NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Business and Basis of Presentation
Business:
Akorn, Inc., together with its wholly-owned subsidiaries (collectively “Akorn,” the “Company,” “we,” “our” or “us”) is a specialty generic pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals, branded as well as private-label over-the-counter consumer health products and animal health pharmaceuticals. We are an industry leader in the development, manufacturing and marketing of specialized generic pharmaceutical products in alternative dosage forms. We focus on difficult-to-manufacture sterile and non-sterile dosage forms including, but not limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants and nasal sprays. In previous years, the Company completed numerous mergers, acquisitions and product acquisitions which resulted in significant growth.
Akorn, Inc. is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, we relocated our corporate headquarters to the Chicago, Illinois area and currently maintain our principal corporate offices in Lake Forest, Illinois. We have pharmaceutical manufacturing facilities in Decatur, Illinois; Somerset, New Jersey; Amityville, New York; Hettlingen, Switzerland; and Paonta Sahib, Himachal Pradesh, India. We operate a central distribution warehouse in Gurnee, Illinois and additional distribution facilities in Amityville, New York and Decatur, Illinois. Our research and development (“R&D”) centers are located in Vernon Hills, Illinois and Cranbury, New Jersey. We maintain other corporate offices in Ann Arbor, Michigan and Gurgaon, Haryana, India.
During the three month periods ended
March 31, 2019
and 2018, the Company reported results for
two
reportable segments: Prescription Pharmaceuticals and Consumer Health. For further detail concerning our reportable segments please see Part I, Item 1, Note 10 - “
Segment Information.”
Our common shares are traded on The NASDAQ Global Select Market under the ticker symbol AKRX. Our principal corporate office is located at 1925 West Field Court Suite 300, Lake Forest, Illinois 60045, with telephone number (847) 279-6100.
Terminated Merger Agreement:
On April 24, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fresenius Kabi AG, a German stock corporation (“Parent”), Quercus Acquisition, Inc., a Louisiana corporation and wholly-owned subsidiary of Parent (“Merger Sub”) and, solely for purposes of Article VIII thereof, Fresenius SE & Co. KGaA, a German partnership limited by shares.
On April 22, 2018, Fresenius Kabi AG delivered to Akorn a letter purporting to terminate the Merger Agreement. On April 23, 2018, Akorn filed a verified complaint entitled Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc. and Fresenius SE & Co. KGaA, in the Court of Chancery of the State of Delaware for breach of contract and declaratory judgment. The complaint alleged, among other things, that (i) the defendants anticipatorily breached their obligations under the Merger Agreement by repudiating their obligation to close the Merger, (ii) the defendants knowingly and intentionally breached their obligations under the Merger Agreement by working to slow the antitrust approval process and by engaging in a series of actions designed to hamper and ultimately block the Merger and (iii) Akorn had performed its obligations under the Merger Agreement, and was ready, willing and able to close the Merger. The complaint sought, among other things, a declaration that Fresenius Kabi AG's termination was invalid, an order enjoining the defendants from terminating the Merger Agreement, and an order compelling the defendants to specifically perform their obligations under the Merger Agreement to use reasonable best efforts to consummate and make effective the Merger. On April 30, 2018, the defendants filed a verified counterclaim alleging that, due primarily to purported data integrity deficiencies, the Company had breached representations, warranties and covenants in the Merger Agreement, and that it had experienced a material adverse effect. The verified counterclaim sought, among other things, a declaration that defendants’ purported termination of the Merger Agreement was valid and that defendants were not obligated to consummate the transaction, and damages.
Following expedited discovery, from July 9 to 13, 2018, the Court of Chancery held a trial on the parties’ claims (the “Delaware Action”). At the conclusion of trial, the Court of Chancery ordered post-trial briefing, which was completed on August 20, 2018, and a post-trial hearing, which was held on August 23, 2018.
On October 1, 2018, the Court of Chancery issued an opinion (the “Opinion”) denying Akorn’s claims for relief and concluding that Fresenius Kabi AG had validly terminated the Merger Agreement. The Court of Chancery concluded that Akorn had experienced a material adverse effect due to its financial performance following the signing of the Merger
Agreement; that Akorn had breached representations and warranties in the Merger Agreement and that those breaches would reasonably be expected to give rise to a material adverse effect; that Akorn had materially breached covenants in the Merger Agreement; and that Fresenius was materially in compliance with its own contractual obligations. On October 17, 2018, the Court of Chancery entered partial final judgment against Akorn on its claims and in favor of the Fresenius parties on their claims for declaratory judgment. The Court of Chancery entered an order holding proceedings on the Fresenius parties’ damages claims in abeyance pending the resolution of any appeal from the partial final judgment.
On October 18, 2018, Akorn filed a notice of appeal from the Opinion and the partial final judgment, as well as a motion seeking expedited treatment of its appeal. On October 23, 2018, the Delaware Supreme Court granted Akorn's motion for expedited treatment and set a hearing on Akorn's appeal for December 5, 2018.
On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s opinion denying Akorn’s claims for declaratory and injunctive relief and granting Defendants’ counterclaim for a declaration that the termination was valid. On December 27, 2018, the Delaware Supreme Court issued a mandate returning the case to the Court of Chancery for consideration of all remaining issues, including the Fresenius parties’ damages claims.
On January 15, 2019, the parties filed a joint letter to the Court of Chancery seeking thirty days to discuss the potential resolution of the Fresenius parties’ damages claims. On February 19, 2019, the parties filed a joint letter advising the Court that they have been unable to resolve the Fresenius parties’ damages claims. The Fresenius parties stated their intention to seek leave to amend their counterclaims to assert a new claim for fraud and that they would seek an expedited trial on such claim purportedly due to Akorn’s financial condition. Akorn stated that it expected to oppose the motions for amendment and expedition, and that it would move to dismiss the Fresenius parties’ damages claims in their entirety.
On February 20, 2019, the Fresenius parties filed a motion for leave to amend and supplement their counterclaim. The Fresenius parties’ proposed amended and supplemented counterclaim alleged that Akorn fraudulently induced Fresenius to enter into the Merger Agreement and thereafter breached contractual representations and warranties and covenants therein. It sought damages of approximately
$102 million
. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’ motion for leave to amend and supplement their counterclaim, arguing that the motion was untimely and prejudicial. On February 27, 2019, the Fresenius parties filed a reply in further support of their motion to file an amended and supplemented counterclaim. On February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and supplemented counterclaim. On March 15, 2019, the Fresenius parties served interrogatories in furtherance of their claim for damages purportedly resulting from breaches of contractual representations and warranties and covenants in the Merger Agreement.
Basis of Presentation
:
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and accordingly do not include all the information and footnotes required by GAAP for annual financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in these financial statements. Operating results for the three month period ended
March 31, 2019
, are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes for the year ended
December 31, 2018
, included in the Company’s Annual Report on Form 10-K filed on March 1, 2019.
Note 2 — Summary of Significant Accounting Policies
Consolidation:
The accompanying condensed consolidated financial statements include the accounts of Akorn, Inc. and its wholly-owned domestic and foreign subsidiaries. All inter-company transactions and balances have been eliminated in consolidation, and the financial statements of Akorn India Private Limited ("AIPL") and Akorn AG have been translated from Indian Rupees to U.S. Dollars and Swiss Francs to U.S. Dollars, respectively, based on the currency translation rates in effect during the period or as of the date of consolidation, as applicable. The Company has no involvement with variable interest entities.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Significant estimates and assumptions for the Company relate to the allowances for chargebacks, rebates, product returns, coupons, promotions and doubtful accounts, as well as the reserve for slow-moving and obsolete inventories, the carrying value and lives of intangible assets, the useful lives of fixed assets, impairments of fixed assets, the carrying value of deferred income
tax assets and liabilities, the assumptions underlying share-based compensation and accrued but unreported employee benefit costs.
Going Concern:
In connection with the preparation of the financial statements for the three month period ended
March 31, 2019
, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity's ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued.
As further described in Note 8 - "Financing Arrangements,” on May 6, 2019, the Company and certain Lenders entered into a Standstill Agreement and First Amendment (the “Standstill Agreement”) to its Term Loan Agreements. Pursuant to the terms of the Standstill Agreement, the Company must enter into a “Comprehensive Amendment” to the Term Loan Agreements that is satisfactory in form and substance to the Lenders. If the Company does not enter into a Comprehensive Amendment by December 13, 2019 or refinance or otherwise address the outstanding Term Loans, an event of default will occur under the Term Loan Agreements which, if not waived, could materially affect the Company’s business, financial position and results of operations. If an event of default occurs and the Lenders accelerate the obligations under the Term Loan Agreements, the Company may not be able to repay the obligations that become immediately due and it could have a material negative impact on the Company’s liquidity and business.
The Company evaluated the impact of entering into the Standstill Agreement on its ability to continue as a going concern. As the Company’s ability to enter into a Comprehensive Amendment with the Lenders is not within its control, and failure to do so would result in an event of default under the Term Loan Agreements, these conditions in the aggregate raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying financial statements are filed. The Company will actively seek to refinance or otherwise address the Term Loans or enter into a “Comprehensive Amendment” to the Term Loan Agreements by December 13, 2019. Based on discussions with the Company’s financial advisor, the Company believes that it will be able to refinance or otherwise address the Term Loans within this timeframe. In the event that the Company is unable to refinance or otherwise address the Term Loans, the Company would seek to enter into a “Comprehensive Amendment” to the Term Loan Agreements. The Standstill Agreement requires the Company and Lenders to negotiate in good faith to enter into such a Comprehensive Amendment.
Revenue Recognition:
Revenue is recognized at a point in time upon the transfer of control of the Company’s products, which occurs upon delivery for substantially all of the Company’s sales. The promises within the contract that are distinct are primarily the Company’s supply of products, which represents a single performance obligation. The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company makes significant estimates for related variable consideration at the point of sale, including chargebacks, rebates, product returns and other discounts and allowances. All sales taxes are excluded from the transaction price. The Company expenses contract fulfillment costs when incurred since the amortization period would have been less than one year. Payment terms are primarily less than
90
days.
