitted by customers with sufficient details to link the accrual recorded at the point of sale with the settlement of the accrual. As a result, the Company is unable to reasonably determine the dollar amount of the change in estimate in its gross to net reporting reflected in its results of operations for each period presented, and, those changes could be significant; however, the Company uses a combination of factors and applications to estimate the dollar amount of reserves for chargebacks and rebates at each balance sheet date. The Company regularly monitors the chargeback reserve based on an analysis of the Company’s product sales and most recent claims, wholesaler inventory, current pricing, and anticipated future pricing changes. If claims are different from the estimate due to changes from estimated rates, accrual rate adjustments are considered prospectively when determining provisions in accordance with authoritative GAAP.
Note 4 — Inventories, Net
The components of inventories, net of allowances, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Finished goods
|
$
|
76,981
|
|
|
$
|
79,226
|
|
Work in process
|
13,870
|
|
|
15,447
|
|
Raw materials and supplies
|
82,794
|
|
|
88,895
|
|
|
$
|
173,645
|
|
|
$
|
183,568
|
|
The Company maintains an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of its net realizable value. The activity in the allowance for excess, obsolete, and net realizable value inventory account for the two years ended
December 31, 2018
and 2017, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
34,402
|
|
|
$
|
33,532
|
|
Provision
|
27,341
|
|
|
21,369
|
|
Charges processed
|
(15,238
|
)
|
|
(20,499
|
)
|
Balance at end of year
|
$
|
46,505
|
|
|
$
|
34,402
|
|
Note 5 - Goodwill and Other Intangible Assets
Intangible assets consist primarily of Goodwill, which is carried at its initial value, subject to evaluation for impairment, In-Process Research and Development (“IPR&D”), which is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other such costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from
one
to
thirty years
. Accumulated amortization of intangible assets was
$217.6 million
and
$219.0 million
at
December 31, 2018
and 2017, respectively. Amortization expense was
$53.5 million
,
$61.4 million
and
$65.7 million
for the years ended
December 31, 2018
, 2017 and 2016, respectively. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows.
IPR&D intangible assets represent the value assigned to acquired R&D projects that principally represent rights to develop and sell a product that the Company has acquired which have not yet been completed or approved. These assets are subject to impairment testing until completion or abandonment of each project. Impairment testing requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenue, cost of sales, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, and competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the IPR&D product, the assets are impaired.
During 2018,
18
IPR&D projects were impaired primarily due to anticipated market conditions and competition upon launch, reducing the viability for future development and resulting in impairment expenses of
$139.5 million
. In 2017 and 2016,
three
and
one
IPR&D projects were impaired resulting in impairment expenses
$24.6 million
and
$3.9 million
, respectively. Additionally, during 2018,
25
product licensing rights and other intangibles were impaired due to market conditions and increase in manufacturing costs resulting in impairment expenses of
$91.6 million
; compared to impairments expenses of
$103.5 million
on
10
product licensing rights in 2017, and
$40.5 million
on
eight
product licensing rights in 2016.
If the Company incurs additional costs to renew or extend the life of an intangible asset, such costs are added to the remaining unamortized cost of the asset, if any, and the sum is amortized over the extended remaining life of the asset.
Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. The Company also models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. The Company performed its annual impairment test on October 1, 2018 and determined that the fair value of its reporting units are in excess of its carrying value and, therefore,
no
goodwill impairment charge was necessary. As a result of the impacts of the termination of the Merger Agreement and the Delaware Opinion, as well as the Term loans downgrade, the Company performed additional impairment testing as of December 31, 2018 and determined that the fair value of its reporting units are in excess of its carrying value and, therefore,
no
goodwill impairment charge was necessary.
Changes in goodwill during the two years ended
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
Goodwill
|
December 31, 2016
|
$
|
284,293
|
|
Foreign currency translation
|
1,017
|
|
December 31, 2017
|
$
|
285,310
|
|
Foreign currency translation
|
(1,431
|
)
|
December 31, 2018
|
$
|
283,879
|
|
The following table sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of
December 31, 2018
for those assets that are not already fully amortized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount (2)
|
|
Accumulated
Amortization
|
|
Reclassifications
|
|
Impairment (1)
|
|
Net
Carrying
Amount
|
|
Weighted Average
Remaining Amortization
Period (years)
|
Product licensing rights
|
$
|
597,960
|
|
|
$
|
(203,323
|
)
|
|
$
|
5,300
|
|
|
$
|
(131,306
|
)
|
|
$
|
268,631
|
|
|
9.2
|
IPR&D
|
149,161
|
|
|
—
|
|
|
(5,300
|
)
|
|
(139,461
|
)
|
|
4,400
|
|
|
N/A - Indefinite lived
|
Trademarks
|
16,000
|
|
|
(6,304
|
)
|
|
—
|
|
|
—
|
|
|
9,696
|
|
|
17.5
|
Customer relationships
|
4,225
|
|
|
(2,318
|
)
|
|
—
|
|
|
—
|
|
|
1,907
|
|
|
7.3
|
Other intangibles
|
11,235
|
|
|
(5,658
|
)
|
|
—
|
|
|
(5,235
|
)
|
|
342
|
|
|
0.3
|
|
$
|
778,581
|
|
|
$
|
(217,603
|
)
|
|
$
|
—
|
|
|
$
|
(276,002
|
)
|
|
$
|
284,976
|
|
|
|
(1) Impairment of product licensing rights and other intangibles is stated at gross carrying cost of
$131.3 million
and
$5.2 million
less accumulated amortization of
$42.8 million
and
$2.1 million
as of the impairment dates. Accordingly, the total net impairment expense was
$91.6 million
, of which
$88.5 million
and
$3.1 million
, were recognized in product licensing rights and other intangibles respectively, for the year ended
December 31, 2018
.
(2) Differences in the Gross Amounts between periods are due to the write down of fully amortized assets.
Changes in intangible assets during the two years ended
December 31, 2018
and 2017, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
licensing
rights
|
|
IPR&D
|
|
Trademarks
|
|
Customer
relationships
|
|
Other
intangibles
|
December 31, 2016
|
$
|
564,005
|
|
|
$
|
173,757
|
|
|
$
|
11,756
|
|
|
$
|
2,427
|
|
|
$
|
6,909
|
|
Acquisitions
|
200
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
|
(58,335
|
)
|
|
—
|
|
|
(1,132
|
)
|
|
(260
|
)
|
|
(1,717
|
)
|
Impairments
|
(103,530
|
)
|
|
(24,596
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2017
|
$
|
402,340
|
|
|
$
|
149,161
|
|
|
$
|
10,624
|
|
|
$
|
2,167
|
|
|
$
|
5,192
|
|
Acquisitions
|
50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
|
(50,567
|
)
|
|
—
|
|
|
(928
|
)
|
|
(260
|
)
|
|
(1,717
|
)
|
Impairments
|
(88,492
|
)
|
|
(139,461
|
)
|
|
—
|
|
|
—
|
|
|
(3,133
|
)
|
Reclassifications
|
5,300
|
|
|
(5,300
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2018
|
$
|
268,631
|
|
|
$
|
4,400
|
|
|
$
|
9,696
|
|
|
$
|
1,907
|
|
|
$
|
342
|
|
The amortization expense of acquired intangible assets for each of the following periods are expected to be as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
Amortization Expense
|
2019
|
|
$
|
40,404
|
|
2020
|
|
31,594
|
|
2021
|
|
31,594
|
|
2022
|
|
31,594
|
|
2023 and thereafter
|
|
145,390
|
|
Total
|
|
$
|
280,576
|
|
Note 6 – Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Land
|
$
|
17,608
|
|
|
$
|
17,846
|
|
Buildings and leasehold improvements
|
138,126
|
|
|
106,316
|
|
Furniture and equipment
|
240,080
|
|
|
202,897
|
|
|
395,814
|
|
|
327,059
|
|
Accumulated depreciation
|
(158,824
|
)
|
|
(130,814
|
)
|
|
236,990
|
|
|
196,245
|
|
Construction in progress
|
97,863
|
|
|
117,173
|
|
Property, plant and equipment, net
|
$
|
334,853
|
|
|
$
|
313,418
|
|
At
December 31, 2018
and
2017
, property, plant and equipment carrying a net book value of
$91.9 million
and
$82.8 million
, respectively, was located outside the United States.
The 2018 increase in Property, Plant and Equipment is due primarily to spending for compliance with Drug Supply Chain Security Act ("DSCSA") requirements and expansion and modernization initiatives at our Decatur and Somerset manufacturing plants.
At
December 31, 2018
, the Company had
$97.9 million
of assets under construction which consisted primarily of investment in building expansions, equipment, and compliance with DSCSA. Depreciation will begin on these assets once they are placed into service. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. For the year ended
December 31, 2018
, the Company recorded impairment losses of
$6.1 million
.
No
impairment losses were recorded in 2017. During 2018, the Company capitalized interest into PP&E in the amount of
$6.3 million
.
Depreciation expense was
$29.3 million
,
$23.7 million
and
$22.2 million
for the years ended
December 31, 2018
,
2017
and 2016, respectively.
Note 7 — Financing Arrangements
Term Loans
During 2014, in order to finance its acquisitions of Hi-Tech Pharmacal Co Inc. and VersaPharm Inc., the Company entered into
two
term loan agreements (the “Term Loans”, or collectively, the “Existing Term Loan Facility”) with certain lenders and with JPMorgan Chase Bank, N.A., as administrative agent. On February 16, 2016, the Company made a voluntary prepayment of its Existing Term Loan Facility of
$200.0 million
which settled all future required quarterly principal repayments of the Term
Loan Agreements as denoted above until the date of maturity of the Term Loan Agreements or April 16, 2021, although future voluntary principal repayments are permitted.
The aggregate principal amount financed was
$1,045.0 million
. As of
December 31, 2018
, outstanding debt under the Term Loans was
$831.9 million
and the Company was in compliance with all applicable covenants which included customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities. As of
December 31, 2018
, the Term Loan has a market price of
$821
per
$1,000
of principal amount. The Existing Term Loan Facility is scheduled to mature in April 16, 2021.
During the year ended
December 31, 2018
, the Company amortized
$5.0 million
of the total Term Loans-related costs, resulting in
$11.5 million
remaining balance of deferred financing costs at
December 31, 2018
. During the years ended December 31, 2017 and 2016, the Company amortized
$5.0 million
and
$10.4 million
, respectively, of Term Loans-related costs. The decrease in amortization of deferred financing fees in 2018 and 2017 as compared to 2016 was primarily the result of the deferred financing fee amortization associated with the voluntary principal repayment in 2016. The Company will amortize this balance using the straight-line method over the life of the Term Loan Agreements.
