e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED June 30, 2007
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-13976
AKORN, INC.
(Exact Name of Registrant as Specified in its Charter)
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LOUISIANA
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72-0717400 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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2500 MILLBROOK DRIVE |
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BUFFALO GROVE, ILLINOIS
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60089 |
(Address of Principal Executive Offices)
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(Zip Code) |
(847) 279-6100
(Registrants telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act
Rule 12b-2).
Yes o No þ
At July 31, 2007 there were 87,588,055 shares of common stock, no par value, outstanding.
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Page |
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PART I. FINANCIAL INFORMATION |
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ITEM 1. Financial Statements. |
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Condensed Consolidated Balance Sheets-June 30, 2007 and December 31, 2006 |
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3 |
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Condensed Consolidated Statements of Operations-Three and six months ended June 30, 2007 and 2006 |
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4 |
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Condensed Consolidated Statement of Shareholders Equity- Six months ended June 30, 2007 and 2006 |
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5 |
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Condensed Consolidated Statements of Cash Flows- Six months ended June 30, 2007 and 2006 |
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6 |
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Notes to Condensed Consolidated Financial Statements. |
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7 |
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. |
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17 |
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. |
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21 |
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ITEM 4. Controls and Procedures. |
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21 |
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PART II. OTHER INFORMATION |
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ITEM 1. Legal Proceedings. |
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21 |
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ITEM 1A. Risk Factors. |
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21 |
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. |
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22 |
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ITEM 3. Defaults Upon Senior Securities. |
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22 |
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ITEM 4. Submission of Matters to a Vote of Security Holders. |
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23 |
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ITEM 5. Other Information. |
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23 |
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ITEM 6. Exhibits. |
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24 |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE DATA
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JUNE 30, |
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DECEMBER 31, |
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2007 |
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2006 |
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(UNAUDITED) |
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(AUDITED) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
|
$ |
12,885 |
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$ |
21,818 |
|
Trade accounts receivable (less allowance for doubtful accounts of $1 and $3,
respectively) |
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1,987 |
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|
4,781 |
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Inventories |
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15,897 |
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11,734 |
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Prepaid expenses and other current assets |
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881 |
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1,321 |
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|
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TOTAL CURRENT ASSETS |
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31,650 |
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39,654 |
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PROPERTY, PLANT AND EQUIPMENT, NET |
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32,956 |
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33,486 |
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OTHER LONG-TERM ASSETS |
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Intangibles, net |
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8,198 |
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8,825 |
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Other |
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103 |
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118 |
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TOTAL OTHER LONG-TERM ASSETS |
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8,301 |
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8,943 |
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TOTAL ASSETS |
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$ |
72,907 |
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$ |
82,083 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Current installments of debt |
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$ |
408 |
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$ |
394 |
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Trade accounts payable |
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3,827 |
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4,719 |
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Accrued compensation |
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726 |
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1,849 |
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Customer accrued liabilities |
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253 |
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391 |
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Accrued expenses and other liabilities |
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963 |
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2,900 |
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TOTAL CURRENT LIABILITIES |
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6,177 |
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10,253 |
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LONG-TERM LIABILITIES |
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Long-term debt, less current installments |
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208 |
|
Product warranty liability |
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1,308 |
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1,308 |
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TOTAL LONG-TERM LIABILITIES |
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1,308 |
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1,516 |
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TOTAL LIABILITIES |
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7,485 |
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11,769 |
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SHAREHOLDERS EQUITY |
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Common stock, no par value 150,000,000 shares authorized;
87,579,283 and 85,990,964 shares issued and outstanding
at June 30, 2007 and December 31, 2006, respectively |
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156,877 |
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150,250 |
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Warrants to acquire common stock |
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2,820 |
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4,862 |
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Accumulated deficit |
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(94,275 |
) |
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(84,798 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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65,422 |
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|
70,314 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
72,907 |
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|
$ |
82,083 |
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See notes to condensed consolidated financial statements.
3
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
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THREE MONTHS ENDED |
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SIX MONTHS ENDED |
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JUNE 30, |
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JUNE 30, |
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2007 |
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2006 |
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2007 |
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2006 |
|
Revenues |
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$ |
11,638 |
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$ |
12,475 |
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$ |
23,373 |
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$ |
42,205 |
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Cost of sales |
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8,752 |
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7,520 |
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17,998 |
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25,517 |
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GROSS PROFIT |
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2,886 |
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4,955 |
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5,375 |
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16,688 |
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Selling, general and administrative expenses |
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5,189 |
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4,669 |
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10,431 |
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9,153 |
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Amortization and write-down of intangibles |
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339 |
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350 |
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|
677 |
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|
701 |
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Research and development expenses |
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2,161 |
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2,121 |
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4,172 |
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4,166 |
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TOTAL OPERATING EXPENSES |
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7,689 |
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7,140 |
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15,280 |
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14,020 |
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OPERATING (LOSS) INCOME |
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(4,803 |
) |
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(2,185 |
) |
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(9,905 |
) |
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2,668 |
|
Interest income/(expense) net |
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169 |
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234 |
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428 |
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(1,085 |
) |
Debt Retirement Expense |
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(391 |
) |
Other income/(expense) |
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1 |
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(12 |
) |
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1 |
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(29 |
) |
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|
(LOSS)/INCOME BEFORE INCOME TAXES |
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(4,633 |
) |
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(1,963 |
) |
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(9,476 |
) |
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1,163 |
|
Income tax provision |
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1 |
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1 |
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NET (LOSS)/INCOME |
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(4,634 |
) |
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(1,963 |
) |
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|
(9,477 |
) |
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|
1,163 |
|
Preferred stock dividends and adjustments |
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|
(234 |
) |
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(560 |
) |
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NET (LOSS)/INCOME AVAILABLE TO COMMON
STOCKHOLDERS |
|
$ |
(4,634 |
) |
|
$ |
(2,197 |
) |
|
$ |
(9,477 |
) |
|
$ |
603 |
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NET (LOSS)/INCOME PER SHARE: |
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BASIC |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.01 |
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|
|
|
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|
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DILUTED |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.01 |
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SHARES USED IN COMPUTING NET (LOSS)/INCOME PER SHARE: |
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BASIC |
|
|
86,982 |
|
|
|
74,853 |
|
|
|
86,619 |
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|
68,321 |
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|
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|
|
|
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DILUTED |
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|
86,982 |
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|
74,853 |
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|
86,619 |
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|
|
76,481 |
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|
|
|
|
|
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See notes to condensed consolidated financial statements.