Provision for estimated chargebacks, rebates, discounts, managed care rebates, product returns and doubtful accounts is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
Freight:
The Company records shipping and handling expense related to product sales as cost of sales.
Cash and Cash Equivalents:
The Company considers all unrestricted, highly liquid investments with maturity of three months or less when acquired, to be cash and cash equivalents. At
March 31, 2019
and December 31, 2018, approximately
$0.8 million
and
$0.9 million
, respectively, of cash held by AIPL was restricted, and was reported within prepaid expenses and other current assets.
The following table sets forth the components of the Company’s cash, cash equivalents, and restricted cash as reported in the consolidated statement of cash flows for the three month periods ended
March 31, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Cash and cash equivalents
|
$
|
184,090
|
|
|
$
|
309,377
|
|
|
Restricted cash
|
785
|
|
|
2,372
|
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
184,875
|
|
|
$
|
311,749
|
|
Accounts Receivable:
Trade accounts receivable are stated at their net realizable value. The nature of the Company’s business involves, in the ordinary course, significant judgments and estimates relating to chargebacks, coupon redemption, product returns, rebates, discounts given to customers and allowances for doubtful accounts. Certain rebates, chargebacks and other credits are recorded as deductions to the Company’s trade accounts receivable where applicable, based on product and customer specific terms.
Unless otherwise noted, the provisions and allowances for the following customer deductions are reflected in the accompanying consolidated financial statements as reductions of revenues and trade accounts receivable, respectively.
Chargebacks
:
The Company enters into contractual agreements with certain third parties such as retailers, hospitals, group-purchasing organizations (“GPOs”) and managed care organizations to sell certain products at predetermined prices. Similarly, we maintain an allowance for rebates and discounts related to billbacks, wholesaler fee for service contracts, GPO administrative fees, government programs, prompt payment and other adjustments with certain customers. Most of the parties have elected to have these contracts administered through wholesalers that buy the product from the Company and subsequently sell it to these third parties. As noted elsewhere, these wholesalers represent a significant percentage of the Company’s gross sales. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific contract is charged back to the Company by the wholesaler. This process typically takes four to six weeks, but for some products may extend out to twelve weeks. The Company tracks sales and submitted chargebacks by product number and contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product and records an allowance as a reduction to gross sales when the Company records its sale of the products. The Company reduces the chargeback allowance when a chargeback request from a wholesaler is processed. Actual chargebacks processed by the Company can vary materially from period to period based upon actual sales volume through the wholesalers. However, the Company’s provision for chargebacks is fully reserved for at the time revenues are recognized.
Management obtains product inventory reports from certain wholesalers to aid in analyzing the reasonableness of the chargeback allowance and to monitor whether wholesaler inventory levels do not significantly exceed customer demand. The Company assesses the reasonableness of its chargeback allowance by applying a product chargeback percentage that is based on a combination of historical activity and future price and mix expectations to the quantities of inventory on hand at the wholesalers according to wholesaler inventory reports. In addition, the Company estimates the percent of gross sales generated through direct and indirect sales channels and the percent of contract vs. non-contract revenue in the period, as these each affect the estimated reserve calculation. In accordance with its accounting policy, the Company also estimates the percent of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a trend of such sales through wholesalers. The Company uses this percentage estimate until historical trends indicate that a revision should be made. On an ongoing basis, the Company evaluates its actual chargeback rate experience and new trends are factored into its estimates each quarter as market conditions change.
For the three month period ended
March 31, 2019
, the Company incurred a chargeback provision of
$205.4 million
, or
44.8%
of gross sales of
$458.6 million
, compared to
$224.0 million
, or
43.0%
of gross sales of
$520.5 million
in the prior year period. The dollar decrease and percent increase in the comparative period was the result of gross sales decreases and a change in contractual terms with a major customer in the first quarter of 2018. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter chargeback rates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences and customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the chargeback rate depending on the direction and velocity of the change(s).
To better understand the impact of changes in chargeback reserve based on circumstances that are not fully outside the Company’s control, for instance, the ratio of sales subject to chargeback to indirect sales, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a
560
basis point (“BP”) change in the ratio of sales subject to chargeback to indirect sales would increase the chargeback reserve by
$0.7 million
or decrease the chargeback reserve by
$2.9 million
depending on the change in the direction of the ratio. Fundamentally, the BP change calculation is determined based on the six month trend of the average ratio of sales subject to chargeback to indirect sales. Due to the competitive generic pharmaceutical industry and our recent experience with wholesalers’ strategy and shifts in contracted and non-contracted indirect sales, we believe that the six month trend of the proportion of direct to indirect sales provides a representative basis for sensitivity analysis.
Rebates, Administrative Fees and Others
: The Company maintains an allowance for rebates, administrative fees and others, related to contracts and other rebate programs that it has in place with certain customers. Rebates, administrative fees and other percentages vary by product and by volume purchased by each eligible customer. The Company tracks sales by product number for each eligible customer and then applies the applicable rebate, administrative fees and other percentage, using both historical trends and actual experience to estimate its rebates, administrative fees and others allowances. The Company reduces gross sales and increases the rebates, administrative fees and others allowance by the estimated rebates, administrative fees and others amounts when the Company sells its products to eligible customers. The Company reduces the rebate allowance when it processes a customer request for a rebate. At each balance sheet date, the Company analyzes the allowance for rebates, administrative fees and others against actual rebates processed and makes adjustments as appropriate. The amount of actual rebates processed can vary materially from period to period as discussed below.
The allowances for rebates, administrative fees and others further takes into consideration price adjustments which are credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products. In the case of a price decrease, a shelf-stock adjustment credit may be given for product remaining in customer’s inventories at the time of the price reduction and is reserved at the point of sale. Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protection are based upon specified terms with customers, estimated changes in market prices, and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available.
Similar to rebates, the reserve for administrative fees and others represents those amounts processed related to contracts and other fee programs which have been in place with certain entities, but they are settled through cash payment to these entities and accordingly are accounted for as a current liability. Otherwise, administrative fees and others operate similarly to rebates.
For the three month period ended
March 31, 2019
, the Company incurred rebates, administrative fees and others of
$64.3 million
, or
14.0%
of gross sales of
$458.6 million
, compared to
$92.3 million
, or
17.7%
of gross sales of
$520.5 million
in the prior year period. The dollar and percent decreases from the comparative period were the result of gross sales decreases and product mix shifts to products with lower rebates, administrative fees and others expense percentages. Additionally, a change in contractual terms with a major customer in the first quarter of 2018, resulted in a decrease in rebates, which is also a contributing factor in the variances between the two periods compared. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter rebates, administrative fees and others rates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences and customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the rebate rate depending on the direction and velocity of the change(s).
To better understand the impact of changes in reserves for rebates, administrative fees and others based on circumstances that are not fully outside the Company’s control, for instance, the proportion of direct to indirect sales subject to rebates, administrative fees and others, the Company performs a sensitivity analysis. Holding all other assumptions constant, for a
560
BP change in the ratio of sales subject to rebates, administrative fees and others to indirect sales would increase the reserve for rebates, administrative fees and others by
$0.0 million
or decrease the same reserve by
$0.4 million
depending on the direction of the change in the ratio. Fundamentally, the BP change calculation is determined based on the six month trend of the average ratio of sales subject to rebates, administrative fees and others to indirect sales. Due to the competitive generic pharmaceutical industry and our recent experience with wholesalers’
strategy and shifts in contracted and non-contracted indirect sales, we believe the six month trend of the average ratio of sales subject to rebates, administrative fees and others to indirect sales provides a representative basis for sensitivity analysis.
Sales Returns:
Certain of the Company’s products are sold with the customer having the right to return the product within specified periods. Provisions are made at the time of sale based upon historical experience. Historical factors such as one-time recall events as well as pending new developments like comparable product approvals or significant pricing movement that may impact the expected level of returns are taken into account to determine the appropriate reserve estimate at each balance sheet date. As part of the evaluation of the reserve required, the Company considers actual returns to date that are in process, the expected impact of any product recalls and the amount of wholesaler’s inventory to assess the magnitude of unconsumed product that may result in sales returns to the Company in the future. The sales returns level can be impacted by factors such as overall market demand and market competition and availability for substitute products which can increase or decrease the pull through for sales of the Company’s products and ultimately impact the level of sales returns.
For the three month period ended
March 31, 2019
, the Company incurred a return provision of
$11.9 million
, or
2.6%
of gross sales of
$458.6 million
, compared to
$7.1 million
, or
1.4%
of gross sales of
$520.5 million
in the prior year period. We note that the dollar and percentage increased in the comparative period was primarily due to the timing of returns processing. The Company ensures that this rate as a percent of gross sales is reasonable through inspection of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter return rates include: acquisitions and integration activities that consolidate dissimilar contract terms and could increase or decrease the return rate depending on the contracting power of the acquired business and consumer demand shifts by products, which could either increase or decrease the return rate depending on the product or products specifically demanded and ultimately returned.
To better understand the impact of changes in return reserve based on certain circumstances, the Company performs a sensitivity analysis. Holding all other assumptions constant, for an average
0.3
months change in the lag from the time of sale to the time the product return is processed, this change would result in an increase of
$0.3 million
or decrease of
$0.4 million
in return reserve expense if the lag increases or decreases, respectively. The average
0.3
months change in the lag from the time of sale to the time the product return is processed was determined based on the difference between the high and low lag time for the past twelve month historical activities. This sensitivity analysis is a change from the three month period ended March 31, 2018, which was determined based on the average variances for the last six months of returns activity. The prior method did not give a measurable variance to calculate a sensitivity. Due to the change in the volume and type of products sold by the Company in the recent past, we have determined that the lag calculation provides a reasonable basis for sensitivity analysis.