As of the date of the filing of this Form 10-K until the maturity of the Term Loans, our spread will be based upon the Ratings Level applicable on such date as documented below. As of the period ended
December 31, 2018
, the Company was a Ratings Level III for the Existing Term Loan Facility.
|
|
|
|
|
Ratings Level
|
Index Ratings
(Moody’s/S&P)
|
Adjusted LIBOR (Eurodollar) Spread
|
Adjusted prime/federal funds rate (ABR) Spread
|
Level I
|
B1/B+ or higher
|
4.25%
|
3.25%
|
Level II
|
B2/B
|
4.75%
|
3.75%
|
Level III
|
B3/B- or lower
|
5.50%
|
4.50%
|
For the years ended
December 31, 2018
, 2017 and 2016, the Company recorded interest expense of
$56.9 million
,
$45.5 million
and
$43.5 million
, respectively in relation to the Term Loans. The increase in interest expense was in part due to a downgrading of the Company's Term loan credit rating.
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”).
The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At
December 31, 2018
, there were
no
outstanding borrowings under the JPM Revolving Facility, and availability was
$135.0 million
.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of the Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries. The JPM Credit Agreement is set to mature in April of 2019.
Subject to other conditions in the JPM Credit Agreement, advances under the JPM Revolving Facility will be made in accordance with a borrowing base consisting of the sum of the following:
|
|
(a)
|
85%
of eligible accounts receivable;
|
|
|
a.
|
65%
of the lower of cost or market value of eligible raw materials and work in process inventory, valued on a first in first out basis, and
|
|
|
b.
|
85%
of the orderly liquidation value of eligible raw materials and work in process inventory, valued on a first in first out basis;
|
|
|
a.
|
75%
of the lower of cost or market value of eligible finished goods inventory, valued on a first in first out basis, and
|
|
|
b.
|
85%
of the orderly liquidation value of eligible finished goods inventory, valued on a first in first out basis up to
85%
of the liquidation value of eligible inventory (or
75%
of market value finished goods inventory); and
|
|
|
(d)
|
Less any reserves deemed necessary by the administrative agent, and allowed in its permitted discretion.
|
The total amount available under the JPM Revolving Facility includes a
$10.0 million
letter of credit facility.
Under the terms of the JPM Credit Agreement, if availability under the JPM Revolving Facility falls below
12.5%
of commitments or
$15.0 million
for more than
30
consecutive days, the Company may be subject to cash dominion, additional reporting requirements, and additional covenants and restrictions. The Company may seek additional commitments to increase the maximum amount of the JPM Revolving Facility to
$200.0 million
.
Unless cash dominion is exercised by the lenders in connection with the JPM Revolving Facility, the Company will be required to repay the JPM Revolving Facility upon its expiration
five years
from issuance, subject to permitted extension, and will pay interest on the outstanding balance monthly based, at the Company’s election, on an adjusted prime/federal funds rate (“ABR”) or an adjusted LIBOR (“Eurodollar”), plus a margin determined in accordance with the Company’s consolidated fixed charge coverage ratio (EBITDA to fixed charges) as follows:
|
|
|
|
Fixed Charge
Coverage Ratio
|
Revolver ABR
Spread
|
Revolver
Eurodollar
Spread
|
Category 1
> 1.50 to 1.0
|
0.50%
|
1.50%
|
Category 2
> 1.25 to 1.00 but
< 1.50 to 1.00
|
0.75%
|
1.75%
|
Category 3
< 1.25 to 1.00
|
1.00%
|
2.00%
|
In addition to interest on borrowings, the Company will pay an unused line fee of
0.25%
per annum on the unused portion of the JPM Revolving Facility.
During an event of default, as defined in the JPM Credit Agreement, any interest rate will be increased by
2.0%
per annum.
The JPM Revolving Facility is secured by all of the assets of Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a deposit account control agreement. The financial covenants require Akorn Loan Parties to maintain the following on a consolidated basis:
|
|
(a)
|
Minimum Liquidity, as defined in the JPM Credit Agreement, of not less than (a)
$120.0 million
plus (b)
25%
of the JPM Revolving Facility commitments during the three-month period preceding the June 1, 2016 maturity date of the Company’s senior convertible notes.
|
|
|
(b)
|
Ratio of EBITDA to fixed charges of no less than
1.00
to
1.00
(measured quarterly for the trailing
4
quarters).
|
As of
December 31, 2018
, the Company was in compliance with all covenants applicable to the JPM Revolving Facility.
The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At
December 31, 2018
, there were
no
outstanding borrowings and
no
outstanding letter of credit under the JPM Revolving Facility.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries.
Convertible Notes
On June 1, 2011, the Company issued
$120.0 million
aggregate principal amount of
3.50%
Convertible Senior Notes due June 1, 2016 (the “Notes”) which included
$20.0 million
in aggregate principal amount of the Notes issued in connection with
the full exercise by the initial purchasers of their over-allotment option. The Notes were governed by the Company’s indenture with Wells Fargo Bank, National Association, as trustee (the “Indenture”). The Notes were offered and sold only to qualified institutional buyers. The net proceeds from the sale of the Notes were approximately
$115.3 million
, after deducting underwriting fees and other related expenses.
The Notes paid interest at an annual rate of
3.50%
semiannually in arrears on June 1 and December 1 of each year, with the first interest payment completed on December 1, 2011. The Notes were convertible into the Company’s common stock, cash or a combination thereof at an initial conversion price of
$8.76
per share, which is equivalent to an initial conversion rate of approximately
114.1553
shares per
$1,000
principal amount of the Notes, subject to adjustment for certain events described in the Indenture.
The Notes became convertible effective April 1, 2012 as a result of the Company’s common stock closing above the required price of
$11.39
per share for
20
of the last
30
consecutive trading days in the quarter ended March 31, 2012. The Notes remained convertible for each successive quarter, up to and including the maturity date of June 1, 2016, as a result of meeting the trading price requirement at the end of each prior quarter. During the year ended December 31, 2015,
$44.3 million
in principal amount of Notes were converted at the holders' request which resulted in recognition of losses of
$1.2 million
, due to the conversions. On June 1, 2016, the remaining
$43.2 million
of Notes was converted at the holder's request, resulting in complete conversion of the Notes.
As a result of the complete conversion on June 1, 2016, during the year ended 2016, the Company recorded the following expenses in relation to the Notes (in thousands):
|
|
|
|
|
|
2016
|
Interest expense at 3.50% coupon rate (1)
|
$
|
687
|
|
Debt discount amortization
|
750
|
|
Deferred financing cost amortization
|
136
|
|
|
$
|
1,573
|
|
|
|
(1)
|
As a result of the restatement of the 2014 financial data and the resultant delays in filings of the 2015 financial statements, the Company was required to remit an additional
0.5%
interest penalty to all holders of the convertible notes from January 1, 2016 to April 5, 2016 and a lump sum payment equal to
0.25%
of the principal balance held by consenting holders of the convertible notes as of April 6, 2016.
|
Aggregate cumulative maturities of long-term obligations (including the Term Loans and the JPM Revolving Facility) as of
December 31, 2018
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Maturities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
831,938
|
|
|
$
|
—
|
|
Note 8 — (Loss) Earnings per Common Share
Basic net (loss) income per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of potentially dilutive securities using the treasury stock method. Additionally, for the twelve month period ended December 31, 2016, the earnings per share amount was calculated using the if-converted method to account for the dilutive impact of the Convertible Notes. The Convertible Notes matured in the quarter ended June 30, 2016.
The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money, (ii) unvested RSUs, and (iii) shares potentially issuable upon conversion of the Notes.
A reconciliation of the (loss) earnings per share data from a basic to a fully diluted basis is detailed below (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
(Loss) income from operations used for basic earnings per share
|
$
|
(401,909
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
184,243
|
|
Convertible debt income adjustments, net of tax
|
—
|
|
|
—
|
|
|
1,049
|
|
(Loss) income from operations adjusted for convertible debt as used for diluted earnings per share
|
$
|
(401,909
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
185,292
|
|
(Loss) income from operations per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(3.21
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
1.50
|
|
Diluted (1)
|
$
|
(3.21
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
1.47
|
|
Shares used in computing (loss) income per share:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
125,383
|
|
|
124,790
|
|
|
122,869
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and unvested RSUs
|
—
|
|
|
—
|
|
|
914
|
|
Shares issuable on conversion of the Notes
|
—
|
|
|
—
|
|
|
2,018
|
|
Total dilutive securities
|
—
|
|
|
—
|
|
|
2,932
|
|
Weighted average diluted shares outstanding
|
125,383
|
|
|
124,790
|
|
|
125,801
|
|
|
|
(1)
|
As a result of the Company's expectation that it would likely settle all future note conversions in shares of the Company's common stock, the diluted income from operations per share calculation for the periods prior to the complete conversion of the convertible debt on June 1, 2016, included the dilutive effect of convertible debt and was offset by the exclusion of interest expense and deferred financing fees related to the convertible debt of
$1.0 million
, after-tax for the year ended December 31, 2016.
|
Note 9 — Leasing Arrangements
The Company leases real and personal property in the normal course of business under various operating leases and other insignificant capital leases, including non-cancelable and month-to-month agreements. Rental expense under these leases was
$6.5 million
,
$5.9 million
and
$5.2 million
for the years ended
December 31, 2018
, 2017 and 2016, respectively.
Landlord incentives are recorded as deferred rent and amortized on a straight-line basis over the lease term. Rent escalations are recorded on a straight-line basis over the lease term. The following is a schedule, by year, of future minimum rental payments required under non-cancelable operating leases in place as of
December 31, 2018
(in thousands):
|
|
|
|
|
Year ending December 31,
|
|
2019
|
$
|
4,564
|
|
2020
|
4,647
|
|
2021
|
4,283
|
|
2022
|
3,724
|
|
2023
|
2,673
|
|
2024 and thereafter
|
6,976
|
|
Total
|
$
|
26,867
|
|
Note 10 — Stock Options, Restricted Stock and Employee Stock Purchase Plan
Stock Option Plan
The Company maintains equity compensation plans that allow the Company’s Board of Directors to grant stock options and other equity awards to eligible employees, officers, directors and consultants. On April 27, 2017, the Company’s shareholders voted to approve the Akorn, Inc. 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). Under the Omnibus Plan,
8.0 million
shares of the Company’s common stock were made available for issuance pursuant to equity awards. The Omnibus Plan replaced the Akorn, Inc. 2014 Stock Option Plan (the "2014 Plan"), which was approved by shareholders at the Company's 2014 Annual Meeting of Shareholders on May 2, 2014 and subsequently amended by proxy vote of the Company’s shareholders on December 16, 2016. The 2014 Plan had reserved
7.5 million
shares for issuance upon the grant of stock options, restricted stock units (“RSUs”), or various other instruments to directors, officers, employees and
consultants. Following shareholder approval of the Omnibus Plan, no new awards could be granted under the 2014 Plan, although previously granted awards remain outstanding pursuant to their original terms. As of December 31, 2018, there were approximately
3.4 million
stock options and
0.1 million
RSU shares outstanding under the 2014 Plan. The 2014 Plan had replaced the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6, 2013. As of December 31, 2018, no awards remain outstanding under the 2003 Plan.