4
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
(In Thousands)
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Warrants to |
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Retained |
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Six Months Ended June 30, 2007 |
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|
Series A |
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Series B |
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acquire |
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Earnings |
|
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|
|
|
|
Common Stock |
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|
Preferred |
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|
Preferred |
|
|
Common |
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(Accumulated |
|
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|
Shares |
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Amount |
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|
Stock |
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|
Stock |
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|
Stock |
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|
Deficit) |
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Total |
|
BALANCES AT DECEMBER 31, 2006 |
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|
85,991 |
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|
$ |
150,250 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,862 |
|
|
$ |
(84,798 |
) |
|
$ |
70,314 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,477 |
) |
|
|
(9,477 |
) |
Exercise of warrants into common stock |
|
|
1,285 |
|
|
|
4,534 |
|
|
|
|
|
|
|
|
|
|
|
(2,042 |
) |
|
|
|
|
|
|
2,492 |
|
Exercise of stock options |
|
|
168 |
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532 |
|
Employee stock purchase plan issuances |
|
|
20 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
Amortization of deferred compensation related to restricted stock awards |
|
|
|
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368 |
|
Restricted Stock Awards withheld for
payment of EE Tax Liability |
|
|
115 |
|
|
|
(445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(445 |
) |
FAS123R share based payment expense |
|
|
|
|
|
|
1,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
BALANCES AT JUNE 30, 2007 |
|
|
87,579 |
|
|
$ |
156,877 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,820 |
|
|
$ |
(94,275 |
) |
|
$ |
65,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
|
|
|
Warrants to |
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Retained |
|
|
|
|
Six Months Ended June 30, 2006 |
|
|
|
|
Series A |
|
|
Series B |
|
|
acquire |
|
|
Earnings |
|
|
|
|
|
|
Common Stock |
|
|
Preferred |
|
|
Preferred |
|
|
Common |
|
|
(Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Deficit) |
|
|
Total |
|
BALANCES AT DECEMBER 31, 2005 |
|
|
27,619 |
|
|
$ |
67,339 |
|
|
$ |
27,232 |
|
|
$ |
10,758 |
|
|
$ |
13,696 |
|
|
$ |
(77,992 |
) |
|
$ |
41,033 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,163 |
|
|
|
1,163 |
|
Preferred stock dividends earned |
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
302 |
|
|
|
|
|
|
|
(357 |
) |
|
|
|
|
Intrinsic value of beneficial conversion
features in convertible preferred stock |
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203 |
) |
|
|
|
|
Conversion of preferred stock into
common stock |
|
|
37,779 |
|
|
|
29,758 |
|
|
|
(27,287 |
) |
|
|
(2,471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants into common stock |
|
|
1,413 |
|
|
|
2,774 |
|
|
|
|
|
|
|
|
|
|
|
(1,886 |
) |
|
|
|
|
|
|
888 |
|
Conversion of convertible notes into
common stock |
|
|
3,540 |
|
|
|
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,298 |
|
Net proceeds from issuance of common
stock and warrants |
|
|
4,312 |
|
|
|
16,257 |
|
|
|
|
|
|
|
|
|
|
|
1,821 |
|
|
|
|
|
|
|
18,078 |
|
Stock issuance under stock option and
stock purchase plans |
|
|
622 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 |
|
Amortization of deferred compensation
related to restricted stock awards |
|
|
|
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277 |
|
FAS123R share based payment expense |
|
|
|
|
|
|
701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT JUNE 30, 2006 |
|
|
75,285 |
|
|
$ |
124,907 |
|
|
$ |
|
|
|
$ |
8,589 |
|
|
$ |
13,631 |
|
|
$ |
(77,389 |
) |
|
$ |
69,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS (UNAUDITED)
See notes to condensed consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS |
|
|
|
ENDED JUNE 30 |
|
|
|
2007 |
|
|
2006 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net (loss)/income |
|
$ |
(9,477 |
) |
|
$ |
1,163 |
|
Adjustments to reconcile net (loss)/income to net
cash (used in)/provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,188 |
|
|
|
1,645 |
|
Amortization of debt discounts |
|
|
|
|
|
|
1,059 |
|
Non-cash stock compensation expense |
|
|
1,877 |
|
|
|
978 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
2,794 |
|
|
|
(1,765 |
) |
Inventories |
|
|
(4,163 |
) |
|
|
(691 |
) |
Prepaid expenses and other current assets |
|
|
455 |
|
|
|
(363 |
) |
Trade accounts payable |
|
|
(892 |
) |
|
|
(314 |
) |
Product warranty liability |
|
|
|
|
|
|
1,159 |
|
Accrued customer liability |
|
|
(138 |
) |
|
|
197 |
|
Accrued expenses and other liabilities |
|
|
(3,060 |
) |
|
|
(1,039 |
) |
|
|
|
|
|
|
|
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES |
|
|
(10,416 |
) |
|
|
2,029 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(981 |
) |
|
|
(1,388 |
) |
Purchase of intangible assets |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(1,031 |
) |
|
|
(1,388 |
) |
FINANCING
ACTIVITIES (see Note 1 below) |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(194 |
) |
|
|
(2,917 |
) |
Proceeds from common stock and warrant offering |
|
|
|
|
|
|
18,078 |
|
Proceeds from warrants exercised |
|
|
2,492 |
|
|
|
888 |
|
Proceeds under stock option and stock purchase plans |
|
|
216 |
|
|
|
300 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
2,514 |
|
|
|
16,349 |
|
|
|
|
|
|
|
|