Allowance for Coupons, Advertising, Promotions and Co-Pay Discount Cards:
The Company issues coupons from time to time that are redeemable against certain of our Consumer Health products. In addition to couponing, from time to time the Company authorizes various retailers to run in-store promotional sales and co-pay discount of its products. At the point of sale, the Company records an estimate of the dollar value of coupons expected to be redeemed, the dollar amount owed back to the retailer and co-pay discount as variable consideration since the Company intends to continuously issue coupons, advertising promotion and co-pay discount from time to time. This coupon estimate is based on historical experience and is adjusted as needed based on actual redemptions. Upon receiving confirmation that an advertising promotion was run, the Company adjusts the estimate of the dollar amount expected to be owed back to the retailer as needed. This estimate is then adjusted to actual upon receipt of an invoice from the retailer. Additionally, the Company provides consumer co-pay discount cards, administered through outside agents to provide discounted products when redeemed. The Company records an estimate of the dollar value of co-pay discounts expected to be utilized based on historical experience and is adjusted as needed based on actual experience.
Doubtful Accounts:
Provisions for doubtful accounts, which reflect trade receivable balances owed to the Company that are believed to be uncollectible, are recorded as a component of selling, general and administrative ("SG&A") expenses. In estimating the allowance for doubtful accounts, the Company considers its historical experience with collections and write-offs, the credit quality of its customers and any recent or anticipated changes thereto, and the outstanding balances and past due amounts from its customers. Note that in the ordinary course of business, and consistent with our peers, we may from time to time offer extended payment terms to our customers as an incentive for new product launches or in other circumstances in accordance with standard industry practices. These extended payment terms do not represent a significant risk to the collectability of accounts receivable as of the period-end. Accounts are considered past due when they remain uncollected beyond the due date specified in the applicable contract or on the applicable invoice, whichever is deemed to take precedence.
Inventories:
Inventories are stated at the lower of cost and net realizable value ("NRV") (see Note 5 -
Inventories, net
). The Company maintains an allowance for slow-moving and obsolete inventory as well as inventory where the cost is in excess
of its NRV. For finished goods inventory, the Company estimates the amount of inventory that may not be sold prior to its expiration or is slow-moving based upon recent sales activity by unit and wholesaler inventory information. The Company also analyzes its raw material and component inventory for slow-moving items and NRV.
The Company capitalizes inventory costs associated with its products prior to regulatory approval when, based on management judgment, future commercialization is considered probable and future economic benefit is expected to be realized. The Company assesses the regulatory approval process and where the product stands in relation to that approval process including any known constraints or impediments to approval. The Company also considers the shelf life of the product in relation to the product timeline for approval.
Property, Plant and Equipment:
Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method in amounts considered sufficient to amortize the cost of the assets to operations over their estimated useful lives or lease terms.
Intangible Assets:
Intangible assets consist primarily of goodwill, which is carried at its initial value, subject to impairment testing, In-Process Research and Development ("IPR&D"), which is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other such costs, which are capitalized and amortized on a straight-line basis over their useful lives, normally ranging from
one year
to
thirty years
. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows. If the Company incurs additional costs to renew or extend the life of an intangible asset, such costs are added to the remaining unamortized cost of the asset, if any, and the sum is amortized over the extended remaining life of the asset. Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. The Company models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. Impairments are recorded within the impairment of intangible assets line in the Condensed Consolidated Statements of Comprehensive (Loss).
Leases:
The Company leases real and personal property in the normal course of business under various operating leases and other insignificant finance leases, including non-cancelable and month-to-month agreements. Our leases have initial lease terms of one to ten years, some of which include options to extend and/or terminate the lease. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and lease payment obligation. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants. Certain leases have free rent periods or escalating rent payment provisions. Leases with an initial term of twelve months or less ("Short-term leases") are not recorded on the Condensed Consolidated Balance Sheet. We recognize rent expense on a straight-line basis over the lease term. Right-of-use ("ROU") assets, net represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. The operating lease ROU asset also include any lease prepayments and is reduced by any lease incentives. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. When the lease agreement does not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including the lease term. See
Note 17 — Leasing Arrangements
for more information.
Net (Loss) Income Per Common Share:
Basic net (loss) income per common share is based upon the weighted average common shares outstanding. Diluted net (loss) income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of stock options and restricted stock using the treasury stock method. Anti-dilutive shares are excluded from the computation of diluted net (loss) income per share.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. See
Note 14 — Income Taxes
for more information.
Fair Value of Financial Instruments:
The Company applies
ASC 820 - Fair Value Measurement
, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework.
ASC 820 - Fair Value Measurement
defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a
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:
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-
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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.
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|
|
|
|
-
|
Level 2
—Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company has no Level 2 assets or liabilities in any of the periods presented.
|
|
|
|
|
-
|
Level 3
—Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities. The portion of the fair valuation of the available-for-sale investment held in shares of Nicox stock that is subject to a lock-up provision is considered a Level 3 asset.
|
The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
|
Description
|
March 31, 2019
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash and cash equivalents
|
$
|
184,090
|
|
|
$
|
184,090
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Nicox stock with lockup provisions
|
18
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
Total assets
|
$
|
184,108
|
|
|
$
|
184,090
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
December 31, 2018
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash and cash equivalents
|
$
|
224,868
|
|
|
$
|
224,868
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Nicox stock with lockup provisions
|
18
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
Total assets
|
$
|
224,886
|
|
|
$
|
224,868
|
|
|
$
|
—
|
|
|
$
|
18
|
|
In accordance with
ASC 820 - Fair Value Measurement
, the Company records unrealized holding gains and losses on available-for-sale securities in the “Accumulated other comprehensive (loss)” caption in the Condensed Consolidated Balance Sheet. As of
March 31, 2019
, the Company maintained rights to receive a small number of shares of Nicox stock held in an expense escrow. The unrealized holding loss on these shares was a negligible dollar amount as of
March 31, 2019
. The escrow shares are not expected to be released within one year, and accordingly, the original cost basis of less than
$0.1 million
on these shares is included within other non-current assets on the Company’s Condensed Consolidated Balance Sheet as of
March 31,
2019
. The fair value of the investment is estimated using observable and unobservable inputs to discount for lack of marketability.
Stock-Based Compensation:
Stock-based compensation cost is estimated at grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions to be used in the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its common stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities of similar term in effect during the quarter in which the options were granted. The dividend yield reflects the Company’s historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises the estimate in subsequent periods, as necessary, if actual forfeitures differ from initial estimates.
The stock-based compensation expense related to performance share units (“PSUs”) is estimated at grant date based on the fair value of the award. For PSUs granted with vesting subject to market conditions, the fair value of the award is determined at grant date using an advanced option-pricing model, such as a Monte Carlo model, and expense is recognized ratably over the requisite service period regardless of whether or not the market condition is satisfied. For PSUs granted with vesting subject to performance conditions, the fair value of the award is based on the market price of the underlying shares on grant date. Expense from such awards is recognized ratably over the vesting period, but is based upon an ongoing evaluation of the number of shares expected to vest and will be adjusted to reflect those awards that do ultimately vest.
The stock-based compensation expense related to restricted stock unit awards (“RSUs”) is based on the fair value of the underlying shares on date of grant. Expense is recognized ratably over the vesting period, reduced by an estimate of future forfeitures.
Note 3 — Stock Options, Restricted Stock Units and Employee Stock Purchase Plan
The Company maintains equity compensation plans that allow the Company’s Board of Directors to grant stock options and other equity awards to eligible employees, officers, directors and consultants. On April 27, 2017, the Company’s shareholders voted to approve the Akorn, Inc. 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). Under the Omnibus Plan,
8.0 million
shares of the Company’s common stock were made available for issuance pursuant to equity awards. The Omnibus Plan replaced the Akorn, Inc. 2014 Stock Option Plan (the "2014 Plan"), which was approved by shareholders at the Company's 2014 Annual Meeting of Shareholders on May 2, 2014 and subsequently amended by proxy vote of the Company’s shareholders on December 16, 2016. The 2014 Plan had reserved
7.5 million
shares for issuance upon the grant of stock options, restricted stock units (“RSUs”), performance share unit awards ("PSUs") or various other instruments to directors, employees and consultants. Following shareholder approval of the Omnibus Plan, no new awards could be granted under the 2014 Plan, although previously granted awards remain outstanding pursuant to their original terms.
As of
March 31, 2019
, there were approximately
3.2 million
stock options and
0.1 million
RSU shares outstanding under the 2014 Plan. The 2014 Plan had replaced the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6, 2013.
No
awards remain outstanding under the 2003 Plan.
Under the Omnibus Plan, there were approximately
3.8 million
RSU shares,
1.0 million
PSU shares and
0.5 million
stock option award shares outstanding as of
March 31, 2019
. As of
March 31, 2019
, approximately
2.2 million
shares remained available for future award grants under the Omnibus Plan.
Also granted in, and outstanding as of the
three
month period ended
March 31, 2019
, were inducement awards consisting of
0.5 million
RSU shares,
0.2 million
PSU shares and
0.4 million
stock option award shares.
The Company accounts for stock-based compensation in accordance with
ASC Topic 718 - Compensation — Stock Compensation
. Accordingly, stock-based compensation cost for stock options and RSUs is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical
experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, as necessary, if actual forfeitures differ from those estimates.
PSU awards granted with vesting subject to market conditions are valued at date of grant through a Monte Carlo simulation model. The calculated grant-date fair value is recognized ratably over the vesting period, subject to forfeiture estimates. PSU awards granted with vesting subject to, and determined by, performance conditions are valued at grant based on the closing price of the Company’s stock and anticipated vesting level at grant date. The awards are re-evaluated quarterly to determine the vesting level that is more likely than not to be achieved, and cumulative expense is adjusted accordingly.