Under the Omnibus Plan,
2.0 million
RSUs have been granted to employees and directors, of which
0.3 million
have vested and
0.2 million
have been forfeited, leaving
1.5 million
RSUs outstanding as of December 31, 2018.
No
stock options were granted under the Omnibus Plan from inception through December 31, 2018. As of December 31, 2018, approximately
6.2 million
shares remain available for future award grants under the Omnibus Plan.
The Company accounts for stock-based compensation in accordance with
ASC Topic 718 - Compensation — Stock Compensation
. Accordingly, stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, as necessary, if actual forfeitures differ from those estimates.
The Company recorded stock-based compensation expense of approximately
$21.5 million
,
$21.0 million
and $
15.4 million
during the years ended
December 31, 2018
, 2017 and 2016, respectively. The Company uses the single-award method for allocating compensation cost to each period.
As of December 31, 2018, the Company agreed to the modification of various stock-based awards of its former Chief Executive Officer and Chief Operating Officer to accelerate vesting to March 31, 2019 and December 31, 2018, respectively. The Company recognized stock-based compensation expense of
$2.1 million
in the year ended
December 31, 2018
related to the accelerated vesting of these awards.
Stock Option Awards
From time to time, the Company has granted stock option awards to certain employees, executives and directors. No stock options were granted in 2018. The assumptions used in estimating the fair value of the stock options granted during the period, along with the weighted-average grant date fair values, were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Expected volatility
|
50%
|
—
|
50%
|
|
46%
|
—
|
50%
|
Expected life (in years)
|
|
4.8
|
|
|
|
4.7
|
|
Risk-free interest rate
|
1.7%
|
—
|
1.7%
|
|
0.9%
|
—
|
1.8%
|
Dividend yield
|
|
—
|
|
|
|
—
|
|
Weighted-average grant date fair value per stock option
|
|
$9.25
|
|
|
|
$11.13
|
|
The table below sets forth a summary of stock option activity within the Company’s stock-based compensation plans for the years ended
December 31, 2018
, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
(in thousands) (1)
|
Outstanding at December 31, 2015
|
|
4,762
|
|
|
$
|
20.33
|
|
|
|
|
|
|
Granted
|
|
2,089
|
|
|
26.61
|
|
|
|
|
|
|
Exercised
|
|
(1,794
|
)
|
|
7.78
|
|
|
|
|
|
|
Forfeited or expired
|
|
(291
|
)
|
|
28.96
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
4,766
|
|
|
$
|
27.27
|
|
|
|
|
|
|
Granted
|
|
66
|
|
|
21.28
|
|
|
|
|
|
|
Exercised
|
|
(623
|
)
|
|
15.53
|
|
|
|
|
|
|
Forfeited or expired
|
|
(156
|
)
|
|
28.20
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
4,053
|
|
|
$
|
28.95
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
(22
|
)
|
|
24.99
|
|
|
|
|
|
|
Forfeited or expired
|
|
(613
|
)
|
|
31.28
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
3,418
|
|
|
$
|
28.55
|
|
|
3.69
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
|
2,350
|
|
|
$
|
29.00
|
|
|
3.41
|
|
$
|
—
|
|
|
|
(1)
|
Includes only those options that were in-the-money as of December 31, 2018. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and the timing and volume of option grants, exercises and forfeitures.
|
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock at the end of the period and the exercise price of stock options. The total intrinsic value of stock options exercised during the years ended
December 31, 2018
, 2017 and 2016 was approximately
$0.2 million
,
$9.8 million
and
$40.3 million
, respectively. As a result of the stock options exercised, the Company received cash and recorded additional paid-in-capital of approximately
$0.5 million
,
$9.7 million
and
$14.0 million
during the years ended
December 31, 2018
, 2017 and 2016, respectively.
As of
December 31, 2018
, the total amount of unrecognized compensation cost related to non-vested stock options was approximately
$7.0 million
, which is expected to be recognized as expense over a weighted-average period of
1.3
years.
Restricted Stock Unit Awards
From time to time, the Company has granted RSUs to certain employees, executives and directors. The majority of the grants to employees, executives and directors are pursuant to the Company's Long-Term Incentive Plans (the "LTIPs"), which call for annual grants of RSUs to all eligible employees and executives. The RSU awards vest
25%
per year on each of the first
four
anniversaries of the grant date. All RSUs are valued at the closing market price of the Company’s common stock on the day of grant and the total value of the units is recognized as expense ratably over the vesting period of the grant. During the years ended
December 31, 2018
, 2017 and 2016 the Company granted
1.7 million
,
0.7 million
and
0.3 million
RSUs to certain employees, executives and directors.
Set forth below is a summary of unvested RSU activity for the three years ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
Number of Shares
(in thousands)
|
|
Weighted Average Per Share
Grant Date Fair Value
|
Unvested at December 31, 2015
|
253
|
|
|
$
|
35.31
|
|
Granted
|
303
|
|
|
29.50
|
|
Vested
|
(118
|
)
|
|
34.95
|
|
Forfeited
|
(22
|
)
|
|
28.85
|
|
Unvested at December 31, 2016
|
416
|
|
|
$
|
31.52
|
|
Granted
|
666
|
|
|
33.10
|
|
Vested
|
(137
|
)
|
|
32.55
|
|
Forfeited
|
(57
|
)
|
|
31.34
|
|
Unvested at December 31, 2017
|
888
|
|
|
$
|
32.55
|
|
Granted (1)
|
1,711
|
|
|
16.07
|
|
Vested
|
(408
|
)
|
|
30.22
|
|
Forfeited (1)
|
(548
|
)
|
|
24.00
|
|
Unvested at December 31, 2018
|
1,643
|
|
|
$
|
19.85
|
|
|
|
(1)
|
RSUs granted and forfeited include
0.4 million
RSUs held by the Company’s former CEO and COO that were modified to accelerate vesting. This modification was treated as forfeiture of the old awards and granting of new awards with modified vesting terms.
|
As of
December 31, 2018
, the total amount of unrecognized compensation cost related to RSU awards was approximately
$25.4 million
which is expected to be recognized as expense over a weighted-average period of
2.9
years.
Employee Stock Purchase Plan
The 2016 Akorn, Inc. Employee Stock Purchase Plan (the “ESPP”) permits eligible employees to acquire shares of the Company’s common stock through payroll deductions. The ESPP has been structured to qualify under Section 423 of the Internal Revenue Code (“IRC”). Employees who elect to participate in the ESPP may withhold from
1%
to
15%
of eligible wages toward the purchase of stock. Shares will be purchased at a
15%
discount off the lesser of the market price at the beginning or the ending of the applicable offering period. The ESPP is designed with
two
offering periods each year, one running from January 1st to December 31st and the other running from July 1st to December 31st. In a given year, employees may enroll in only one offering period, not both. Per IRC rules, annual purchases per employee are limited to
$25,000
worth of stock, valued as of the beginning of the offering period. Accordingly, with the
15%
discount, employees may withhold no more than
$21,250
per year toward the purchase of stock under the ESPP. Employees are further limited to purchasing no more than
15,000
shares of stock per year. A total of
2.0 million
shares of the Company’s stock have been set aside for issuance under the ESPP. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016.
The initial offering period under the ESPP began in January 2017 and ran through the end of the year. The Company did not have an ESPP offering period starting on July 1, 2017 and did not have any offering periods in 2018 pursuant to terms of the Merger Agreement. During the year ended December 31, 2017, participants contributed approximately
$2.8 million
through payroll deductions toward the purchase of shares under the ESPP. The Company recorded stock-based compensation expense of
$1.1 million
during the year ended December 31, 2017 related to the ESPP.
A total of
2.0 million
shares of stock were set aside for issuance under the ESPP. Participants in the 2017 offering period acquired a total of
0.1 million
shares, leaving
1.9 million
shares remaining available for future issuance as of
December 31, 2018
.
Note 11 — Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted and implements comprehensive tax legislation which, among other changes, reduces the federal statutory corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves to a territorial system. Additionally, in December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the
effect of the changes in the Tax Act. The Company has completed the accounting for all of the enactment-date income tax effects of the Act within the prescribed measurement period, as defined in SAB 118, which ended on December 22, 2018.
Based on the provisions of the Tax Act, the Company re-measured its U.S. deferred tax assets and liabilities and adjusted its deferred tax balances to reflect the lower U.S. corporate income tax rate at December 31, 2017. The Company recorded the impact of the rate change on the return to provision differences that resulted in an income tax benefit of
$3.0 million
which is included as a discrete item in the 2018 income tax benefit. The Company’s foreign subsidiaries do not have accumulated earnings that can be distributed; therefore, the provisions of the Act related to the repatriation of foreign earnings are not applicable to the Company at
December 31, 2018
.