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(8,933 |
) |
|
|
16,990 |
|
Cash and cash equivalents at beginning of period |
|
|
21,818 |
|
|
|
791 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
12,885 |
|
|
$ |
17,781 |
|
|
|
|
|
|
|
|
Amount paid for interest |
|
$ |
25 |
|
|
$ |
561 |
|
Amount paid for income taxes |
|
$ |
3 |
|
|
$ |
2 |
|
Note 1: In March 2006, $7,298 in principal and interest related to convertible notes was
retired by conversion to the
common stock of Akorn, Inc. (See Note H Financing Arrangements)
6
AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A BUSINESS AND BASIS OF PRESENTATION
Business: Akorn, Inc. and its wholly owned subsidiary, Akorn (New Jersey), Inc. (collectively,
the Company), manufacture and market diagnostic and therapeutic pharmaceuticals in specialty
areas such as ophthalmology, rheumatology, anesthesia and antidotes, among others. Customers,
including physicians, optometrists, wholesalers, group purchasing organizations and other
pharmaceutical companies, are served primarily from three operating facilities in the United
States. In September 2004, the Company, along with a venture partner, Strides Arcolab Limited
(Strides), formed a mutually owned limited liability company, Akorn-Strides, LLC (the Joint
Venture Company). The accompanying unaudited condensed consolidated financial statements include
the accounts of Akorn, Inc. and Akorn (New Jersey) Inc. Intercompany transactions and balances have
been eliminated in consolidation.
Basis of Presentation: These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and accordingly do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in these financial statements. Operating
results for the six-month period ended June 30, 2007 are not necessarily indicative of the results
that may be expected for a full year. For further information, refer to the consolidated financial
statements and footnotes for the year ended December 31, 2006, included in the Companys Annual
Report on Form 10-K.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 allowance for
doubtful accounts, the allowance for chargebacks, the allowance for rebates, the allowance for
product returns and discounts, the reserve for slow-moving and obsolete inventory, the carrying
value of intangible assets and the carrying value of deferred income tax assets.
Chargebacks: The Company enters into contractual agreements with certain third parties such as
hospitals and group-purchasing organizations to sell certain products at predetermined prices. The
parties have elected to have these contracts administered through wholesalers that buy the product
from the Company and subsequently sell it to those third parties. When a wholesaler sells products
to one of these third parties that are subject to a contractual price agreement, the difference
between the price paid to the Company by the wholesaler and the price under the specific contract
is charged back to the Company by the wholesaler. The Company tracks sales and submitted
chargebacks by product number and contract for each wholesaler. Utilizing this information, the
Company estimates a chargeback percentage for each product. The Company reduces gross sales and
increases the chargeback allowance by the estimated chargeback amount for each product sold to a
wholesaler. The Company reduces the chargeback allowance when it processes a request for a
chargeback from a wholesaler. Actual chargebacks processed by the Company can vary materially from
period to period based upon actual sales volume through the wholesalers. However, the Companys
provision for chargebacks is fully reserved for at the time when sales revenues are recognized.
Management obtains certain wholesaler inventory reports to aid in analyzing the reasonableness
of the chargeback allowance that will be paid out in the future. The Company assesses the
reasonableness of its chargeback allowance by applying the product chargeback percentage based on
historical activity to the quantities of inventory on hand per the wholesaler inventory reports and
an estimate of in-transit inventory that is not reported on the wholesaler inventory reports at the
end of each reporting period. In accordance with its accounting policy, the Companys estimate of
the percentage amount of wholesaler inventory that will ultimately be sold to a third party that is
subject to a contractual price agreement is based on a six-quarter trend of such sales through
wholesalers. The Company uses this percentage estimate (95% in 2007) until historical trends
indicate that a revision should be made.
7
On an ongoing basis, the Company evaluates its actual chargeback rate experience and new
trends are factored into its estimates each quarter as market conditions change.
Sales Returns: Certain of the Companys products are sold with the customer having the right
to return the product within specified periods and guidelines for a variety of reasons, including
but not limited to, pending expiration dates. Provisions are made at the time of sale based upon
tracked historical experience, by customer in some cases. The Company estimates its sales returns
reserve based on a historical percentage of returns to sales utilizing a twelve month look back
period. One-time historical factors or pending new developments that would impact the expected
level of returns are taken into account to determine the appropriate reserve estimate at each
balance sheet date.
As part of the evaluation of the balance required, the Company considers actual returns to
date that are in process, the expected impact of any product recalls and the wholesalers inventory
information to assess the magnitude of unconsumed product that may result in a sales return to the
Company in the future. The sales returns level can be impacted by factors such as overall market
demand and market competition and availability for substitute products which can increase or
decrease the end-user pull through for sales of the Companys products and ultimately impact the
level of sales returns. Actual returns experience and trends are factored into the Companys
estimates each quarter as market conditions change.