The Company uses the single-award method for allocating compensation cost related to stock options to each period. The following table sets forth the components of the Company’s share-based compensation expense for the three month period ended
March 31, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Stock options
|
$
|
1,381
|
|
|
$
|
3,159
|
|
|
Employee stock purchase plan
|
229
|
|
|
—
|
|
|
Restricted stock units and Performance share units
|
3,110
|
|
|
2,349
|
|
|
Total stock-based compensation expense
|
$
|
4,720
|
|
|
$
|
5,508
|
|
Stock Option awards
From time to time, the Company has granted stock option awards to certain employees, executives and directors.
No
stock options were granted in 2018. Set forth in the following table are the weighted-average assumptions used in estimating the grant date fair value of the stock options granted under the Company's equity compensation plans during the three month period ended
March 31, 2019
, along with the weighted-average grant date fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Expected volatility
|
67
|
%
|
|
—
|
%
|
|
Expected life (in years)
|
6.2
|
|
|
—
|
|
|
Risk-free interest rate
|
2.52
|
%
|
|
—
|
%
|
|
Dividend yield
|
—
|
|
|
—
|
|
|
Fair value per stock option
|
$
|
2.44
|
|
|
$
|
—
|
|
|
Forfeiture rate
|
8
|
%
|
|
—
|
%
|
The table below sets forth a summary of stock option activity within the Company’s stock-based compensation plans for the three month period ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value
(in thousands) (1)
|
|
Outstanding at December 31, 2018
|
3,418
|
|
|
$
|
28.55
|
|
|
3.69
|
|
$
|
—
|
|
|
Granted
|
860
|
|
|
3.90
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
(196
|
)
|
|
27.61
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
4,082
|
|
|
$
|
23.40
|
|
|
4.38
|
|
$
|
—
|
|
|
Exercisable at March 31, 2019
|
2,599
|
|
|
$
|
28.64
|
|
|
2.61
|
|
$
|
—
|
|
(1) The Aggregate Intrinsic Value of stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock as of the date indicated and the exercise price of the stock options. Stock options for which the exercise price exceeded the market price have been omitted. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and the timing and volume of option grants, exercises and forfeitures.
Restricted Stock Unit awards
From time to time, the Company has granted RSUs to certain employees, executives and directors. Historically, the majority of RSU grants to employees and executives have been pursuant to the Company's Long-Term Incentive Plans (the "LTIPs"), which call for annual grants of RSUs to all eligible employees and executives. The RSU awards vest
25%
per year on each of the first
four
anniversaries of the grant date. All RSUs are valued at the closing market price of the Company’s common stock on the day of grant and the total value of the units is recognized as expense ratably over the vesting period of the grant. During the three month period ended
March 31, 2019
, the Company granted
3.2 million
RSUs to certain employees, executives and directors. Of this total,
2.7 million
RSUs were granted to certain employees as a retention incentive. These awards vest in full
two years
after grant date. The remaining
0.5 million
RSUs were granted as an inducement award to the Company’s new CEO.
Set forth below is a summary of unvested RSU activity during the three month period ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
Number of Units
(in thousands)
|
|
Weighted Average Per Share
Grant Date Fair Value
|
|
Unvested at December 31, 2018
|
1,643
|
|
$
|
19.85
|
|
|
Granted
|
3,197
|
|
$
|
4.02
|
|
|
Vested
|
(273)
|
|
$
|
23.75
|
|
|
Forfeited
|
(153)
|
|
$
|
16.44
|
|
|
Unvested at March 31, 2019
|
4,414
|
|
$
|
9.52
|
|
During the three month period ended
March 31, 2019
, approximately
0.3 million
RSU shares vested and were released, generating tax-deductible expenses totaling
$1.0 million
, while
no
RSU shares vested during the three month period ended
March 31, 2018
.
Performance Share Unit awards
During the quarter ended March 31, 2019, the Company granted
1.2 million
PSU award shares to certain executives. Of this total,
1.0 million
vest
two years
after grant with vesting level contingent upon meeting various performance conditions, while the remaining
0.2 million
vest
four years
after grant with vesting level contingent on various market conditions.
No
PSU awards were granted by the Company prior to the quarter ended
March 31, 2019
.
Set forth below is a summary of unvested PSU activity during the three month period ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Units
(in thousands)
|
Weighted Average Grant Date Fair Value per Unit
|
|
Vesting Based on Performance Conditions
|
Weighted Average Grant Date Fair Value per Unit
|
|
Vesting Based on Market Conditions
|
Weighted Average Grant Date Fair Value per Unit
|
|
Unvested at December 31, 2018
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
Granted
|
1,239
|
|
3.99
|
|
|
985
|
|
4.06
|
|
|
254
|
|
3.73
|
|
|
Vested
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Forfeited
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Unvested at March 31, 2019
|
1,239
|
|
$
|
3.99
|
|
|
985
|
|
$
|
4.06
|
|
|
254
|
|
$
|
3.73
|
|
Set forth below is a summary of the valuation inputs for PSUs granted with vesting subject to market conditions during the three month period ended
March 31, 2019
:
|
|
|
|
|
|
|
|
Valuation Inputs for PSUs with Vesting Subject to Market Conditions:
|
|
|
PSUs Issued (units in thousands)
|
254
|
|
|
Risk Free Rate
|
2.58
|
%
|
|
Volatility
|
55.10
|
%
|
|
Dividend
|
—
|
%
|
|
Valuation Per Share
|
$
|
3.73
|
|
|
Total Fair Value (in thousands)
|
$
|
947
|
|
|
|
|
|
Expected Term (years)
|
4
|
|
|
|
|
|
Forfeiture Rate Assumed
|
8.00
|
%
|
Employee Stock Purchase Plan
The 2016 Akorn, Inc. Employee Stock Purchase Plan (the “ESPP”) permits eligible employees to acquire shares of the Company’s common stock through payroll deductions. The ESPP has been structured to qualify under Section 423 of the Internal Revenue Code (“IRC”). Employees who elect to participate in the ESPP may withhold from
1%
to
15%
of eligible wages toward the purchase of stock. Shares will be purchased at a
15%
discount off the lesser of the market price at the beginning or the ending of the applicable offering period. The ESPP is designed with
two
offering periods each year, one running from January 1st to December 31st and the other running from July 1st to December 31st. In a given year, employees may enroll in only one offering period, not both. Per IRC rules, annual purchases per employee are limited to
$25,000
worth of stock, valued as of the beginning of the offering period. Accordingly, with the
15%
discount, employees may withhold no more than
$21,250
per year toward the purchase of stock under the ESPP. Employees are further limited to purchasing no more than
15,000
shares of stock per year. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016. A total of
2.0 million
shares of the Company’s stock have been set aside for issuance under the ESPP, of which
146,247
shares have been issued to date.
During the quarter ended
March 31, 2019
, participants contributed approximately
$0.5 million
through payroll deductions toward the future purchase of shares under the ESPP.
Note 4 — Accounts Receivable, Sales and Allowances
The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is typical of the pharmaceutical industry and is not necessarily specific to the Company. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the terms of the respective agreement with the end-user customer (which in turn depends on the specific end-user customer, each having its own pricing arrangement that entitles it to a particular deduction). This process can lead to partial payments to the Company against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.
With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying Condensed Consolidated Statements of Comprehensive (Loss). Additionally, with the exception of administrative fees and others, which is included as a current liability, the ending reserve balances are included in trade accounts receivable, net in the Company’s Condensed Consolidated Balance Sheets.
Trade accounts receivable, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
Gross accounts receivable (1)
|
$
|
361,065
|
|
|
$
|
308,305
|
|
|
Less reserves for:
|
|
|
|
|
Chargebacks (2)
|
(67,474
|
)
|
|
(55,312
|
)
|
|
Rebates (2)
|
(74,723
|
)
|
|
(55,963
|
)
|
|
Product returns
|
(34,411
|
)
|
|
(35,146
|
)
|
|
Discounts and allowances
|
(7,740
|
)
|
|
(6,561
|
)
|
|
Advertising and promotions
|
(1,769
|
)
|
|
(1,574
|
)
|
|
Doubtful accounts
|
(623
|
)
|
|
(623
|
)
|
|
Trade accounts receivable, net
|
$
|
174,325
|
|
|
$
|
153,126
|
|
(1) The increase in the Gross accounts receivable balance as of
March 31, 2019
, when compared to the
December 31, 2018
balance is due to higher accounts receivable carryover due to timing of sales during the compared period.
(2) The increase in the Chargebacks and Rebates balances as of
March 31, 2019
, when compared to the
December 31, 2018
balance were primarily due to payment timing, product mix, customer mix and higher wholesaler inventory.
For the three month periods ended
March 31, 2019
and
2018
, the Company recorded the following adjustments to gross sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Gross sales
|
$
|
458,641
|
|
|
$
|
520,533
|
|
|
Less adjustments for:
|
|
|
|
|
Chargebacks (1)
|
(205,394
|
)
|
|
(223,963
|
)
|
|
Rebates, administrative and other fees (1)
|
(64,264
|
)
|
|
(92,279
|
)
|
|
Product returns (2)
|
(11,902
|
)
|
|
(7,121
|
)
|
|
Discounts and allowances
|
(9,050
|
)
|
|
(10,238
|
)
|
|
Advertising, promotions and others
|
(2,160
|
)
|
|
(2,869
|
)
|
|
Revenues, net
|
$
|
165,871
|
|
|
$
|
184,063
|
|
(1) The decreases in chargebacks and rebates, administrative and other fees for the three month periods ended
March 31, 2019
as compared to the same periods in
2018
, were primarily due to volume declines as well as product mix and customer mix.
(2) The increase in product returns for the three month periods ended
March 31, 2019
, as compared to the same periods in
2018
, was primarily due to the timing of returns processing.