The income tax (benefit) provision consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Deferred
|
|
Total
|
Year ended December 31, 2018
|
|
|
|
|
|
Federal
|
$
|
2,768
|
|
|
$
|
(40,345
|
)
|
|
$
|
(37,577
|
)
|
State
|
(1,677
|
)
|
|
(2,093
|
)
|
|
(3,770
|
)
|
Foreign
|
32
|
|
|
5,042
|
|
|
5,074
|
|
|
$
|
1,123
|
|
|
$
|
(37,396
|
)
|
|
$
|
(36,273
|
)
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Federal
|
$
|
78,806
|
|
|
$
|
(105,006
|
)
|
|
$
|
(26,200
|
)
|
State
|
1,706
|
|
|
(9,785
|
)
|
|
(8,079
|
)
|
Foreign
|
89
|
|
|
(458
|
)
|
|
(369
|
)
|
|
$
|
80,601
|
|
|
$
|
(115,249
|
)
|
|
$
|
(34,648
|
)
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Federal
|
$
|
107,818
|
|
|
$
|
(26,377
|
)
|
|
$
|
81,441
|
|
State
|
11,247
|
|
|
(4,325
|
)
|
|
6,922
|
|
Foreign
|
—
|
|
|
(1,306
|
)
|
|
(1,306
|
)
|
|
$
|
119,065
|
|
|
$
|
(32,008
|
)
|
|
$
|
87,057
|
|
The income tax provision differs from the “expected” tax expense computed by applying the U.S. Federal corporate income tax rates of
21%
to income before income taxes, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Computed “expected” tax provision
|
$
|
(92,018
|
)
|
|
$
|
(20,719
|
)
|
|
$
|
94,955
|
|
Change in income taxes resulting from:
|
|
|
|
|
|
State income taxes, net of Federal income tax
|
(11,667
|
)
|
|
(537
|
)
|
|
4,501
|
|
Change in state income tax rate, net of Federal income tax
|
(16
|
)
|
|
(4,714
|
)
|
|
—
|
|
Foreign income tax (benefit) provision
|
(1,658
|
)
|
|
2,206
|
|
|
1,580
|
|
Deduction for domestic production activities
|
—
|
|
|
(2,527
|
)
|
|
(7,280
|
)
|
Stock compensation
|
2,480
|
|
|
(1,316
|
)
|
|
(11,395
|
)
|
R&D tax credits
|
(750
|
)
|
|
(1,200
|
)
|
|
(825
|
)
|
Nondeductible acquisition fees
|
(1,165
|
)
|
|
1,974
|
|
|
39
|
|
Interest and penalties from Federal audit
|
7,935
|
|
|
15,650
|
|
|
—
|
|
Federal rate change
|
(3,027
|
)
|
|
(26,902
|
)
|
|
—
|
|
Discrete adjustments to prior year
|
570
|
|
|
1,561
|
|
|
—
|
|
162(m) Officers Compensation Limitation
|
1,483
|
|
|
—
|
|
|
—
|
|
Other expense, net
|
934
|
|
|
1,201
|
|
|
2,564
|
|
Valuation allowance change
|
60,626
|
|
|
675
|
|
|
2,918
|
|
Income tax (benefit) provision
|
$
|
(36,273
|
)
|
|
$
|
(34,648
|
)
|
|
$
|
87,057
|
|
The geographic allocation of the Company’s income before income taxes between U.S. and foreign operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Pre-tax (loss) income from U.S. operations
|
$
|
(428,299
|
)
|
|
$
|
(49,572
|
)
|
|
$
|
287,880
|
|
Pre-tax loss from foreign operations
|
(9,883
|
)
|
|
(9,626
|
)
|
|
(16,580
|
)
|
Total pre-tax (loss) income
|
$
|
(438,182
|
)
|
|
$
|
(59,198
|
)
|
|
$
|
271,300
|
|
Net deferred income taxes at
December 31, 2018
and
2017
include (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Net operating loss carry-forward
|
$
|
48,766
|
|
|
$
|
25,100
|
|
Stock-based compensation
|
9,071
|
|
|
7,668
|
|
Chargeback reserves
|
14,173
|
|
|
17,802
|
|
Reserve for product returns
|
8,012
|
|
|
9,479
|
|
Inventory valuation reserve
|
9,688
|
|
|
10,207
|
|
Long-term debt
|
2,226
|
|
|
3,084
|
|
Interest greater than 30% of EBITDA
|
13,930
|
|
|
—
|
|
Other
|
16,444
|
|
|
10,806
|
|
Total deferred tax assets
|
$
|
122,310
|
|
|
$
|
84,146
|
|
Valuation allowance
|
(71,157
|
)
|
|
(10,531
|
)
|
Net deferred tax assets
|
$
|
51,153
|
|
|
$
|
73,615
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Prepaid expenses
|
$
|
(2,137
|
)
|
|
$
|
(1,709
|
)
|
Depreciation & amortization – tax over book
|
(49,547
|
)
|
|
(108,788
|
)
|
Other
|
$
|
(35
|
)
|
|
$
|
—
|
|
Total deferred tax liabilities
|
$
|
(51,719
|
)
|
|
$
|
(110,497
|
)
|
Net deferred income tax (liability)
|
$
|
(566
|
)
|
|
$
|
(36,882
|
)
|
The Company records a valuation allowance to reduce net deferred income tax assets to the amount that is more likely than not to be realized. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was necessary, the Company evaluated the data and believes that it is not more likely than not that the deferred tax assets in the US, India, and Switzerland will be realized. Accordingly, the company has recorded a full valuation allowance against US, India, and Switzerland deferred tax assets
.
The Company established a valuation allowance of
$71.2 million
,
$10.5 million
and
$9.9 million
against its deferred tax assets as of
December 31, 2018
,
2017
and 2016, respectively.
The deferred tax balances have been reflected gross on the balance sheet and are netted only if they are in the same jurisdiction.
The Company’s net operating loss (“NOL”) carry-forwards as of
December 31, 2018
consist of four component pieces: (i) U.S. Federal NOL carry-forwards valued at
$22.2 million
, (ii) State NOL carry-forwards valued at
$2.7 million
(iii) foreign (Indian) NOLs of
$23.7 million
and (iv) foreign (Swiss) NOLs of
$0.7 million
. The U.S. Federal NOL carry-forwards were obtained through the Merck Acquisition completed in the fourth quarter of 2013 in addition to the current year loss generated. State NOL carry-forwards are primarily from the loss generated in current year. The Company has established a full valuation allowance against U.S. Federal and State NOL carry-forwards due to uncertainty related to future earnings projections. The Indian NOL carry-forwards of
$23.7 million
relate to operating losses by the Company’s subsidiary in India, which was acquired in 2012. The Company has established a valuation allowance against this entire amount. A portion of the Swiss NOL was obtained through the Akorn AG acquisition completed in the first quarter of 2015. It has also generated a loss in the current year. The NOL carry-forwards begin to expire in 2023 and, accordingly, the Company has established a valuation allowance against the entire amount.
The Company completed an examination of its Federal income tax return for the year ended December 31, 2015 by the Internal Revenue Service. The Company’s U.S. Federal income tax returns filed for years 2016 and 2017 are open for examination by the Internal Revenue Service. The majority of the Company’s state and local income tax returns filed for years 2015 through 2017 remain open for examination as well.
In accordance with
ASC 740-10-25 - Income Taxes — Recognition
, the Company performs reviews of its tax positions to determine whether it is “more likely than not” that its tax positions will be sustained upon examination, and if any tax positions are deemed to fall short of that standard, the Company reserves based on the financial exposure and the likelihood of its tax positions not being sustained. Based on its review as of
December 31, 2018
, the Company determined that it would not recognize tax benefits as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
$
|
2,285
|
|
Additions relating to current year
|
303
|
|
Payments of amounts relating to prior years
|
(1,287
|
)
|
Balance at December 31, 2016
|
$
|
1,301
|
|
Additions relating to 2017
|
416
|
|
Additions relating to prior years
|
24,297
|
|
Terminations of exposures relating to prior years
|
(619
|
)
|
Balance at December 31, 2017
|
$
|
25,395
|
|
Additions relating to 2018
|
269
|
|
Additions relating to prior years
|
4,425
|
|
Terminations of exposures relating to prior years
|
(702
|
)
|
Balance at December 31, 2018
|
$
|
29,387
|
|
If recognized,
$2.3 million
of the above positions will impact the Company’s effective rate, while the remaining
$27.1 million
would result in adjustments to the Company’s deferred taxes. On
December 31, 2018
, the Company filed a non-automatic accounting method change related to the chargebacks and rebates reserves that accounts for
$27.1 million
of the unrecognized tax benefits. It is pending approval from the Internal Revenue Service as of
December 31, 2018
and as such the Company reasonably expects this balance to reverse during the following year. Due to the uncertainty of both timing and resolution of potential income tax examinations, the Company is unable to determine whether the remaining
December 31, 2018
balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve months. The Company accounts for interest and penalties as income tax expense. In the year ended
December 31, 2018
, the Company recorded a reduction to penalties of
$0.4 million
and increased the interest by
$4.5 million
. The Company recorded the current year interest, net of tax benefit, of
$1.7 million
related to unrecognized tax benefits. At
December 31, 2018
, the Company had accrued a total of
$8.6 million
and
$12.1 million
of penalties and interest, respectively.
Note 12 — Segment Information
The Company has
two
operating segments, which constitute the Company’s
two
reportable segments and the Company’s CEO is the CODM, as defined in
ASC Topic 280 - Segment Reporting.
Our performance is assessed and resources allocated by the CODM based on the following two reportable segments:
|
|
•
|
Prescription Pharmaceuticals
|
The Company’s Prescription Pharmaceuticals segment principally consists of generic and branded prescription pharmaceuticals products which span a broad range of indications as well as a variety of dosage forms including: sterile ophthalmics, injectables and inhalants, and non-sterile oral liquids, topicals and nasal sprays. The Company’s Consumer Health segment principally consists of animal health and OTC products, both branded and private label. OTC products include, but are not limited to, a suite of products for the treatment of dry eye sold under the TheraTears® brand name.
Financial information about the Company’s reportable segments is based upon internal financial reports that aggregate certain operating information. The Company’s CEO oversees operational assessments and resource allocations based upon the results of the Company’s reportable segments, which have available and discrete financial information.
Selected financial information by reportable segment is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
REVENUES, NET:
|
|
|
|
|
|
Prescription Pharmaceuticals
|
$
|
620,669
|
|
|
$
|
772,524
|
|
|
$
|
1,053,579
|
|
Consumer Health
|
73,349
|
|
|
68,521
|
|
|
63,264
|
|
Total revenues, net
|
$
|
694,018
|
|
|
$
|
841,045
|
|
|
$
|
1,116,843
|
|
GROSS PROFIT:
|
|
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
$
|
213,560
|
|
|
$
|
402,082
|
|
|
$
|
644,319
|
|
Consumer Health
|
32,456
|
|
|
30,124
|
|
|
29,193
|
|
Total gross profit
|
$
|
246,016
|
|
|
$
|
432,206
|
|
|
$
|
673,512
|
|
The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. Inter-segment activity at the gross profit level is minimal. The Company does not have discrete assets by segment, as certain manufacturing and warehouse facilities support more than one segment, and therefore does not report assets by segment. Financial information including revenues and gross profit from external customers by product or product line is not provided, as to do so would be impracticable.
During the years ended
December 31, 2018
,
2017
and
2016
, approximately
$16.4 million
,
$25.5 million
and
$26.3 million
of the Company’s net revenue, respectively, was from customers located in foreign countries. All of the net revenue is related to our Prescription Pharmaceutical segment.