NOTE C STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share Based Payment (SFAS 123(R)), applying the modified prospective method.
Prior to the adoption of SFAS 123(R), the Company applied the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for its stock-based awards, and
accordingly, recognized no compensation cost for its stock plans other than for its restricted
stock awards.
Under the modified prospective method, SFAS 123(R) applies to new awards and to awards that were
outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or
cancelled. Compensation expense recognized during the first six months of 2007 includes the portion
vesting during the period for (1) all share-based payments granted prior to, but not yet vested as
of December 31, 2005, based on the grant date fair value estimated in accordance with the original
provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and (2) all share-based payments granted subsequent to December 31, 2005,
based on the grant-date fair value estimated using the Black-Scholes option-pricing model.
Stock option compensation expense of $619,000 and $1,509,000 was recognized during the three and
six-month periods ended June 30, 2007. Stock option compensation expense of $498,000 and $701,000
was recognized during the three and six month periods ended June 30, 2006, of which $111,000 and
$290,000 related to existing stock options granted prior to January 1, 2006 and $387,000 and
$411,000 related to stock options granted during the three and six month periods ended June 30,
2006. For awards issued prior to January 1, 2006, the Company used the multiple award method for
allocating the compensation cost to each period. For awards issued on or after January 1, 2006,
concurrent with the adoption of SFAS 123(R), the Company has elected to use the single-award method
for allocating the compensation cost to each period.
As of June 30, 2007, the total amount of unrecognized compensation cost related to nonvested stock
options was $3,910,000 which is expected to be recognized as expense over a weighted-average period
of 2.3 years.
The weighted-average assumptions used in estimating the fair value of the stock options granted
during the period, along with the weighted-average grant date fair values, were as follows:
8
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS |
|
THREE MONTHS |
|
|
ENDED |
|
ENDED |
|
|
JUNE 30, 2007 |
|
JUNE 30, 2006 |
|
|
(SFAS 123(R)) |
|
(SFAS 123 (R)) |
|
|
|
Expected Volatility |
|
|
45 |
% |
|
|
45 |
% |
Expected Life (in years) |
|
|
4.0 |
|
|
|
3.6 |
|
Risk-free interest rate |
|
|
4.8 |
% |
|
|
5.0 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
Fair value per stock option |
|
$ |
2.72 |
|
|
$ |
1.91 |
|
Forfeiture Rate |
|
|
10 |
% |
|
|
10 |
% |
A summary of stock based compensation activity within the Companys stock-based compensation plans
for the six-month period ended June 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Number of |
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Shares |
|
|
Average |
|
|
Contractual Term |
|
|
Aggregate |
|
|
|
(in thousands) |
|
|
Exercise Price |
|
|
(Years) |
|
|
Intrinsic Value |
|
|
Outstanding at January 1, 2007 |
|
|
3,155 |
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,115 |
|
|
$ |
6.29 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(168 |
) |
|
$ |
3.18 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(48 |
) |
|
$ |
5.27 |
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
5,054 |
|
|
$ |
4.49 |
|
|
|
3.3 |
|
|
$ |
12,632 |
|
|
Exercisable at June 30, 2007 |
|
|
2,565 |
|
|
$ |
3.21 |
|
|
|
2.3 |
|
|
$ |
9,684 |
|
|
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the
difference between the market value of the Companys common stock as of the end of the period and
the exercise price of the stock options. The total intrinsic value of stock options exercised
during the three and six-month periods ended June 30, 2007 was $306,000 and $545,000, respectively.
As a result of the stock options exercised, the Company recorded cash received and additional
paid-in-capital of $256,000 and $532,000 during the three and six-month periods ended June 30,
2007.
The Company also grants restricted stock awards to certain employees. Restricted stock awards are
valued at the closing market value of the Companys common stock on the day of grant and the total
value of the award is recognized as expense ratably over the vesting period of the employees
receiving the grants. The Company has not granted restricted stock awards during 2007. As of June
30, 2007, the total amount of unrecognized compensation expense related to nonvested restricted
stock awards was $810,000. The Company recognized compensation expense of $147,000 and $368,000
during the three and six-month periods ended June 30 2007, related to outstanding restricted stock
awards. The Company recognized compensation expense of $147,000 and $277,000 during the three and
six-month periods ended June 30, 2006, respectively, related to outstanding restricted stock
awards.
The following is a summary of nonvested restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Weighted Average |
|
|
|
(in thousands) |
|
|
Grant Date Fair Value |
|
|
Nonvested at December 31, 2006 |
|
|
350 |
|
|
$ |
5.05 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(175 |
) |
|
$ |
5.05 |
|
Canceled |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2007 |
|
|
175 |
|
|
$ |
5.05 |
|
|
9
NOTE D REVENUE RECOGNITION
The Company recognizes product sales for its ophthalmic and hospital drugs & injectables
business segments upon the shipment of goods or upon the delivery of goods, depending on the sales
terms. Revenue is recognized when all obligations of the Company have been fulfilled and collection
of the related receivable is probable.
The contract services segment, which produces products for third party customers based upon
their specifications and at pre-determined prices, also recognizes sales upon the shipment of goods
or upon delivery of the product or service as appropriate. Revenue is recognized when all
obligations of the Company have been fulfilled and collection of the related receivable is
probable.