Note 5 — Inventories, Net
The components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
Finished goods
|
$
|
68,876
|
|
|
$
|
76,981
|
|
|
Work in process
|
14,060
|
|
|
13,870
|
|
|
Raw materials and supplies
|
79,816
|
|
|
82,794
|
|
|
Inventories, net
|
$
|
162,752
|
|
|
$
|
173,645
|
|
The Company maintains an allowance for excess and obsolete inventory, as well as inventory for which its cost is in excess of its net realizable value. Inventory at
March 31, 2019
and
December 31, 2018
, was reported net of these reserves of
$48.5 million
and
$46.5 million
, respectively.
Note 6 — Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
Land and land improvements
|
$
|
17,516
|
|
|
$
|
17,608
|
|
|
Buildings and leasehold improvements
|
138,526
|
|
|
138,126
|
|
|
Furniture and equipment
|
244,178
|
|
|
240,080
|
|
|
Sub-total
|
400,220
|
|
|
395,814
|
|
|
Accumulated depreciation
|
(166,300
|
)
|
|
(158,824
|
)
|
|
Property, plant and equipment in service, net
|
$
|
233,920
|
|
|
$
|
236,990
|
|
|
Construction in progress
|
92,050
|
|
|
97,863
|
|
|
Property, plant and equipment, net
|
$
|
325,970
|
|
|
$
|
334,853
|
|
At
March 31, 2019
and
December 31, 2018
, property, plant and equipment, net, with a net carrying value of
$94.0 million
and
$91.9 million
, respectively, was located outside the United States.
At
March 31, 2019
, the Company had
$92.1 million
of assets under construction which consisted primarily of investment in equipment, and compliance with the Drug Supply Chain Security Act ("DSCSA"). Depreciation will begin on these assets once they are placed into service. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. During the three month period ended
March 31, 2019
, the Company recorded impairment losses of
$8.9 million
, as a result of the Company announcing that it was exploring strategic alternatives to exit the India manufacturing facility.
No
impairment losses were recorded during three month period ended March 31, 2018.
The Company recorded depreciation expense of
$7.6 million
and
$7.1 million
during the three month periods ended
March 31, 2019
and
2018
, respectively.
Note 7 — Goodwill and Other Intangible Assets, Net
Intangible assets consist primarily of Goodwill, which is carried at its initial value, subject to evaluation for impairment, In-Process Research and Development (“IPR&D”), which is accounted for as an indefinite-lived intangible asset, subject to impairment testing until completion or abandonment of the project, and product licensing costs, trademarks and other such costs, which are capitalized and amortized on a straight-line basis over their useful lives, ranging from
one
to
thirty years
.
As of
March 31, 2019
and
2018
, accumulated amortization of intangible assets was
$224.0 million
and
$232.2 million
, respectively. The Company recorded amortization expense of
$11.1 million
and
$13.2 million
during the three month periods ended
March 31, 2019
and 2018, respectively. The Company regularly assesses its amortizable intangible assets for impairment based on several factors, including estimated fair value and anticipated cash flows.
IPR&D intangible assets represent the value assigned to acquired R&D projects that principally represent rights to develop and sell a product that the Company has acquired which have not yet been completed or approved. These assets are subject to impairment testing until completion or abandonment of each project. Impairment testing requires significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenue, cost of sales, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, and competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the IPR&D product, the assets are impaired.
During the three month period ended
March 31, 2019
,
no
IPR&D projects were impaired, while during the three month period ended March 31, 2018,
three
IPR&D projects were impaired due to the Company's expectations of market conditions upon launch, resulting in an impairment expense of
$17.9 million
. Additionally, during the three month period ended
March 31, 2019
,
one
product licensing rights was impaired due to competition resulting in impairment expenses of
$10.4
million; compared to impairments of
$0.9 million
expenses on
one
product licensing rights due to competition during the comparative prior year period.
Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment may exist. The Company uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. The Company’s valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. The Company also models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit. The Company performed an interim impairment test on October 1, 2018 and determined that the fair value of its reporting units are in excess of its carrying value and; therefore,
no
goodwill impairment charge was necessary. As a result of Akorn announcing that it was exploring strategic alternatives to exit the India manufacturing facility, the Company performed impairment testing as of
March 31, 2019
, which resulted in a goodwill impairment of
$16.0 million
.
The following table provides a summary of the activity in goodwill by segment for the three month period ended
March 31, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Health
|
|
Prescription
Pharmaceuticals
|
|
Total
|
|
Balances at December 31, 2018
|
$
|
16,717
|
|
|
$
|
267,162
|
|
|
$
|
283,879
|
|
|
Currency translation adjustments
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
Impairments
|
—
|
|
|
(15,955
|
)
|
|
(15,955
|
)
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
|
Balances at March 31, 2019
|
$
|
16,717
|
|
|
$
|
251,206
|
|
|
$
|
267,923
|
|
The following table sets forth the major categories of the Company’s intangible assets as of
March 31, 2019
and
December 31, 2018
, and the weighted average remaining amortization period as of
March 31, 2019
and
December 31, 2018
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amount (2)
|
|
Accumulated
Amortization
|
|
Reclassifications
|
|
Impairment (1)
|
|
Net
Balance
|
|
Wtd Avg Remaining
Amortization Period
(years)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licensing rights
|
$
|
472,041
|
|
|
$
|
(209,135
|
)
|
|
$
|
—
|
|
|
$
|
(15,000
|
)
|
|
$
|
247,906
|
|
|
8.9
|
|
IPR&D
|
4,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,400
|
|
|
N/A - Indefinite lived
|
|
Trademarks
|
16,000
|
|
|
(6,535
|
)
|
|
—
|
|
|
—
|
|
|
9,465
|
|
|
17.4
|
|
Customer relationships
|
4,225
|
|
|
(2,383
|
)
|
|
—
|
|
|
—
|
|
|
1,842
|
|
|
7.1
|
|
Other intangibles
|
6,000
|
|
|
(5,969
|
)
|
|
—
|
|
|
—
|
|
|
31
|
|
|
0
|
|
|
502,666
|
|
|
$
|
(224,022
|
)
|
|
$
|
—
|
|
|
$
|
(15,000
|
)
|
|
$
|
263,644
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licensing rights
|
$
|
597,960
|
|
|
$
|
(203,323
|
)
|
|
$
|
5,300
|
|
|
$
|
(131,306
|
)
|
|
$
|
268,631
|
|
|
9.2
|
|
IPR&D
|
149,161
|
|
|
—
|
|
|
(5,300
|
)
|
|
(139,461
|
)
|
|
4,400
|
|
|
N/A - Indefinite lived
|
|
Trademarks
|
16,000
|
|
|
(6,304
|
)
|
|
—
|
|
|
—
|
|
|
9,696
|
|
|
17.5
|
|
Customer relationships
|
4,225
|
|
|
(2,318
|
)
|
|
—
|
|
|
—
|
|
|
1,907
|
|
|
7.3
|
|
Other intangibles
|
11,235
|
|
|
(5,658
|
)
|
|
—
|
|
|
(5,235
|
)
|
|
342
|
|
|
0.3
|
|
|
$
|
778,581
|
|
|
$
|
(217,603
|
)
|
|
$
|
—
|
|
|
$
|
(276,002
|
)
|
|
$
|
284,976
|
|
|
|
(1) Impairment of product licensing rights is stated at gross carrying cost of
$15.0 million
less accumulated amortization of
$4.6 million
as of the impairment date. Accordingly, the total net impairment expense was
$10.4 million
, for the three month period ended
March 31, 2019
.
(2) Differences in the Gross Amounts between periods are due to the write down of fully amortized assets and additions during the period.
Note 8 — Financing Arrangements
Term Loans
During 2014, in order to finance its acquisitions of Hi-Tech Pharmacal Co Inc. and VersaPharm Inc., Akorn, Inc., together with certain of its subsidiaries (Akorn, Inc., together with such subsidiaries, the “Akorn Loan Parties”), entered into
two
term loan agreements (the “Term Loan Agreements” and the loans outstanding thereunder, the “Term Loans”) with certain lenders (the “Lenders”) and with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent (the “Term Loan Administrative Agent”). The aggregate principal amount of the Term Loans was
$1,045.0 million
. As of
March 31, 2019
, outstanding debt under the Term Loan Agreements was
$831.9 million
. The Company believes it was in compliance with all applicable covenants in the Term Loan Agreements, which included customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities, as of
March 31, 2019
. As of
March 31, 2019
, the Term Loans were scheduled to mature on April 16, 2021.
During the three month periods ended
March 31, 2019
and 2018, the Company amortized
$1.3 million
and
$1.3 million
, respectively of the deferred financing cost related to the Term Loans, resulting in
$10.2 million
remaining balance of deferred financing costs at
March 31, 2019
. The Company will amortize this balance using the straight-line method over the life of the Term Loan Agreements.
As of
March 31, 2019
, the Company's spread was based upon the Ratings Level as documented below. As of
March 31, 2019
, the Company was a Ratings Level III for the Term Loan Agreements.
|
|
|
|
|
|
|
|
Ratings Level
|
Index Ratings
(Moody’s/S&P)
|
Adjusted LIBOR (Eurodollar) Spread
|
Adjusted Base Rate (ABR) Spread
|
|
Level I
|
B1/B+ or higher
|
4.25%
|
3.25%
|
|
Level II
|
B2/B
|
4.75%
|
3.75%
|
|
Level III
|
B3/B- or lower
|
5.50%
|
4.50%
|
For the three month periods ended
March 31, 2019
and 2018, the Company recorded interest expense of
$16.7 million
and
$12.3 million
, respectively in relation to the Term Loans. The increase in interest expense is related to higher interest rates during the three month period ended
March 31, 2019
, compared to the same period in 2018.
On May 6, 2019, the Akorn Loan Parties entered into a Standstill Agreement and First Amendment (the “Standstill Agreement”) in respect of the Term Loan Agreements with an ad hoc group of Lenders (the “Ad Hoc Group”), certain other Lenders (together with the Ad Hoc Group, the “Standstill Lenders”) and the Term Loan Administrative Agent (together with the Akorn Loan Parties and the Standstill Lenders, the “Standstill Parties”). Capitalized terms used but not defined herein have the meanings given to them in the Standstill Agreement or the Term Loan Agreements, as applicable.