The carrying amounts of Goodwill by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
|
Consumer Health
|
|
Total
|
December 31, 2016
|
$
|
267,576
|
|
|
$
|
16,717
|
|
|
$
|
284,293
|
|
Acquisitions and other adjustments
|
—
|
|
|
—
|
|
|
—
|
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translations
|
1,017
|
|
|
—
|
|
|
1,017
|
|
December 31, 2017
|
$
|
268,593
|
|
|
$
|
16,717
|
|
|
$
|
285,310
|
|
Acquisitions and other adjustments
|
—
|
|
|
—
|
|
|
—
|
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translations
|
(1,431
|
)
|
|
—
|
|
|
(1,431
|
)
|
December 31, 2018
|
$
|
267,162
|
|
|
$
|
16,717
|
|
|
$
|
283,879
|
|
Note 13 — Commitments and Contingencies
The Company has entered into strategic business agreements for the development and marketing of finished dosage form pharmaceutical products with various pharmaceutical development companies.
Each strategic business agreement includes a future payment schedule for contingent milestone payments and in certain strategic business agreements, minimum royalty payments. The Company will be responsible for contingent milestone payments and minimum royalty payments to these strategic business partners based upon the occurrence of future events. Each strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development progress timeline, successful product testing and validation, successful clinical studies, various FDA and other regulatory approvals and other factors as negotiated in each agreement. None of the contingent milestone payments or minimum royalty payments is individually material to the Company.
The Company is engaged in various supply agreements with third parties which obligate the Company to purchase various active pharmaceutical ingredients or finished products at contractual minimum levels. None of these agreements is individually or in aggregate material to the Company. Further, the Company does not believe at this time that any of the purchase obligations represent levels above that of normal business demands.
The table below summarizes contingent, potential milestone payments that would become due to strategic partners in the years 2019 and beyond, assuming all such contingencies occur (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
Milestone Payments
|
2019
|
|
$
|
4,658
|
|
2020
|
|
3,890
|
|
2021
|
|
2,650
|
|
2022 and beyond
|
|
1,800
|
|
Total
|
|
$
|
12,998
|
|
The Company is a party in legal proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, management of the Company believes that the ultimate disposition of such proceedings and exposures will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company. Legal proceedings which may have a material effect on the Company have been further disclosed in Note 19 - “
Legal Proceedings.
”
Note 14 — Supplemental Cash Flow Information (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Amount paid for interest
|
$
|
57,144
|
|
|
$
|
45,472
|
|
|
$
|
44,063
|
|
Amount paid for income taxes, net
|
9,261
|
|
|
42,003
|
|
|
132,695
|
|
Non-cash conversion of convertible notes to common shares
|
—
|
|
|
—
|
|
|
43,215
|
|
Accrued capital expenditures
|
$
|
6,492
|
|
|
$
|
13,824
|
|
|
$
|
12,391
|
|
Note 15 – Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No.
2018-15
— Intangibles — Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).
The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this
Update. Accordingly, the amendments in this Update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized under Subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity (customer) in a hosting arrangement that is a service contract determines which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized
depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in this Update also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The term of the hosting arrangement includes the non-cancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the
arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The entity also is required to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets. The amendments in this Update clarify that the capitalized implementation costs related to each module or component of a hosting arrangement that is a service contract are also subject to the guidance in Subtopic 360-10 on abandonment. The amendments in this Update also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, for all entities. The amendments in this Update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company believes that the adoption of this ASU will not have a material impact on its financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU
No.
2018-13—
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.
The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The FASB issued final guidance that removes, modifies and adds certain disclosure requirements for fair value measurements as part of its disclosure framework project as follows:
(a) Removals: The following disclosure requirements were removed from Topic 820:
1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
2. The policy for timing of transfers between levels
3. The valuation processes for Level 3 fair value measurements
(b) Modifications: The following disclosure requirements were modified in Topic 820:
1. For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
2. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
(c) Additions: The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:
1. The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period
2. The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
In addition, the amendments eliminate "
at a minimum"
from the phrase
"an entity shall disclose at a minimum"
to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company believes that the adoption of this ASU will not have a material impact on its financial position, results of operations or cash flows.
In June 2018, the FASB ASU
No.
2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Under this ASU, an entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost
recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company believes that the adoption of this ASU will not have a material impact on its financial position, results of operations or cash flows.
In February 2016, FASB issued ASU
No.
2016-02
-
Leases
(Topic 842), as modified by subsequently issued ASUs 2018-10, 2018-11 and 2018-20 (collectively ASU 2016-02). ASU 2018-02 establishes a comprehensive new lease accounting model. The new standard clarifies the definition of a lease and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than one year. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The new standard initially required a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. In July 2018, the FASB decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This additional transition method changes only when an entity is required to initially apply the transition requirements of the new leases standard; it does not change how those requirements apply. We expect to elect the practical expedient to not separate non-lease components, to not provide comparative reporting periods and the ‘package of practical expedients’, which permits us to forgo reassessment of our prior conclusions about lease identification, lease classification and initial direct costs for leases entered into prior to the effective date. We do not expect to elect the use-of-hindsight practical expedient. Upon adoption, operating leases will be reported on the statement of financial position as right-of-use assets and lease liabilities. The Company will adopt and implement this ASU on January 1, 2019 using the modified retrospective method and will not restate comparative periods. We have completed our review of all material leases including the search for any embedded leases, elected the package of practical expedients and accounting policy, and are currently finalizing our assessment of the overall financial statement impact. We expect this ASU will have a material impact on the Company’s financial position and result in the Company recording operating Lease liabilities and Right-of-use asset balances of approximately
$26 million
. The impact on the Company’s results of operations is not expected to materially differ from recorded amounts under ASC 840. The impact of the adoption of this ASU is non-cash in nature and is therefore not expected to materially affect the Company’s cash flows.
Recently Adopted Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No.
2017-09,
Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.
Per the ASU, a
n entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU.
The ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017.
Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.
The standard was adopted on January 1, 2018, and did not have a material impact on the Company's consolidated financial statements or financial statement disclosures.
In March 2017, the FASB issued ASU
No. 2017-07,
— Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which apply to all employers, including not-for-profit entities, that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments in this ASU require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60- 35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Disclosure that the practical expedient was used is required. The standard was adopted on January 1, 2018, and did not have a material impact on the Company's consolidated financial statements or financial statement disclosures.
In November 2016, the FASB issued ASU
No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
, which addresses classification and presentation of changes in restricted
cash on the statement of cash flows. The standard requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. The ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes that interim period. Entities should apply this ASU using a retrospective transition method to each period presented.
The standard was adopted on January 1, 2018, and did not have a material impact on the Company's consolidated financial statements or financial statement disclosures.
In August 2016, the FASB issued
ASU 2016-15,
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows.
ASU 2016-15
is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The standard was adopted on January 1, 2018, and did not have a material impact on the Company's consolidated financial statements or financial statement disclosures.
In May 2014, FASB issued
ASU 2014-09 - Revenue from Contracts with Customers (Topic 606)
, as modified by subsequently issued
ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09). ASU 2014-09
superseded the revenue recognition requirements in
ASC (Topic 605) Revenue Recognition,
and most industry specific guidance. This ASU also supersedes some cost guidance included in
ASC 605-35 Revenue Recognition Construction Type and Production Type Contracts
. Similar to the previous guidance, the Company makes significant estimates related to variable consideration at the point of sale, including chargebacks, rebates, product returns, and other discounts and allowances. Revenue is recognized at a point in time upon the transfer of control of the Company's products, which occurs upon delivery for substantially all of the Company's sales. The Company has adopted the practical expedient to exclude all sales taxes and contract fulfillment costs from the transaction price. The Company adopted the standard effective January 1, 2018 using the modified retrospective approach. The adoption of
ASU 2014-09
did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the year ended
December 31, 2018
. See
Note 16 — Customer, Supplier and Product Concentration
for the disaggregation of net revenues by major customers.
Note 16 — Customer, Supplier and Product Concentration
Customer Concentration
In the years ended
December 31, 2018
,
2017
and
2016
, a significant portion of the Company’s gross and net sales reported were to
three
large wholesale drug distributors, and a significant portion of the Company’s accounts receivable as of
December 31, 2018
,
2017
and
2016
were due from these wholesale drug distributors as well. AmerisourceBergen Health Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) collectively referred to herein as the “Big 3 Wholesalers”, are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. Aside from these
three
wholesale drug distributors, no other individual customer accounted for more than
10%
or more of gross sales, net revenue or gross trade receivables for the indicated dates and periods.
If sales to the Big 3 Wholesalers were to diminish or cease, the Company believes that the end users of its products would find little difficulty obtaining the Company’s products from another distributor. Further, the Company is subject to credit risk from its accounts receivable, more heavily weighted to the Big 3 Wholesalers, but as of and for the years ended
December 31, 2018
,
2017
and
2016
, the Company has not experienced significant losses with respect to its collection of these gross accounts receivable balances.