Provision for estimated doubtful accounts, chargebacks, rebates, discounts and product returns
is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
NOTE E ACCOUNTS RECEIVABLE ALLOWANCES
The nature of the Companys business inherently involves, in the ordinary course, significant
amounts and substantial volumes of transactions and estimates relating to allowances for doubtful
accounts, product returns, chargebacks, rebates and discounts given to customers. This is a natural
circumstance of the pharmaceutical industry and not specific to the Company and inherently
lengthens the collection process. Depending on the product, the end-user customer, the specific
terms of national supply contracts and the particular arrangements with the Companys wholesaler
customers, certain rebates, chargebacks and other credits are deducted from the Companys accounts
receivable. The process of claiming these deductions depends on wholesalers reporting to the
Company the amount of deductions that were earned under the respective terms with end-user
customers (which in turn depends on which end-user customer, with different pricing arrangements
might be entitled to a particular deduction). This process can lead to partial payments against
outstanding invoices as the wholesalers take the claimed deductions at the time of payment.
The provisions for the following customer reserves are reflected in the accompanying financial
statements as reductions of revenues in the income statement with the exception of the allowance
for doubtful accounts which is reflected as part of selling, general and administrative expense.
The ending reserve amounts are included in the net trade accounts receivable and customer accrued
liabilities in the balance sheet.
Net trade accounts receivable consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, |
|
|
DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
Gross Accounts Receivable |
|
$ |
14,453 |
|
|
$ |
15,827 |
|
Less: |
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts |
|
|
(1 |
) |
|
|
(3 |
) |
Returns Reserve |
|
|
(1,697 |
) |
|
|
(2,437 |
) |
Discount and Allowances Reserve |
|
|
(310 |
) |
|
|
(236 |
) |
Chargeback and Rebates Reserves |
|
|
(10,458 |
) |
|
|
(8,370 |
) |
|
|
|
|
|
|
|
Net Trade Accounts Receivable |
|
$ |
1,987 |
|
|
$ |
4,781 |
|
|
|
|
|
|
|
|
For the three-month periods ended June 30, 2007 and 2006, the Company recorded chargeback and
rebate expense of $8,905,000 and $8,100,000, respectively. This increase was primarily due to
increased sales to wholesalers in 2007. For the six-month periods ended June 30, 2007 and 2006,
the Company recorded chargeback and rebate expense of $15,690,000 and $11,743,000, respectively.
This increase was primarily due to increased sales to wholesalers.
For the three-month periods ended June 30, 2007 and 2006, the Company recorded a provision for
product returns of $(136,000) and $760,000, respectively. For the six-month periods ended June 30,
2007 and 2006, the Company recorded a provision for product returns of $490,000 and $1,607,000,
respectively. The decrease in the provision was to recognize significantly improved customer
returns experience in the period.
10
For the three-month periods ended June 30, 2007 and 2006, the Company recorded a net benefit
for doubtful accounts of $8,000 and $21,000, respectively. For the six-month periods ended June
30, 2007 and 2006, the Company recorded a net benefit for doubtful accounts of $7,000 and $88,000,
respectively.
For the three-month periods ended June 30, 2007 and 2006, the Company recorded a provision for
cash discounts of $328,000 and $362,000, respectively. For the six-month periods ended June 30,
2007 and 2006, the Company recorded a provision for cash discounts of $607,000 and $952,000,
respectively. This decrease primarily related to a cash discount for a large sale of the Companys
antidote products in the March 2006 period.
NOTE F INVENTORIES
The components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, |
|
|
DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
Finished goods |
|
$ |
3,429 |
|
|
$ |
2,923 |
|
Work in process |
|
|
1,663 |
|
|
|
1,293 |
|
Raw materials and supplies |
|
|
10,805 |
|
|
|
7,518 |
|
|
|
|
|
|
|
|
|
|
$ |
15,897 |
|
|
$ |
11,734 |
|
|
|
|
|
|
|
|
Inventory at June 30, 2007 and December 31, 2006 is reported net of reserves for slow-moving,
unsalable and obsolete items of $648,000 and $510,000, respectively, primarily related to finished
goods. For the three-month periods ended June 30, 2007 and 2006, the Company recorded a provision
of $71,000 and $(33,000), respectively. For the six-month periods ended June 30, 2007 and 2006,
the Company recorded a provision of $239,000 and $200,000, respectively.
NOTE G PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, |
|
|
DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
Land |
|
$ |
396 |
|
|
$ |
396 |
|
Buildings and leasehold improvements |
|
|
18,089 |
|
|
|
18,071 |
|
Furniture and equipment |
|
|
38,269 |
|
|
|
37,826 |
|
Automobiles |
|
|
55 |
|
|
|
55 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
56,809 |
|
|
|
56,348 |
|
Accumulated depreciation |
|
|
(30,148 |
) |
|
|
(28,637 |
) |
|
|
|
|
|
|
|
|
|
|
26,661 |
|
|
|
27,711 |
|
Construction in progress |
|
|
6,295 |
|
|
|
5,775 |
|
|
|
|
|
|
|
|
Property, Plant, & Equipment, net |
|
$ |
32,956 |
|
|
$ |
33,486 |
|
|
|
|
|
|
|
|
Construction in progress primarily represents capital expenditures related to the Companys
lyophilization (freeze-dry) project. Future costs are estimated to be approximately $100,000. The
Company is awaiting final review and a successful Pre-Approval Inspection (PAI) by the U.S. Food
and Drug Administration (FDA) before this equipment can be placed into commercial production.