The Standstill Agreement provides that, for the duration of the Standstill Period (as defined below), among other matters, neither the Term Loan Administrative Agent nor the Lenders may (i) declare any Event of Default or (ii) otherwise seek to exercise any rights or remedies, in each case of clauses (i) and (ii) above, to the extent directly relating to any alleged Event of Default arising from any alleged breach of any of the covenants contained in Sections 5.01, 5.02, 5.03, 5.06 or 5.07 of the Term Loan Agreements (the “Specified Covenants”), to the extent the facts and circumstances giving rise to any such breach have been (x) publicly disclosed by the Company or (y) disclosed in writing by the Company to private side Lenders or certain advisors to the Ad Hoc Group (collectively, the “Specified Matters”). “Standstill Period” means the period of time from the effective date of the Standstill Agreement (the “Effective Date”) through the earliest of (a) December 13, 2019; (b) the delivery of a notice of termination of the Standstill Period by Lenders holding a majority of the Term Loans (the “Required Lenders”) upon the occurrence of a Default or Event of Default under the Term Loan Agreements, excluding any Default or Event of Default relating to a Specified Matter; or (c) the delivery of a notice of termination of the Standstill Period by the Required Lenders as a result of any breach of, or non-compliance with, any provision of the Standstill Agreement by the Akorn Loan Parties, including without limitation any such breach or noncompliance by the Akorn Loan Parties of or with any Affirmative Covenants and Milestones or Negative Covenants (each as defined below) or other covenants set forth in the Standstill Agreement, subject, in each case, to any applicable cure period expressly set forth therein (each, a “Standstill Event of Default”).
In exchange for the agreement of the Lenders to standstill during the Standstill Period, the Standstill Agreement provides, among other matters, that:
|
|
|
|
•
|
during the Standstill Period:
|
|
|
|
|
◦
|
the Company must deliver certain financial and other reporting to the Lenders or their advisors, including monthly financial statements, 13-week cash flow forecasts and variance reports and certain regulatory information, and participate in various update calls with the Lenders and their advisors (the “Affirmative Covenants and Milestones”);
|
|
|
|
|
◦
|
the Company and its subsidiaries are restricted, among other matters, from (i) consummating certain asset sales and investments, (ii) making certain restricted payments with respect to the Company’s common stock and any subordinated indebtedness, (iii) engaging in sale and leaseback transactions, (iv) incurring certain liens and indebtedness, (v) reinvesting any proceeds received from certain asset sales, and (vi) without the consent of the Required Lenders at such time, (A) designating any Restricted Subsidiary as an Unrestricted Subsidiary, or otherwise creating or forming any Unrestricted Subsidiary, and/or (B) transferring any assets of the Company or any of its Restricted Subsidiaries to any Unrestricted Subsidiary, except as otherwise permitted under the Term Loan Agreements (after giving effect to the Standstill Agreement) (collectively, the “Negative Covenants”);
|
|
|
|
|
◦
|
the Company must pay a fee in an amount equal to
0.625%
of the outstanding principal of any Term Loans prepaid or repaid during the Standstill Period (other than as a result of any asset sale, condemnation event, incurrence of non-permitted indebtedness or excess cash flow);
|
|
|
|
|
◦
|
the Company must notify the Ad Hoc Group and/or such advisors before making certain payments in respect of judgments or settlements of ongoing litigation matters (a “Specified Litigation Payment”); and
|
|
|
|
|
◦
|
the Company must pay the fees and expenses of certain advisors to the Ad Hoc Group;
|
|
|
|
|
•
|
the Company and the Standstill Lenders must negotiate in good faith to enter into a comprehensive amendment of the Term Loan Agreements (the “Comprehensive Amendment”), which Comprehensive Amendment must be satisfactory in form and substance to the Required Lenders;
|
|
|
|
|
•
|
on the Effective Date, the Company paid a one-time in-kind fee in an amount equal to
1.75%
of the aggregate principal amount of the Term Loans of the Standstill Lenders outstanding on such date; and
|
|
|
|
|
•
|
the interest margins payable by the Company with respect to outstanding Term Loans (as described above) were increased by
1.50%
(
i.e.
,
150
basis points), with
0.75%
(
i.e.
,
75
basis points) of such increase payable in cash and
0.75%
(
i.e.
,
75
basis points) of such increase payable in kind.
|
Subject to a five business day cure period (the “Cure Period”), the Company’s failure to comply with the Affirmative Covenants and Milestones during the Standstill Period would permit the Required Lenders to terminate the Standstill Period and exercise any rights and remedies under the Term Loan Agreements with respect to the Specified Matters or a Standstill Event of Default. The Company’s failure to comply with the Negative Covenants during the Standstill Period would permit the Required Lenders to terminate the Standstill Agreement and constitute an immediate Event of Default under the Term Loan Agreements. The Company’s failure to comply with any Affirmative Covenants and Milestones (subject to the Cure Period), Negative Covenants or other covenants in the Standstill Agreement would also result in a further increase of the interest margins payable with respect to outstanding Term Loans by
0.50%
(
i.e.
,
50
basis points), which increased interest would be payable in kind.
Any Specified Litigation Payment made over the objection of the Ad Hoc Group would (i) entitle the Required Lenders to terminate the Standstill Period and (ii) constitute an Event of Default under the Term Loan Agreements if such payment has a Material Adverse Effect (as defined in the Term Loan Agreements). The failure of the Company to comply with the
covenant in respect of the Specified Litigation Payment during the Standstill Period would result in an Event of Default
under the Loan Agreement.
The failure to enter into a Comprehensive Amendment on or prior to November 15, 2019, would result in payment by the Company of a one-time in-kind fee in an amount equal to
0.625%
of the Term Loans outstanding on such date and require the Akorn Loan Parties to pledge for the benefit of the Lenders all unpledged equity interests in foreign subsidiaries. The failure to enter into a Comprehensive Amendment on or prior to December 13, 2019, constitutes an immediate Event of Default under the Term Loan Agreements.
The execution of the Standstill Agreement should not be construed as (and does not constitute an admission as to) any right, remedy, claim, defense, liability or wrongdoing or responsibility on the part of any Standstill Party. Entry into the Standstill Agreement also should not be construed as (and does not constitute an admission as to) the occurrence of a Default or Event of Default. In the Standstill Agreement, the Standstill Lenders acknowledged that, as of the Effective Date, to the best of their knowledge, they were not aware of any potential Defaults or Events of Default under the Term Loan Agreements other than with respect to the Specified Covenants relating to the Specified Matters.
The Company will actively seek to refinance or otherwise address the Term Loans or enter into a “Comprehensive Amendment” to the Term Loan Agreements by December 13, 2019. Based on discussions with the Company’s financial advisor, the Company believes that it will be able to refinance or otherwise address the Term Loans within this timeframe. In the event that the Company is unable to refinance or otherwise address the Term Loans by such date, the Company would seek to enter into a “Comprehensive Amendment” to the Term Loan Agreements.
JPMorgan Credit Facility
On April 17, 2014, the Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan, as administrative agent, Bank of America, N.A., as syndication agent, and the lenders party thereto (at closing, JPMorgan, Bank of America, N.A. and Wells Fargo Bank, N. A.) for a
$150.0 million
revolving credit facility (the “JPM Revolving Facility”).
The Company believes it was in compliance with all covenants applicable to the JPM Revolving Facility as of
March 31, 2019
.
The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At
March 31, 2019
, there were
no
outstanding borrowings under the JPM Revolving Facility, and availability was
$135.0 million
.
The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of the Akorn Loan Parties and their respective subsidiaries in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries.
On April 16, 2019, the Akorn Loan Parties, entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) governing the JPM Revolving Facility with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The A&R Credit Agreement provides for a revolving line of credit of up to
$150.0 million
on an uncommitted basis, and amends the Existing Credit Agreement in certain other respects, including, among other things:
•
extending the maturity date by
90 days
to July 16, 2019; and
•
decreasing the undrawn fee from
0.25%
to
0.05%
.
The JPM Revolving Facility, as amended by the A&R Credit Agreement, is fully uncommitted and discretionary with each lender under the A&R Credit Agreement permitted to make revolving loans or issue letters of credit in its sole discretion.
Debt Maturities Schedule
Aggregate cumulative maturities of debt obligations (including the Term Loans and the JPM Revolving Facility) as of
March 31, 2019
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2020
|
|
2021
|
|
Maturities of debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
831,938
|
|
Note 9 — (Loss) Earnings Per Share
Basic net (loss) income per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of potentially dilutive securities using the treasury stock method.
The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money, and (ii) unvested RSUs and PSUs.
A reconciliation of the (loss) per share data from a basic to a fully diluted basis is detailed below (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Net (loss)
|
$
|
(82,181
|
)
|
|
$
|
(28,747
|
)
|
|
Net (loss) per share:
|
|
|
|
|
Basic
|
$
|
(0.65
|
)
|
|
$
|
(0.23
|
)
|
|
Diluted
|
$
|
(0.65
|
)
|
|
$
|
(0.23
|
)
|
|
Shares used in computing net (loss) per share:
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
125,566
|
|
|
125,240
|
|
|
Dilutive securities:
|
|
|
|
|
|
|
Stock option
|
—
|
|
|
—
|
|
|
Unvested RSUs and PSUs
|
—
|
|
|
—
|
|
|
Total dilutive securities
|
—
|
|
|
—
|
|
|
Weighted average diluted shares outstanding
|
125,566
|
|
|
125,240
|
|
|
|
|
|
|
|
Shares subject to stock options omitted from the calculation of (loss) per share as their effect would have been anti-dilutive
|
3,917
|
|
|
3,287
|
|
|
Shares subject to unvested RSUs and PSUs omitted from the calculation of (loss) per share as their effect would have been anti-dilutive
|
4,423
|
|
|
70
|
|
Note 10 — Segment Information
During the three month period ended
March 31, 2019
and 2018, the Company reported results for the following
two
reportable segments:
- Prescription Pharmaceuticals
- Consumer Health
The Company’s Prescription Pharmaceuticals segment principally consists of generic and branded prescription pharmaceuticals products which span a broad range of indications as well as a variety of dosage forms including: sterile ophthalmics, injectables and inhalants, and non-sterile oral liquids, topicals and nasal sprays. The Company’s Consumer Health segment principally consists of animal health and OTC products, both branded and private label. OTC products include, but are not limited to, a suite of products for the treatment of dry eye sold under the TheraTears
®
brand name.