The following table sets forth the Company’s gross trade accounts receivable, gross sales and net revenue disaggregated by major customers for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Accounts Receivable as of December 31,
|
|
2018
|
|
2017
|
|
2016
|
Disaggregation of gross A/R by major customers
|
Gross
Accounts
Receivable
|
|
Gross
Accounts
Receivable %
|
|
Gross
Accounts
Receivable
|
|
Gross
Accounts
Receivable %
|
|
Gross
Accounts
Receivable
|
|
Gross
Accounts
Receivable %
|
Amerisource
|
$
|
55,160
|
|
|
17.9
|
%
|
|
$
|
99,771
|
|
|
26.3
|
%
|
|
$
|
184,623
|
|
|
35.6
|
%
|
Cardinal
|
59,443
|
|
|
19.3
|
%
|
|
79,731
|
|
|
21.1
|
%
|
|
78,344
|
|
|
15.1
|
%
|
McKesson
|
149,000
|
|
|
48.3
|
%
|
|
146,321
|
|
|
38.6
|
%
|
|
172,468
|
|
|
33.2
|
%
|
Combined Total
|
263,603
|
|
|
85.5
|
%
|
|
325,823
|
|
|
86.0
|
%
|
|
435,435
|
|
|
83.9
|
%
|
Other
|
44,702
|
|
|
14.5
|
%
|
|
52,936
|
|
|
14.0
|
%
|
|
83,740
|
|
|
16.1
|
%
|
Grand Total
|
$
|
308,305
|
|
|
100.0
|
%
|
|
$
|
378,759
|
|
|
100.0
|
%
|
|
$
|
519,175
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Sales YTD
|
|
2018
|
|
2017
|
|
2016
|
Disaggregation of gross sales by major customers
|
Gross Sales
|
|
Gross Sales %
|
|
Gross Sales
|
|
Gross Sales %
|
|
Gross Sales
|
|
Gross Sales %
|
Amerisource
|
$
|
386,543
|
|
|
20.5
|
%
|
|
$
|
554,690
|
|
|
23.6
|
%
|
|
$
|
852,924
|
|
|
29.5
|
%
|
Cardinal
|
390,438
|
|
|
20.7
|
%
|
|
411,458
|
|
|
17.5
|
%
|
|
445,255
|
|
|
15.4
|
%
|
McKesson
|
789,620
|
|
|
41.8
|
%
|
|
918,157
|
|
|
39.1
|
%
|
|
939,662
|
|
|
32.5
|
%
|
Combined Total
|
1,566,601
|
|
|
83.0
|
%
|
|
1,884,305
|
|
|
80.2
|
%
|
|
2,237,841
|
|
|
77.4
|
%
|
Other
|
321,261
|
|
|
17.0
|
%
|
|
466,766
|
|
|
19.8
|
%
|
|
653,426
|
|
|
22.6
|
%
|
Grand Total
|
$
|
1,887,862
|
|
|
100.0
|
%
|
|
$
|
2,351,071
|
|
|
100.0
|
%
|
|
$
|
2,891,267
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue YTD
|
|
2018
|
|
2017
|
|
2016
|
Disaggregation of net revenues by major customers
|
Net
Revenue
|
|
Net Revenue %
|
|
Net
Revenue
|
|
Net Revenue %
|
|
Net
Revenue
|
|
Net Revenue %
|
Amerisource
|
$
|
144,776
|
|
|
20.9
|
%
|
|
$
|
160,671
|
|
|
19.1
|
%
|
|
$
|
260,225
|
|
|
23.3
|
%
|
Cardinal
|
109,747
|
|
|
15.8
|
%
|
|
150,257
|
|
|
17.9
|
%
|
|
182,045
|
|
|
16.3
|
%
|
McKesson
|
173,363
|
|
|
25.0
|
%
|
|
222,715
|
|
|
26.5
|
%
|
|
270,276
|
|
|
24.2
|
%
|
Combined Total
|
427,886
|
|
|
61.7
|
%
|
|
533,643
|
|
|
63.5
|
%
|
|
712,546
|
|
|
63.8
|
%
|
Other
|
266,132
|
|
|
38.3
|
%
|
|
307,402
|
|
|
36.5
|
%
|
|
404,297
|
|
|
36.2
|
%
|
Grand Total
|
$
|
694,018
|
|
|
100.0
|
%
|
|
$
|
841,045
|
|
|
100.0
|
%
|
|
$
|
1,116,843
|
|
|
100.0
|
%
|
Sales to the Big 3 Wholesalers primarily represent purchases of products in the Prescription Pharmaceuticals segment and generate the majority of the Prescription Pharmaceuticals segment revenue. The Prescription Pharmaceuticals segment revenue represented
89.4%
,
91.9%
and
94.3%
, of the net revenue for the twelve months ended
December 31, 2018
,
2017
and
2016
, respectively. Chain pharmacies are the major customers in the Consumer Health segment. For more information, see
Note 12 — Segment Information
.
Supplier Concentration
The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical products for its own use and for third parties with which it has contracted. The principal components of the Company’s products are active and inactive pharmaceutical ingredients and certain packaging materials. Certain of these ingredients and components are available from only a single source and, in the case of certain of the Company’s abbreviated new drug applications and new drug applications, only one supplier of raw materials has been identified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay the Company’s development and marketing efforts. In addition, certain of the pharmaceutical products marketed by the Company are manufactured by a third party manufacturer, which serves as the Company’s sole source of that finished product. If for any reason the Company is unable to obtain sufficient quantities of any of the raw materials or components required to produce and package its products, it may not be able to manufacture its products as planned, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Likewise, if the Company’s manufacturing partners experience any similar difficulties in obtaining raw materials or in manufacturing the finished product, the Company’s results of operations would be negatively impacted.
No
individual supplier represented
10%
or more of the Company’s purchases in any of the years ended
December 31, 2018
,
2017
and
2016
.
Product Concentration
In the year ended
December 31, 2018
,
none
of the Company’s products represented
10%
or more of total net revenue, while in the year ended December 31,
2017
and
2016
, Ephedrine Sulfate Injection represented approximately
10%
and
20%
of the Company’s total net revenue, respectively. The Company attempts to minimize the risk associated with product concentration by continuing to acquire and develop new products to add to its portfolio.
Note 17 — Related Party Transactions
During the years ended
December 31, 2018
,
2017
and
2016
, the Company obtained legal services totaling
$4.1 million
,
$0.8 million
and
$1.3 million
, respectively, of which
$1.3 million
and
$0.1 million
was payable as of
December 31, 2018
and
2017
, respectively, from Polsinelli PC, a law firm for which the spouse of the Company’s Executive Vice President, General Counsel and Secretary is an attorney and shareholder.
The Company also obtained and paid legal services totaling
$0.5 million
during the year ended
December 31, 2018
from Segal McCambridge Singer & Mahone, a firm for which the brother in law of the Company's Executive Vice President, General Counsel and Secretary is a partner.
The Company obtained support services for compliance with DSCSA requirements totaling
$0.1 million
during the year ended
December 31, 2018
from Domino Amjet, Inc., a company for which the brother of the Company’s Executive Vice President, General Counsel and Secretary is a Vice President of Sales.
Note 18 – Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
(In thousands, except per share amounts)
|
Revenues
|
|
Gross
Profit
|
|
Operating
(Loss) Income (1)(2)
|
|
Amount
|
|
Per Basic
Share
|
|
Per Diluted
Share
|
Year Ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter
|
$
|
153,386
|
|
|
$
|
25,247
|
|
|
$
|
(195,865
|
)
|
|
$
|
(215,038
|
)
|
|
$
|
(1.71
|
)
|
|
$
|
(1.71
|
)
|
3rd Quarter
|
165,625
|
|
|
57,262
|
|
|
(75,980
|
)
|
|
(70,140
|
)
|
|
(0.56
|
)
|
|
(0.56
|
)
|
2nd Quarter
|
190,944
|
|
|
81,279
|
|
|
(91,166
|
)
|
|
(87,984
|
)
|
|
(0.70
|
)
|
|
(0.70
|
)
|
1st Quarter
|
184,063
|
|
|
82,228
|
|
|
(25,415
|
)
|
|
(28,747
|
)
|
|
(0.23
|
)
|
|
(0.23
|
)
|
Year Ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter
|
$
|
186,057
|
|
|
$
|
82,905
|
|
|
$
|
(121,601
|
)
|
|
$
|
(65,217
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.52
|
)
|
3rd Quarter
|
202,428
|
|
|
97,763
|
|
|
8,760
|
|
|
(2,897
|
)
|
|
(0.02
|
)
|
|
(0.02
|
)
|
2nd Quarter
|
199,140
|
|
|
102,769
|
|
|
14,244
|
|
|
2,537
|
|
|
0.02
|
|
|
0.02
|
|
1st Quarter
|
253,420
|
|
|
148,769
|
|
|
75,713
|
|
|
41,027
|
|
|
0.33
|
|
|
0.33
|
|
(1) The shift from an Operating income position in the first quarter of 2017, to an Operating loss in the fourth quarter 2017, was primarily due to impairments of Intangibles assets, net. See
Note 5 - Goodwill and Other Intangible Assets
for further details.
(2) The significant increase in Operating loss in the fourth quarter of 2018 compared to the prior 2018 quarters, was primarily due to impairments of Intangibles assets, net. See
Note 5 - Goodwill and Other Intangible Assets
for further details.
Note 19 – Legal Proceedings
The Company is a party to legal proceedings and potential claims arising in the ordinary course of our business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management of the Company believes that the ultimate disposition of such proceedings and exposure will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.
Litigation Related to the Merger
Akorn, Inc. v. Fresenius Kabi AG
On April 22, 2018, Fresenius Kabi AG delivered to Akorn a letter purporting to terminate the Merger Agreement. On April 23, 2018, Akorn filed a verified complaint entitled
Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc. and Fresenius SE & Co. KGaA
, in the Court of Chancery of the State of Delaware for breach of contract and declaratory judgment. The complaint alleged, among other things, that (i) the defendants anticipatorily breached their obligations under the Merger Agreement by repudiating their obligation to close the Merger, (ii) the defendants knowingly and intentionally breached their obligations under the Merger Agreement by working to slow the antitrust approval process and by engaging in a series of actions designed to hamper and ultimately block the Merger and (iii) Akorn had performed its obligations under the Merger Agreement, and was ready, willing and able to close the Merger. The complaint sought, among other things, a declaration that Fresenius Kabi AG's termination was invalid, an order enjoining the defendants from terminating the Merger Agreement, and an order compelling the defendants to specifically perform their obligations under the Merger Agreement to use reasonable best efforts to consummate and make effective the Merger. On April 30, 2018, the defendants filed a verified counterclaim alleging that, due primarily to purported data integrity deficiencies, the Company had breached representations, warranties and covenants in the Merger Agreement, and that it had experienced a material adverse effect. The verified counterclaim sought, among other things, a declaration that defendants’ purported termination of the Merger Agreement was valid and that defendants were not obligated to consummate the transaction, and damages.
Following expedited discovery, from July 9 to 13, 2018, the Court of Chancery held a trial on the parties’ claims (the “Delaware Action”). At the conclusion of trial, the Court of Chancery ordered post-trial briefing, which was completed on August 20, 2018, and a post-trial hearing, which was held on August 23, 2018.
On October 1, 2018, the Court of Chancery issued an opinion (the “Opinion”) denying Akorn’s claims for relief and concluding that Fresenius Kabi AG had validly terminated the Merger Agreement. The Court of Chancery concluded that Akorn had experienced a material adverse effect due to its financial performance following the signing of the Merger Agreement; that Akorn had breached representations and warranties in the Merger Agreement and that those breaches would reasonably be expected to give rise to a material adverse effect; that Akorn had materially breached covenants in the Merger Agreement; and that Fresenius was materially in compliance with its own contractual obligations. On October 17, 2018, the Court of Chancery entered partial final judgment against Akorn on its claims and in favor of the Fresenius parties on their claims for declaratory judgment. The Court of Chancery entered an order holding proceedings on the Fresenius parties’ damages claims in abeyance pending the resolution of any appeal from the partial final judgment.
On October 18, 2018, Akorn filed a notice of appeal from the Opinion and the partial final judgment, as well as a motion seeking expedited treatment of its appeal. On October 23, 2018, the Delaware Supreme Court granted Akorn's motion for expedited treatment and set a hearing on Akorn's appeal for December 5, 2018. On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s opinion denying Akorn’s claims for declaratory and injunctive relief and granting Defendants’ counterclaim for a declaration that the termination was valid. On December 27, 2018, the Delaware Supreme Court issued a mandate returning the case to the Court of Chancery for consideration of all remaining issues, including the Fresenius parties’ damages claims.