The Company anticipates a successful inspection and placing the lyophilization equipment in service
in the second half of 2007, however, the outcome of an FDA inspection cannot be determined ahead of
time. There can be no assurance the Company will realize the anticipated benefits from its
investment into lyophilization capability and, if not, material impairment charges may be required.
NOTE H FINANCING ARRANGEMENTS
11
The Companys long-term debt consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, |
|
|
DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
Mortgages payable |
|
$ |
408 |
|
|
$ |
602 |
|
Less current installments of debt |
|
|
(408 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
|
|
|
$ |
208 |
|
|
|
|
|
|
|
|
On September 30, 2005, the Company renewed its credit agreement (the Credit Facility) with
LaSalle Bank National Association (LaSalle Bank). The renewal extended the existing Credit
Facility until September 30, 2008 and increased the Revolving Commitment amount (the Revolver)
from $5,000,000 to $10,000,000, as well as made modifications of prior existing covenants and the
addition of a tangible net worth financial covenant. The borrowing rate was reduced to the LaSalle
Bank prime rate (8.25% at June 30, 2007) plus 0.50%. On June 30, 2007, the Company had $8,057,000
of undrawn availability under the Credit Facility which is based on its level of accounts
receivable and inventory and certain equipment as of June 30, 2007. There was no borrowing against
the Revolver at June 30, 2007.
On August 8, 2007, the Company entered into an Amendment to Credit Agreement with LaSalle Bank
(the Amendment). Among other things, the Amendment added certain financial covenants and
adjusted the definitions EBITDA, Borrowing Base and Revolving Commitment Amount. The Amendment
also includes the option, subject to additional underwriting review, to increase the maximum
borrowings under the Revolver to $20 million over the life of the Credit Facility, which expires in
September 2008. The description of the Amendment herein is only a summary and is qualified in its
entirety by the full text of such Amendment, which is filed as an exhibit hereto and is
incorporated by reference herein.
In 2003, the Company issued subordinated promissory notes in the aggregate principal amount of
$2,767,000 (the 2003 Subordinated Notes) along with warrants to purchase 276,714 shares of common
stock at an exercise price of $1.10 per share. The Company retired the 2003 Subordinated Notes with
cash payments totaling $3,288,000 on March 20, 2006. The 2003 Subordinated Notes warrants to
purchase 276,714 shares of common stock were exercised on a cashless basis during 2006. The net
common stock issuance was 199,412 shares.
In 2001, the Company entered into a $5,000,000 convertible subordinated debt agreement, which
included a $3,000,000 Tranche A note (Tranche A Note) and a $2,000,000 Tranche B note (Tranche B
Note), (collectively, the Convertible Note Agreement). Under the terms of the Convertible Note
Agreement, both the Tranche A Note and the Tranche B Note were due on December 20, 2006 and were
issued with detachable warrants (the Tranche A Warrants and the Tranche B Warrants) to purchase
shares of common stock.
The convertible feature of the Convertible Note Agreement, as amended, allowed for conversion
of the subordinated debt plus interest into the Companys common stock, at a price of $2.28 per
share of common stock for the Tranche A Note and $1.80 per share of common stock for the Tranche B
Note.
The Company negotiated an early settlement of the Tranche A Note and the Tranche B Note in
March 2006. The associated principal and accumulated interest of approximately $7,298,000 was
retired by conversion into 3,540,281 shares of the Companys common stock on March 31, 2006. A
debt retirement fee of approximately $391,000 was paid as an inducement to retire these notes prior
to the original maturity date of December 20, 2006. The detachable warrants to purchase 1,667,000
shares of common stock were exercised on a cashless basis on November 15, 2006 and the associated
net common stock issuance was 807,168 shares.
In June 1998, the Company entered into a $3,000,000 mortgage agreement with Standard Mortgage
Investors, LLC of which there were outstanding borrowings of $408,000 and $602,000 at June 30, 2007
and December 31, 2006, respectively. The principal balance is payable over 10 years, with the final
payment due in June 2008. The mortgage note bears a fixed interest rate of 7.375% and is secured by
the real property located in Decatur, Illinois.
12
NOTE I COMMON STOCK ISSUANCE
On March 8, 2006 the Company issued 4,311,669 shares of its common stock in a private
placement with various investors at a price of $4.50 per share which included warrants to purchase
1,509,088 additional shares of common stock. The warrants are exercisable for a five year period
at an exercise price of $5.40 per share and may be exercised by cash payment of the exercise price
or by means of a cashless exercise. The aggregate offering price of the private placement was
approximately $19,402,000 and the net proceeds to the Company, after payment of approximately
$1,324,000 of commissions and expenses, was approximately $18,078,000. The net proceeds of
$18,078,000 were allocated based on the relative fair market values of the common stock and
warrants with $16,257,000 allocated to the common stock and $1,821,000 allocated to the warrants.