Financial information about the Company’s reportable segments is based upon internal financial reports that aggregate certain operating information. The Company’s Chief Operating Decision Maker (“CODM”), as defined in
ASC 280 - Segment Reporting
, who is also the CEO, oversees operational assessments and resource allocations based upon the results of the Company’s reportable segments, which have available and discrete financial information.
Selected financial information by reportable segment is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
Revenues, net:
|
|
|
|
|
Prescription Pharmaceuticals
|
$
|
148,015
|
|
|
$
|
164,302
|
|
|
Consumer Health
|
17,856
|
|
|
19,761
|
|
|
Total revenues, net
|
165,871
|
|
|
184,063
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
Prescription Pharmaceuticals
|
45,443
|
|
|
73,508
|
|
|
Consumer Health
|
8,070
|
|
|
8,720
|
|
|
Total gross profit
|
53,513
|
|
|
82,228
|
|
|
|
|
|
|
|
Operating expenses
|
118,996
|
|
|
107,643
|
|
|
|
|
|
|
|
Operating (loss)
|
(65,483
|
)
|
|
(25,415
|
)
|
|
|
|
|
|
|
Other expenses, net
|
(15,278
|
)
|
|
(10,612
|
)
|
|
|
|
|
|
|
(Loss) before income taxes
|
$
|
(80,761
|
)
|
|
$
|
(36,027
|
)
|
The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. Inter-segment activity at the gross profit level is minimal. The Company does not have discrete assets by segment, as certain manufacturing and warehouse facilities support more than one segment, and therefore does not report assets by segment. Financial information including revenues and gross profit from external customers by product or product line is not provided as to do so would be impracticable.
The following table sets forth the Company’s net revenues by geographic region for the
three
month periods ended
March 31, 2019
and 2018. The Domestic region represents sales within the United States of America and its territories while the Foreign region represents sales within all other countries and territories (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
Three Months Ended
March 31, 2018
|
|
Region
|
Amount
|
|
% of Total Revenues
|
|
Amount
|
|
% of Total Revenues
|
|
Domestic
|
$
|
164,134
|
|
|
99.0%
|
|
$
|
181,015
|
|
|
98.3%
|
|
Foreign
|
1,737
|
|
|
1.0%
|
|
3,048
|
|
|
1.7%
|
|
Total Revenues
|
$
|
165,871
|
|
|
100.0%
|
|
$
|
184,063
|
|
|
100.0%
|
Note 11 – Share Repurchases
In July 2016, the Company announced that the Board of Directors authorized a stock repurchase program (the "Stock Repurchase Program") pursuant to which the Company may repurchase up to
$200.0 million
of the Company’s common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or others, including accelerated stock repurchase arrangements, pursuant to a Rule 10b5-1 repurchase plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be suspended or discontinued at any time without notice and at the Company's discretion, and at this time no estimate to the effect on the results of the Company due to the Stock Repurchase Program can be made.
The Company did
no
t repurchase any shares during the three month period ended
March 31, 2019
. In aggregate, over the life of the Stock Repurchase Program, the Company repurchased
1.8 million
shares at an average purchase price of
$24.89
. As of
March 31, 2019
, 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 and require that shares repurchased by a company be treated as authorized but unissued shares instead of treasury stock. As a result, all stock repurchases are presented as a reduction to issued and outstanding shares of common stock.
Note 12 — 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 that 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
|
$
|
2,159
|
|
|
2020
|
1,890
|
|
|
2021
|
2,650
|
|
|
2022
|
1,800
|
|
|
Total
|
$
|
8,499
|
|
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 Terminated 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 alleged that Akorn fraudulently induced Fresenius to enter into the Merger Agreement and thereafter breached contractual representations and warranties and covenants therein. It sought damages of approximately
$102 million
. On February 25, 2019, Akorn filed an opposition to the Fresenius parties’ motion for leave to amend and supplement their counterclaim, arguing that the motion was untimely and prejudicial. On February 27, 2019, the Fresenius parties filed a reply in further support of their motion to file an amended and supplemented counterclaim. On February 28, 2019, the Court of Chancery denied the Fresenius parties’ motion for leave to file an amended and supplemented counterclaim. On March 15, 2019, the Fresenius parties served interrogatories in furtherance of their claim for damages purportedly resulting from breaches of contractual representations and warranties and covenants in the Merger Agreement.
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 on July 24, 2018. On December 21, 2018, the defendants filed their answer to the unfair trade practices claim, the sole remaining claim in the amended petition. On January 31, 2019, Louisiana filed a motion with the trial court raising a procedural argument that the other claims originally pled in the amended petition, including a common law claim for fraud and a statutory claim for fraud against the Louisiana Medicaid agency, had been improperly dismissed. That motion is presently scheduled for hearing in May 2019. There is no overall case schedule in place, and active discovery has not yet commenced.
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
(the “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, during a class period from November 3, 2016, to April 20, 2018, 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.
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.
On March 8, 2019, the parties in the Data Integrity Securities Litigation filed a proposed stipulation which sought, among other things: (i) leave to file a second amended class action complaint, which would extend the end date of the alleged class period from November 3, 2016, through September 28, 2018; (ii) to consolidate the Wickstrom complaint into the Data Integrity Securities Litigation for all purposes; and (iii) to extend the existing discovery schedule in order to permit time to mediate lead plaintiffs’ claims and to conduct additional discovery related to the expanded class period.
On March 12, 2019, counsel for Wickstrom filed a letter with the Court seeking leave to file an opposition to the lead plaintiffs’ request to consolidate the Wickstrom complaint into the Data Integrity Securities Litigation. On March 25, 2019, counsel for Wickstrom filed a memorandum in opposition to the lead plaintiffs’ stipulation. On March 26, 2019, lead plaintiffs filed a reply in further support of their request for consolidation. During a March 27, 2019 conference, the Court found that the Wickstrom action was related to the Data Integrity Securities Litigation and ordered oral argument for April 22, 2019, on lead plaintiffs’ requests to file a second amended complaint and to consolidate the Wickstrom complaint.
Following the March 27, 2019 hearing, the Court entered an order finding the Data Integrity Securities Litigation and Wickstrom action to be related and requesting the reassignment of the Wickstrom action. The Court also extended the discovery and pretrial deadlines.
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.
On February 4, 2019, the court held a hearing, at which it instructed the parties to confer concerning the possible retention of a special master to resolve the pending motions to dismiss and to oversee any proceedings thereafter. After conferring, the parties jointly proposed a candidate for special master. On March 6, 2019, the Court entered an order appointing the parties’ proposed candidate as special master. The order directs the special master to provide the Court with a written report and recommendation on the pending motion to dismiss within 60 days of his appointment or 30 days of any oral argument.
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. Defendants filed a reply memorandum of law in further support of their motion to dismiss on February 28, 2019.
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. Other than amounts previously disclosed that have been recorded for intermediate court decisions and damages claims, the Company has determined that contingent liabilities associated with the other legal matters disclosed above 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 13 — Customer, Supplier and Product Concentration
Customer Concentration
In the three month periods ended
March 31, 2019
and 2018, a significant portion of the Company’s gross and net revenues reported were to
three
large wholesale drug distributors, and a significant portion of the Company’s accounts receivable as of
March 31, 2019
and December 31, 2018 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
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 three month periods ended
March 31, 2019
and December 31, 2018, the Company has not experienced significant losses with respect to its collection of these gross accounts receivable balances.
The following table sets forth the percentage of the Company's gross accounts receivable attributable to the Big 3 Wholesalers as of
March 31, 2019
and December 31, 2018:
|
|
|
|
|
|
|
|
Big 3 Wholesalers combined:
|
March 31,
2019
|
|
December 31,
2018
|
|
Percentage of gross trade accounts receivable
|
86%
|
|
86%
|
The following table sets forth the percentage of the Company’s gross sales attributable to the Big 3 Wholesalers for the
three
month periods ended
March 31, 2019
and 2018:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Big 3 Wholesalers combined:
|
2019
|
|
2018
|
|
Percentage of gross sales
|
84%
|
|
83%
|
The following table sets forth the Company’s net revenues disaggregated by major customers for the
three
month periods ended
March 31, 2019
and 2018 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
Three Months Ended
March 31, 2018
|
|
Disaggregation of net revenues by major customers
|
Net Revenue
|
|
Net Revenue %
|
|
Net Revenue
|
|
Net Revenue %
|
|
Amerisource
|
$
|
30,096
|
|
|
18.1%
|
|
$
|
37,955
|
|
|
20.6%
|
|
Cardinal
|
29,761
|
|
|
17.9%
|
|
27,189
|
|
|
14.8%
|
|
McKesson
|
37,752
|
|
|
22.8%
|
|
53,221
|
|
|
28.9%
|
|
Big 3 Wholesalers combined
|
97,609
|
|
|
58.8%
|
|
118,365
|
|
|
64.3%
|
|
All Others
|
68,262
|
|
|
41.2%
|
|
65,698
|
|
|
35.7%
|
|
Total Revenues
|
165,871
|
|
|
100.0%
|
|
184,063
|
|
|
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
89.2%
and
89.3%
of the consolidated net revenue for three month periods ended
March 31, 2019
and 2018, respectively. Chain pharmacies are the major customers in the Consumer Health segment. For more information, see
Note 10 — 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 the
three
month periods ended
March 31, 2019
or 2018.