On January 15, 2019, the parties filed a joint letter to the Court of Chancery seeking thirty days to discuss the potential resolution of the Fresenius parties’ damages claims. On February 19, 2019, the parties filed a joint letter advising the Court that they have been unable to resolve the Fresenius parties’ damages claims. The Fresenius parties stated their intention to seek leave to amend their counterclaims to assert a new claim for fraud and that they would seek an expedited trial on such claim purportedly due to Akorn’s financial condition. Akorn stated that it expected to oppose the motions for amendment and expedition, and that it would move to dismiss the Fresenius parties’ damages claims in their entirety.
On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement their counterclaim. The Fresenius parties’ proposed amended and supplemented counterclaim alleges that Akorn fraudulently induced Fresenius to enter into the Merger Agreement and thereafter breached contractual representations and warranties and covenants therein. It seeks damages of approximately
$102 million
. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’ motion for leave to amend and supplement their counterclaim, arguing that the motion was untimely and prejudicial. On February 27, 2019, the Fresenius parties filed a reply in further support of their motion to file an amended and supplemented counterclaim. On February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and supplemented counterclaim.
Other Matters
State of Louisiana v. Hi-Tech, et. al
The Louisiana Attorney General filed suit, Number 624,522,
State of Louisiana v. Abbott Laboratories, Inc., et al.,
in the Nineteenth Judicial District Court, Parish of East Baton Rouge, Louisiana state court, including Hi-Tech Pharmacal and other defendants. Louisiana’s complaint alleges that the defendants violated Louisiana state laws in connection with Medicaid reimbursement for certain vitamins, dietary supplements, and DESI products that were allegedly ineligible for reimbursement. After extensive motion and appellate practice, on October 3, 2017, the trial court issued a judgment holding that for the one remaining claim, brought under Louisiana’s unfair trade practices claim, Louisiana could not seek civil penalties for conduct pre-dating June 2, 2006. The defendants filed an application for supervisory writs with the Court of Appeal for the First Circuit on October 24, 2017, seeking reversal of the trial court’s denial of their no cause of action exception with respect to the unfair trade practices claim, which the First Circuit denied the writ on July 24, 2018.
In re Akorn, Inc. Data Integrity Securities Litigation
On March 8, 2018, a purported shareholder of the Company filed a putative class action complaint entitled
Joshi Living Trust v. Akorn, Inc. et al
., in the United States District Court for the Northern District of Illinois alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint named as defendants the Company, Chief Executive Officer Rajat Rai, Chief Financial Officer Duane Portwood and Chief Accounting Officer Randall Pollard. The complaint alleged that defendants made materially false or misleading statements and/or material omissions by failing to disclose sooner
the existence of investigations into data integrity at the Company. The Complaint sought, among other things, an award of damages, attorneys’ fees and expenses. The Company disputes these claims.
On May 31, 2018, the Court issued an order appointing Gabelli & Co. Investment Advisors, Inc. and Gabelli Funds, LLC as lead plaintiffs pursuant to the Private Securities Litigation Reform Act (“PSLRA”), approving their selection of lead counsel and liaison counsel and amending the case caption to
In re Akorn, Inc. Data Integrity Securities Litigation
. On June 14, 2018, lead plaintiffs filed a motion to lift the PSLRA stay of discovery. On June 22, 2018, the Company filed a memorandum in opposition to the motion to lift the PSLRA stay. On June 26, 2018, the Court denied the motion to lift the PSLRA stay, subject to entry of a preservation order.
On September 5, 2018, lead plaintiffs filed an amended complaint against the Company, Rajat Rai, Duane A. Portwood, Mark M. Silverberg, Alan Weinstein, Ronald M. Johnson, Brian Tambi, John Kapoor, Kenneth S. Abramowitz, Adrienne L. Graves, Steven J. Meyer and Terry A. Rappuhn. The amended complaint asserts (i) claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Fraud Claims”) against Defendants Akorn, Rai, Portwood, Silverberg, Weinstein, Johnson and Tambi; and (ii) claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Proxy Claims”) against defendants Akorn, Rai, Kapoor, Weinstein, Abramowitz, Graves, Johnson, Meyer, Rappuhn and Tambi. The amended complaint alleges that defendants knew or recklessly disregarded widespread institutional data integrity problems at Akorn’s manufacturing and research and development facilities, while making or causing Akorn to make contrary misleading statements and omissions of material fact concerning the Company’s data integrity at its facilities. The amended complaint alleges that corrective information was provided to the market on two separate dates, causing non-insider shareholders to lose over
$1.07 billion
and
$613 million
in value respectively. The amended complaint seeks an award of equitable relief and damages.
On October 29, 2018, the parties filed a stipulation and joint motion providing for the dismissal of certain claims and defendants. On October 30, 2018, the Court granted the parties’ motion, dismissing the Proxy Claims without prejudice; dismissing defendants Kapoor, Abramowitz, Graves, Meyer and Rappuhn without prejudice; and dismissing Defendant Silverberg with prejudice.
On December 19, 2018, the remaining defendants filed an answer to the amended complaint, disputing the plaintiffs’ remaining allegations. The parties are presently engaged in fact discovery.
Wickstrom v. Akorn, Inc. et al.
On February 21, 2019, Plaintiff Johnny Wickstrom, a purported shareholder of the Company, filed a putative class action complaint in the United States District Court for the Northern District of Illinois alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint names as defendants the Company, Rajat Rai and Duane Portwood. The complaint alleged that defendants made materially false or misleading statements and/or material omissions concerning its compliance with U.S. Food and Drug Administration (“FDA”) regulations and that those misstatements were corrected when the Company disclosed its receipt from the FDA of a warning letter at the Company’s facility in Decatur, IL. The complaint seeks, among other things, an award of damages, attorneys’ fees and expenses.
Kogut v. Akorn, et. al.
On March 8, 2016, a purported shareholder of the Company filed a putative derivative suit entitled
Kogut v. Akorn, Inc., et al
., in Louisiana state court in the Parish of East Baton Rouge. On June 10, 2016, the plaintiff filed an amended complaint asserting shareholder derivative claims alleging breaches of fiduciary duty in connection with the Company’s accounting for its acquisition and the restatement of its financials. On September 23, 2016, the Company filed a motion to dismiss the case. The case was subsequently stayed. On September 21, 2018, the plaintiff filed a second amended complaint, which added claims for shareholder derivative claims alleging breaches by certain present and former officers and directors of Akorn of fiduciary duties related to, among other matters, Akorn’s compliance with U.S. Food and Drug Administration (“FDA”) regulations and requirements regarding data integrity. On December 3, 2018, the Company and certain individual defendants moved to dismiss the complaint. Briefing on the motion to dismiss was completed on January 31, 2019.
In re Akorn, Inc. Shareholder Derivative Litigation
On October 15, 2018, Dale Trsar, a purported shareholder of the Company, filed a putative derivative suit captioned
Trsar v. Kapoor, et al.
, in the Circuit Court of Cook County, IL. The suit alleged breaches by certain present and former officers and directors of Akorn of fiduciary duties related to, among other matters, Akorn’s compliance with FDA regulations and
requirements regarding data integrity. On October 26, 2018, Trsar moved to dismiss the complaint voluntarily. On November 5, 2018, the Court granted Plaintiff Trsar’s motion and dismissed the complaint without prejudice.
On November 6, 2018, Trsar filed a putative derivative complaint captioned
Trsar v. Kapoor, et al.
against defendants John N. Kapoor, Rajat Rai, Duane A. Portwood, Mark M. Silverberg, Alan Weinstein, Kenneth S. Abramowitz, Steven J. Meyer, Terry Allison Rappuhn, Adrienne L. Graves, Ronald M. Johnson and Brian Tambi in the United States District Court for the Northern District of Illinois (the “
Trsar
Action”). The complaint purports to allege derivatively on behalf of the Company that (i) the defendants breached their fiduciary duties to the Company and its shareholders by failing to address the Company’s alleged non-compliance with FDA regulations; and (ii) the defendants violated Section 14(a) of the Securities Exchange Act of 1934, and SEC Rule 14a-9 promulgated thereunder, by making false or misleading statements in proxy statements issued to Akorn shareholders on November 14, 2016 and March 20, 2017. The complaint seeks an award of equitable relief and damages.
On December 10, 2018, Felix Glaubach, a purported shareholder of the Company, filed a putative derivative complaint captioned
Glaubach v. Kapoor, et al.
against John N. Kapoor, Rajat Rai, Mark M. Silverberg, Duane A. Portwood, Alan Weinstein, Kenneth S. Abramowitz, Steven J. Meyer, Terry Allison Rappuhn, Adrienne L. Graves, Ronald M. Johnson, and Brian Tambi in the United States District Court for the Northern District of Illinois (the “
Glaubach
Action”). The complaint purported to allege derivatively on behalf of the Company that (i) the defendants breached their fiduciary duties to the Company and its shareholders by failing to address the Company’s alleged non-compliance with FDA regulations; (ii) John N. Kapoor and Brian Tambi breached their fiduciary duties to the Company and its shareholders by misappropriating inside information in connection with sales of the Company’s stock; (iii) Rajat Rai and Duane A. Portwood were unjustly enriched; (iv) the Defendants wasted the Company’s assets; and (v) the Defendants violated Section 14(a) of the Securities Exchange Act of 1934, and SEC Rule 14a-9 promulgated thereunder, by making false or misleading statements in proxy statements issued to the Company’s shareholders. The complaint sought an award of equitable relief and damages. On January 11, the
Glaubach
Action was consolidated with the
Trsar
Action, with the complaint filed in the
Trsar
Action designated as operative, and the case caption was amended to
In re Akorn, Inc. Shareholder Derivative Litigation
.
On January 14, 2019, defendants filed a motion to dismiss the operative complaint in the consolidated action. Plaintiffs filed an opposition to defendants’ motion to dismiss on February 14, 2019.
Pope v. Akorn Sales Inc. and Akorn, Inc.
On April 7, 2017, a jury in the State Court of Houston County in the State of Georgia reached a verdict of
$20.5 million
in damages against Akorn, Inc. in a product liability case,
Ann Pope and Anthony Pope v. Horatio V. Cabasares, M.D., Horatio V. Cabasares, M.D., P.C. Houston Healthcare Systems, Inc., Akorn Sales, Inc., and Akorn, Inc.,
in which plaintiffs claimed the Company provided inadequate labeling on its product methylene blue. While an intermediate appellate decision affirmed the verdict on November 2, 2018, the Company filed a petition for certiorari with the Georgia Supreme Court on November 29, 2018, challenging liability as well as the compensatory and punitive damage awards.