NOTE J EARNINGS PER COMMON SHARE
Basic net income (loss) per common share is based upon weighted average common shares
outstanding. Diluted net income (loss) per common share is based upon the weighted average number
of common shares outstanding, including the dilutive effect of convertible preferred stock, stock
options, warrants and convertible debt using the treasury stock and if converted methods. However,
for the three-month periods ended June 30, 2007 and 2006 and the six-month period ended June 30,
2007, the assumed exercise or conversion of any of these securities would have been anti-dilutive;
and, accordingly, the diluted loss per share equals the basic loss per share for that period. A
reconciliation of the earnings per share data from a basic to a fully diluted basis is detailed
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
SIX MONTHS ENDED |
|
|
|
JUNE 30, |
|
|
JUNE 30, |
|
|
JUNE 30, |
|
|
JUNE 30, |
|
Fully Diluted Earnings Per Share Data |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net income (loss) available to common
stockholders basic |
|
$ |
(4,634 |
) |
|
$ |
(2,197 |
) |
|
$ |
(9,477 |
) |
|
$ |
603 |
|
Dividend adjustment for dilutive preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings fully diluted basis |
|
$ |
(4,634 |
) |
|
$ |
(2,197 |
) |
|
$ |
(9,477 |
) |
|
$ |
603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Shares |
|
|
86,982 |
|
|
|
74,853 |
|
|
|
86,619 |
|
|
|
68,321 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,610 |
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully Diluted Shares |
|
|
86,982 |
|
|
|
74,853 |
|
|
|
86,619 |
|
|
|
76,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of such shares as of June 30, 2007 and June 30, 2006 subject to warrants,
convertible debt, and convertible preferred stock was 525,000 and 13,106,000, respectively. The
number of such shares as of June 30, 2007 and June 30, 2006 subject to stock options was 5,054,000
and 3,771,000, respectively.
NOTE K INDUSTRY SEGMENT INFORMATION
The Company classifies its operations into three business segments: ophthalmic, hospital drugs
& injectables and contract services. The ophthalmic segment manufactures, markets and distributes
diagnostic and therapeutic pharmaceuticals. The hospital drugs & injectables segment manufactures,
markets and distributes drugs and injectable pharmaceuticals, primarily in niche markets. The
contract services segment manufactures products for third party pharmaceutical and biotechnology
customers based on their specifications. Selected financial information by industry segment is
presented below (in thousands).
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmic |
|
$ |
3,893 |
|
|
$ |
5,703 |
|
|
$ |
8,110 |
|
|
$ |
9,510 |
|
Hospital Drugs & Injectables |
|
|
5,178 |
|
|
|
5,104 |
|
|
|
10,621 |
|
|
|
29,001 |
|
Contract Services |
|
|
2,567 |
|
|
|
1,668 |
|
|
|
4,642 |
|
|
|
3,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
11,638 |
|
|
$ |
12,475 |
|
|
$ |
23,373 |
|
|
$ |
42,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmic |
|
$ |
648 |
|
|
$ |
2,287 |
|
|
$ |
1,322 |
|
|
$ |
3,285 |
|
Hospital Drugs & Injectables |
|
|
1,468 |
|
|
|
2,190 |
|
|
|
2,986 |
|
|
|
12,367 |
|
Contract Services |
|
|
770 |
|
|
|
478 |
|
|
|
1,067 |
|
|
|
1,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
2,886 |
|
|
|
4,955 |
|
|
|
5,375 |
|
|
|
16,688 |
|
Operating expenses |
|
|
7,689 |
|
|
|
7,140 |
|
|
|
15,280 |
|
|
|
14,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/income |
|
|
(4,803 |
) |
|
|
(2,185 |
) |
|
|
(9,905 |
) |
|
|
2,668 |
|
Interest & Other income (expense) |
|
|
170 |
|
|
|
222 |
|
|
|
429 |
|
|
|
(1,114 |
) |
Debt Retirement expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Income before income taxes |
|
$ |
(4,633 |
) |
|
$ |
(1,963 |
) |
|
$ |
(9,476 |
) |
|
$ |
1,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company manages its business segments to the gross profit level and manages its operating
and other costs on a company-wide basis. Intersegment activity at the gross profit level is
minimal. The Company does not identify assets by segment for internal purposes, as certain
manufacturing and warehouse facilities support more than one segment.
NOTE L COMMITMENTS AND CONTINGENCIES
On March 29, 2007, the Company received an FDA Warning Letter (the Warning Letter) following
a routine inspection of its Decatur, Illinois manufacturing facility conducted from September 12
through September 29, 2006. The Warning Letter cited deviations from current Good Manufacturing
Practice (cGMP) Regulations. According to the Warning Letter, failure to promptly correct the
violations cited in the Warning Letter may result in legal action without further notice,
including, without limitation, seizure and injunction. While the Warning Letter has not
interrupted or delayed the manufacture and distribution of the Companys Decatur products currently
approved by the FDA, the FDA may withhold approval of pending new drug applications delisting the
Decatur manufacturing facility as a manufacturer until the violations are corrected. The Warning
Letter states that a reinspection may be necessary.
The Company hand-delivered its response to the Warning Letter within the 15 working days
prescribed therein. This response clarified associated actions that had been initiated and
completed prior and subsequent to the receipt of the Warning Letter. Remaining action items were
completed during the second quarter of 2007 and a cGMP inspection of the Decatur facility by the
FDA commenced July 23, 2007.
The Warning Letter has delayed the PAI process and the Companys in-service date for its
lyophilizers and relaunch of IC-Green. The impact on revenues in the first half of 2007 due to lack
of IC-Green sales was approximately $2,500,000 in reduced sales. The Company is working with a
contract manufacturer for IC-Green until the Decatur lyophilization operation receives approval.
The Company believes that the FDA inspection which commenced July 23, 2007 will also cover the PAI
of its lyophilization facility. The commissioning of the lyophilization facility is contingent
upon a successful PAI and is anticipated to occur in the second half of 2007.