Product Concentration
In the
three
month period ended
March 31, 2019
,
one
of the Company's products, Myorisan
™ (isotretinoin capsules, USP),
represented approximately
12%
of total net revenue while
none
of the Company's products represented greater than
10%
of its total net sales revenue in the three month period ended March 31, 2018. The Company attempts to minimize the risk associated with product concentrations by continuing to acquire and develop new products to add to its existing product portfolio.
Note 14 — Income Taxes
The following table sets forth information about the Company’s income tax provision (benefit) for the periods indicated (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2019
|
|
2018
|
|
(Loss) before income taxes
|
$
|
(80,761
|
)
|
|
$
|
(36,027
|
)
|
|
Income tax provision (benefit)
|
1,420
|
|
|
(7,280
|
)
|
|
Net (loss)
|
$
|
(82,181
|
)
|
|
$
|
(28,747
|
)
|
|
|
|
|
|
|
Income tax provision (benefit) as a percentage of (loss) before income taxes
|
(1.8
|
)%
|
|
20.2
|
%
|
During the three month periods ended
March 31, 2019
and 2018, the Company recorded an income tax provision of
$1.4 million
and an income tax benefit of
$7.3 million
, or
(1.8)%
and
20.2%
, of (loss) before income tax in the applicable periods, respectively. The Company did not use the discrete method to calculate the quarterly provision due to the company’s overall valuation allowance position. The reason for the overall tax provision rate of
(1.8)%
during the three month period ended
March 31, 2019
is due to the full valuation allowance recorded against our deferred tax assets.
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 U.S., India, and Switzerland will be realized. Accordingly, the Company has recorded a full valuation allowance against U.S., India, and Switzerland deferred tax assets
.
The Company has a valuation allowance of
$84.6 million
against its deferred tax assets as of
March 31, 2019
.
In accordance with ASC 740-10-25,
Income Taxes - Recognition
, the Company reviews 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 establishes reserves based on the financial exposure and the likelihood that its tax positions would not be sustained. Based on its evaluations, the Company determined that it would not recognize tax benefits on
$29.5 million
related to uncertain tax positions as of
March 31, 2019
. If recognized,
$2.4 million
of the above positions would 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 March 31, 2019, and as such the Company reasonably expects this balance to reverse during 2019. The Company accounts for interest and penalties as income tax expense. During the three month period ended
March 31, 2019
, the Company recorded
no
penalties and
$1.3 million
interest related to unrecognized tax benefits. As of
March 31, 2019
, the Company had accrued a total of
$8.6 million
and
$13.4 million
of penalties and interest, respectively.
Note 15 – Related Party Transactions
In 2019 and 2018, the Company obtained legal services from Polsinelli PC, a firm for which the spouse of the Company’s Executive Vice President, General Counsel and Secretary is a shareholder. During the three month periods ended
March 31, 2019
and 2018, the Company obtained legal services totaling
$1.5 million
and
$0.6 million
, respectively, of
which
$1.0 million
and
$0.5 million
was payable as of
March 31, 2019
and 2018, respectively.
During the three month periods ended
March 31, 2019
and 2018, the Company also obtained and paid legal services totaling
$0.1 million
and
$0.2 million
, respectively, to Segal McCambridge Singer & Mahoney, a firm for which the brother-in-law of the Company’s Executive Vice President, General Counsel and Secretary is a shareholder.
Note 16 – 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 ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. 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 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.
Recently Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No.
2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
The amendments in this ASU 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 standard was adopted on January 1, 2019, and did not have a material impact on the Company's financial statements or financial statement disclosures.
In February 2016, FASB issued ASU
No.
2016-02
-
Leases
(Topic 842), as modified by subsequently issued ASUs 2019-01, 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. 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 elected 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 did not elect the use-of-hindsight practical expedient. 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 finalized our assessment of the overall financial statement impact. We adopted the ASC on January 1, 2019, using the modified retrospective method and did not restate comparative periods. At adoption, we recorded Total Lease liabilities of
$24.7 million
and Total Right-of-use assets, net of
$23.0 million
in its consolidated statement of financial position. The impact on the Company’s results of operations did not materially differ from recorded amounts under ASC 840. The impact of the adoption of this ASU is non-cash in nature and therefore did not materially affect the Company’s cash flows. See
Note 17 — Leasing Arrangements
for additional disclosures.
In May 2017, the FASB issued 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.
T
he 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 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 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
. 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 three months ended March 31, 2018. See
Note 13 — Customer, Supplier and Product Concentration
for the disaggregation of net revenues by major customers.
Note 17 — Leasing Arrangements
The Company leases real and personal property in the normal course of business under various operating leases and other insignificant finance leases, including non-cancelable and immaterial month-to-month agreements. We recognize rent expense on a straight-line basis over the lease term. During the three month period ended
March 31, 2019
, total lease cost was
$1.2 million
. During the three month period ended March 31, 2018, total lease cost under ASC 840 was
$0.8 million
.
The following table sets forth the Company’s lease cost components (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Operating lease cost
|
$
|
1,152
|
|
|
Amortization of finance lease assets
|
46
|
|
|
Interest on finance lease liabilities
|
7
|
|
|
Short-term lease cost
|
10
|
|
|
Total lease cost (1)
|
$
|
1,215
|
|
(1) Of the total lease cost amount,
$0.6 million
is being reported in selling, general and administrative,
$0.3 million
in cost of sales and
$0.3 million
in research and development expenses within the Condensed Consolidated Statement of Comprehensive (Loss).
The following table sets forth the Company’s Supplemental cash flow information related to leases
(in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
1,179
|
|
|
Operating cash flows from finance leases
|
5
|
|
|
Financing cash flows from finance leases
|
335
|
|
|
|
|
|
Right-of-use assets, net obtained in exchange for new lease obligations:
|
|
|
Operating lease liabilities
|
22,523
|
|
|
Finance lease liabilities
|
$
|
441
|
|
The following table sets forth the Company’s Supplemental balance sheet information related to leases (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Right-of-use assets, net:
|
|
|
Operating leases, gross
|
$
|
22,523
|
|
|
Accumulated amortization
|
550
|
|
|
Operating leases, net
|
$
|
21,973
|
|
|
Finance leases (included in "Other non-current assets"), gross
|
75
|
|
|
Accumulated depreciation
|
5
|
|
|
Finance leases (included in "Other non-current assets"), net
|
$
|
70
|
|
|
Total Right-of-use assets, net
|
$
|
22,043
|
|
|
|
|
|
Lease liabilities:
|
|
|
Current portion of Operating lease liability
|
$
|
2,238
|
|
|
Long-term Operating lease liability
|
21,480
|
|
|
Total Operating lease liability
|
$
|
23,718
|
|
|
Current portion of Finance lease (included in "Accrued expenses and other liabilities") liability
|
$
|
19
|
|
|
Long-term Finance lease (included in "Pension obligations and other liabilities") liability
|
48
|
|
|
Total Finance lease liability
|
$
|
67
|
|
|
Total Lease liabilities
|
$
|
23,785
|
|
The following table sets forth the Company’s Weighted-average lease terms and discount rates (lease term in years):
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Weighted-average remaining lease terms:
|
|
|
Operating leases
|
8.92
|
|
|
Finance leases
|
3.33
|
|
|
|
|
|
Weighted-average discount rates:
|
|
|
Operating leases
|
10.01
|
%
|
|
Finance leases
|
5.50
|
%
|
The following table sets forth the Company’s scheduled maturities of lease liabilities as of
March 31, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
Operating leases
|
|
Finance leases
|
|
2019 (last nine months of 2019)
|
$
|
3,332
|
|
|
$
|
16
|
|
|
2020
|
4,531
|
|
|
22
|
|
|
2021
|
4,357
|
|
|
22
|
|
|
2022
|
3,990
|
|
|
13
|
|
|
2023
|
3,323
|
|
|
—
|
|
|
2024 and thereafter
|
17,294
|
|
|
—
|
|
|
Total lease payments (1)
|
$
|
36,827
|
|
|
$
|
73
|
|
|
Less: Imputed interest
|
$
|
13,109
|
|
|
$
|
6
|
|
|
Total lease liabilities
|
$
|
23,718
|
|
|
$
|
67
|
|
(1)
U
nder ASC 842, the Company is required to take into consideration contractual lease renewal options that are reasonably assured to be exercised when determining the lease liability at transition. As of
March 31, 2019
, the Company has approximately
$11 million
of reasonably assured renewal option payments included in the total lease payments.
The following table sets forth the Company’s scheduled of future minimum rental payments for operating leases under ASC 840 as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
Year ending December 31,
|
Operating leases
|
|
2019
|
$
|
4,564
|
|
|
2020
|
4,647
|
|
|
2021
|
4,283
|
|
|
2022
|
3,724
|
|
|
2023
|
2,673
|
|
|
2024 and thereafter
|
6,976
|
|
|
Total lease payments
|
$
|
26,867
|
|
Note 18 — 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 the components of net periodic cost for our pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
($ in thousands)
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
632
|
|
|
$
|
557
|
|
|
Interest cost
|
61
|
|
|
51
|
|
|
Expected return on plan assets
|
(175
|
)
|
|
(189
|
)
|
|
Amortization of:
|
|
|
|
|
Prior service (benefit)
|
(5
|
)
|
|
(5
|
)
|
|
Net actuarial loss
|
49
|
|
|
—
|
|
|
Participant contributions
|
(194
|
)
|
|
(168
|
)
|
|
Net periodic benefit cost
|
$
|
368
|
|
|
$
|
246
|
|
The Company contributed approximately
$0.4 million
for the three month period ended
March 31, 2019
, and expects to contribute a total of approximately
$1.7 million
to the pension plan in 2019.
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 three month period ended
March 31, 2019
and 2018, plan-related expenses totaled approximately
$0.8 million
and
$0.7 million
, respectively. The Company's matching contribution is funded on a current basis.