The legal matters discussed above and others could result in losses, including damages, fines and civil penalties, and criminal charges, which could be substantial. We record accruals for these contingencies to the extent that we conclude that a loss is both probable and reasonably estimable. Regarding the aforementioned labeling verdict and intermediate appellate decision related to Methylene Blue Injection, the Company has recorded a
$20.5 million
liability as of
December 31, 2018
for which a corresponding insurance receivable
$10 million
is also recorded. The Company maintains product liability insurance coverage in excess of the amount of the verdict and will seek to enforce its coverage rights in excess of the
$10 million
receivable noted above. The Company recorded a
$5 million
contingent liability as of December 31, 2018 related to damage claims. Regarding the other matters disclosed above, the Company has determined that contingent liabilities associated with these legal matters are reasonably possible but they cannot be reasonably estimated. Given the nature of the litigation and investigations and the complexities involved, the Company is unable to reasonably estimate a possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation or investigation. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid.
Note 20 – Share Repurchases
In July 2016, the Company announced that the Board of Directors authorized a stock repurchase program (the "Stock Repurchase Program") pursuant to which the Company may repurchase up to
$200.0 million
of the Company’s common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or others, including accelerated stock repurchase arrangements, pursuant to a Rule 10b5-1 repurchase plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be suspended or discontinued at any time without notice and at the Company's discretion, and at this time no estimate to the effect on the results of the Company due to the Stock Repurchase Program can be made.
The Company did not repurchase any of its common stock during 2018 and 2017. During 2016, the Company repurchased
1.8 million
shares at an average price of
$24.89
. In aggregate, over the life of the Stock Repurchase Program the Company has repurchased
1.8 million
shares at an average purchase price of
$24.89
. As of December 31, 2018, the Company had
$155.0 million
remaining under the repurchase authorization.
Companies incorporated under Louisiana law are subject to the Louisiana Business Corporation Act ("LBCA"). Provisions of the LBCA eliminate the concept of treasury stock. As a result, all stock repurchases are presented as a reduction to issued shares of common stock, the stated value of common stock and retained earnings.
Note 21 — Pension plan and 401(k) Program
Akorn AG Pension Plan
The Company maintains a pension plan for its employees in Switzerland as required by law. The pension plan is funded by contributions by both employees and employers, with the sum of the contributions made by the employer required to be at least equal to the sum of the contributions made by employees. The Company contributes the necessary amounts required by local laws and regulations. Plan assets for the pension plan are held in a retirement trust fund with investments primarily in publicly traded securities and assets.
The purpose of this pension plan is to provide old age pensions. Some of the pension funds also provide benefits in case of disability and to the next of kin in case of premature death. Additionally, the pension funds can be used before retirement to buy a principal residence, to start an independent activity, or when leaving Switzerland permanently. If a participant leaves the company, accumulated pension funds are transferred either into a savings account or into the pension fund of a new employer.
The following table sets forth a summary of the defined benefit pension plan funded status:
|
|
|
|
|
|
|
|
Consolidated Financial Statement Position:
|
($ in thousands)
|
|
December 31,
|
|
2018
|
|
2017
|
|
Fair value of plan assets
|
$
|
23,610
|
|
$
|
24,281
|
|
Less: Benefit obligation
|
30,772
|
|
30,185
|
|
Funded status - Benefit obligation in excess of plan assets
|
$
|
(7,162
|
)
|
$
|
(5,904
|
)
|
The following table sets forth the change in plan assets:
|
|
|
|
|
|
|
|
Change in plan assets:
|
($ in thousands)
|
|
2018
|
|
2017
|
|
Fair value of plan assets, beginning of year
|
$
|
24,281
|
|
$
|
24,906
|
|
Actual return on plan assets
|
(409
|
)
|
1,245
|
|
Participant contributions
|
753
|
|
646
|
|
Employer contributions
|
1,503
|
|
1,292
|
|
Benefits paid
|
(2,446
|
)
|
(4,767
|
)
|
Translation adjustments and other
|
(72
|
)
|
959
|
|
Fair value of plan assets, end of year
|
$
|
23,610
|
|
$
|
24,281
|
|
The following table sets forth the change in benefit obligation:
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
($ in thousands)
|
|
2018
|
|
2017
|
|
Benefit obligation, beginning of year
|
$
|
30,185
|
|
$
|
32,594
|
|
Service cost
|
2,166
|
|
1,982
|
|
Interest cost
|
197
|
|
253
|
|
Actuarial losses (gains)
|
771
|
|
(1,129
|
)
|
Benefits paid
|
(2,446
|
)
|
(4,767
|
)
|
Translation adjustments and other
|
(101
|
)
|
1,252
|
|
Benefit obligation, end of year
|
$
|
30,772
|
|
$
|
30,185
|
|
The following table sets forth the changes in items not yet recognized as a component of net periodic cost:
|
|
|
|
|
|
|
|
Changes in Unrecognized pension cost, pre-tax
|
($ in thousands)
|
|
2018
|
|
2017
|
|
Unrecognized pension cost, pre-tax, beginning of year
|
$
|
(2,561
|
)
|
$
|
(4,546
|
)
|
Amortization during year
|
(19
|
)
|
120
|
|
Actuarial (losses) gains
|
(771
|
)
|
1,129
|
|
Asset (losses) gains
|
(1,140
|
)
|
472
|
|
Translation adjustments and other
|
$
|
12
|
|
$
|
264
|
|
Unrecognized pension cost, pre-tax, end of year
|
$
|
(4,479
|
)
|
$
|
(2,561
|
)
|
The following table sets forth the estimated amounts that will be amortized from accumulated other comprehensive (loss) into net periodic benefit cost in 2019:
|
|
|
|
|
Estimated amortization from Other Comprehensive Income into net periodic benefit cost in 2019:
|
($ in thousands)
|
Amortization of actuarial (losses)
|
$
|
(197
|
)
|
Amortization of prior service credit
|
19
|
|
Estimated net (loss)
|
$
|
(178
|
)
|
The following table sets forth the aggregated information for the pension plan:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31,
|
|
2018
|
|
2017
|
|
Projected benefit obligation
|
$
|
30,772
|
|
$
|
30,185
|
|
Accumulated benefit obligation
|
30,583
|
|
29,985
|
|
Fair value of plan assets
|
$
|
23,610
|
|
$
|
24,281
|
|
The following table sets forth the components of net periodic cost for our pension plan:
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
($ in thousands)
|
|
2018
|
|
2017
|
|
2016
|
|
Service cost
|
$
|
2,166
|
|
$
|
1,982
|
|
$
|
2,087
|
|
Interest cost
|
197
|
|
253
|
|
238
|
|
Expected return on plan assets
|
(731
|
)
|
(773
|
)
|
(741
|
)
|
Amortization of:
|
|
|
|
Prior service cost (benefit)
|
(19
|
)
|
(19
|
)
|
—
|
|
Net actuarial loss
|
—
|
|
139
|
|
212
|
|
Participant contributions
|
(753
|
)
|
(625
|
)
|
(598
|
)
|
Net periodic benefit cost
|
$
|
860
|
|
$
|
957
|
|
$
|
1,198
|
|
We estimate the discount rate for our pension benefit obligation based on AA-AAA rated Swiss bonds. The expected rate of return on plan assets takes into consideration expected long-term returns based upon the weighted-average allocation of equities, fixed income and other asset components comprising the plan's assets at the plan's measurement date. The following tables set forth the key assumptions used to determine the net periodic cost for each fiscal year and the benefit obligation at fiscal year-end:
|
|
|
|
|
|
|
|
Key assumptions used to determine the net periodic cost:
|
2018
|
|
2017
|
|
2016
|
|
Discount rate
|
0.80
|
%
|
0.65
|
%
|
0.75
|
%
|
Expected rate of return on plan assets
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
Rate of increase in compensation levels
|
0.75
|
%
|
0.75
|
%
|
0.75
|
%
|
|
|
|
|
|
|
Key assumptions used to determine the benefit obligation:
|
2018
|
|
2017
|
|
Discount rate
|
0.80
|
%
|
0.65
|
%
|
Rate of increase in compensation levels
|
0.75
|
%
|
0.75
|
%
|
The pension plan's assets are invested with the objective of being able to meet current and future benefit payment needs, while maximizing total investment returns within the constraints of a prudent level of portfolio risk and diversification. The assets of the plan are diversified across asset classes to achieve an optimal balance between risk and return, and between income and growth of assets through capital appreciation. The following table sets forth the asset allocation of our pension plan assets, by category:
|
|
|
|
|
|
Plan assets by category:
|
December 31,
|
|
2018
|
|
2017
|
|
Debt securities
|
37.9
|
%
|
34.0
|
%
|
Equity securities
|
33.2
|
%
|
32.4
|
%
|
Real estate
|
15.4
|
%
|
4.3
|
%
|
Other
|
12.9
|
%
|
27.3
|
%
|
Cash and cash equivalents
|
0.6
|
%
|
2.0
|
%
|
Total Plan Assets
|
100.0
|
%
|
100.0
|
%
|
This pooled pension fund is held in a trust. This fund is comprised of various publicly traded securities and assets (equity, fixed income, reits, direct real estate and alternative investments). The trust does not have a separate portfolio for Akorn. Akorn is entitled to a proportion of the total assets of the trust. The fair value amounts were provided by the fund administrator who values at market the total portfolio in accordance with ASC 820 - Fair Value of Financial Instruments. The
$23.6 million
and
$24.3 million
represents the fair values of the plan assets as of December 31, 2018 and 2017, respectively. The fair value hierarchy of the plan assets for 2018 and 2017 was level II.
The Company expects to contribute approximately
$1.3 million
to the pension plan in 2019.
The following table sets forth the Company's estimated future benefit payments:
|
|
|
|
|
Year
|
($ in thousands)
|
2019
|
$
|
1,477
|
|
2020
|
1,451
|
|
2021
|
1,316
|
|
2022
|
1,328
|
|
2023
|
1,278
|
|
Years 2024 - 2028
|
$
|
7,317
|
|
Smart Choice! Akorn's 401(k) Program
All U.S. full-time Akorn employees are eligible to participate in the Company’s 401(k) Plan. The Company matches the employee contribution to
50%
of the first
6%
of an employee's eligible compensation. Company matching contributions vest
50%
after two years of credited service and
100%
after three years of credited service. During the years ended
December 31, 2018
, 2017 and 2016, plan-related expenses totaled approximately
$2.6 million
,
$2.6 million
and
$2.2 million
, respectively. The Company's matching contribution is funded on a current basis.
Note 22 – Subsequent Events
On February 25, 2019, the Company made a decision to explore strategic alternatives for exiting its Paonta Sahib, Himachal Pradesh, India manufacturing facility. The Paonta Sahib facility has not yet been FDA approved. It is a sterile injectable facility with separate areas dedicated to general injectable products, carbapenem injectable products, cephalosporin injectable products and hormonal injectable products.