The Company recorded product warranty expense of zero for the three months ended June 30, 2007
and June 30, 2006. For the six months ended June 30, 2007 and June 30, 2006, the Company recorded
product warranty expense of zero and $1,159,000, respectively, and recognized the corresponding
long-term liability for its obligation pertaining to the sale of two injectable antidotes to the
United States Department of Health and Human Services (HHS). This obligation provides that the
Company will guarantee the stability of the injectable antidotes to HHS for a period of ten years
from the shipment date. In the event either of these two products does not retain its stability
during this ten year period, the Company is obligated to replace the product at no cost to HHS. Our
supplier, Hameln Pharmaceuticals, will also share this cost if we do not meet the DTPA stability
requirement. If the ongoing product testing confirms the ten-year stability for DTPA we will not
incur a replacement cost and this reserve will be eliminated with a corresponding reduction to cost
of sales after the ten-year period.
14
The Company is a party in legal proceedings and potential claims arising in the ordinary
course of its business. The amount, if any, of ultimate liability with respect to such matters
cannot be determined. Despite the inherent uncertainties of litigation, management of the Company
at this time does not believe that such proceedings will have a material adverse impact on the
financial condition, results of operations, or cash flows of the Company.
NOTE M CUSTOMER AND SUPPLIER CONCENTRATION
AmerisourceBergen Health Corporation (Amerisource), Cardinal Health, Inc. (Cardinal) and
McKesson Drug Company (McKesson) are all distributors of the Companys products, as well as
suppliers of a broad range of health care products. These three customers accounted for 69% and 74%
of the Companys gross revenues and 55% and 58% of net revenues for the three months ended June 30,
2007 and 2006, respectively. They accounted for approximately 78% and 82% of the gross accounts
receivable balances as of June 30, 2007 and 2006, respectively. These three customers accounted
for 73% and 40% of the Companys gross revenues and 52% and 24% of net revenues for the six months
ended June 30, 2007 and 2006, respectively. The Companys
major customer for the six month period ended June 30, 2006 was
the United States Department of Health and Human Services
(HHS) which purchased $21,962,000 of the Companys
injectable antidote products during the first quarter of 2006.
If sales to any of Amerisource, Cardinal or McKesson were to diminish or cease, the Company
believes that the end users of its products would find little difficulty obtaining the Companys
products either directly from the Company or from another distributor.
Colbert Packaging Corporation accounted for 11% of the Companys purchases in the three months
ended June 30, 2007 while no supplier of products accounted for more than 10% of the Companys
purchases in the three months ended June 30, 2006. For the six months ended June 30, 2007, Alcan
Inc. accounted for 14% of the Companys purchases. Hameln Pharmaceuticals GmbH accounted for 20%
of the Companys purchases for the six months ended June 30, 2006.
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 Companys 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 Companys Abbreviated New
Drug Applications (ANDAs) and New Drug Applications (NDAs), 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
Companys development and marketing efforts. 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 Companys business, financial condition and results of operations.
NOTE N RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing a two-step process for the financial statement measurement and recognition of a tax
position taken or expected to be taken in a tax return. The first step involves the determination
of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will
be sustained upon examination, based on the technical merits of the position. The second step
requires that any tax position that meets the more-likely-than-not recognition threshold be
measured and recognized in the financial statements at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides
guidance on the accounting for related interest and penalties, accounting in interim periods,
financial statement classification and disclosure.
The Company has determined it does not have material uncertain tax positions or unrecognized
tax benefits and there is no material impact on its financial position, results of operations or
cash flows. The adoption of FIN 48 by the Company had no impact on its opening balance of retained
earnings. The Company classifies interest on tax settlements as a component of interest expense
and penalties on tax settlements as a component of administrative expense in its financial
statements.
15
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply
whenever another U.S. GAAP standard requires (or permits) assets or liabilities to be measured at
fair value but does not expand the use of fair value to any new circumstances. This standard will
also require additional disclosures in both annual and quarterly reports. SFAS 157 will be
effective for financial statements issued for fiscal years beginning after November 15, 2007. The
adoption of SFAS 157 is not expected to have a material impact on the Companys results of
operations or financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value, which are currently not required to be measured
at fair value. Under SFAS 159, an entity may, at specified election dates, choose to measure items
at fair value on an instrument-by-instrument basis. Entities would be required to report a
cumulative adjustment to retained earnings for unrealized gains and losses at the adoption date,
and to recognize changes in fair value in earnings for any items for which the fair value option
has been elected. SFAS 159 will be effective for financial statements issued for fiscal years
beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material
impact on the Companys results of operations or financial position.
16
Item 2.
AKORN, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS
Certain statements in this Form 10-Q constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. When used in this document, the words
anticipate, believe, estimate and expect and similar expressions are generally intended to
identify forward-looking statements. Any forward-looking statements, including statements regarding
the intent, belief or expectations of Akorn or its management are not guarantees of future
performance. These statements involve risks and uncertainties and actual results may differ
materially from those in the forward-looking statements as a result of various factors, including
but not limited to:
|
|
|
Our ability to comply with all of the requirements of the FDA, including current Good
Manufacturing Practices regulations; |
|
|
|
|
Our ability to resolve our Food and Drug Administration
compliance issues at our Decatur, Illinois facilities; |
|
|
|
|
Our ability to obtain regulatory approvals of, commence operations at and obtain business
for our new lyophilization facility; |
|
|
|
|
Our ability to generate cash from operations sufficient to meet our working capital requirements; |
|
|
|
|
The effects of federal, state and other governmental regulation on our business; |
|
|
|
|
Our success in developing, manufacturing, acquiring and marketing new products; |
|
|
|
|
The success of our strategic partnerships for the development and marketing of new products; |
|
|
|
|
Our ability to bring new products to market and the effects of sales of such products on our financial results; |
|
|
|
|
The effects of competition from generic pharmaceuticals and from other pharmaceutical companies; |
|
|
|
|
Availability of raw materials needed to produce our products; and |
|
|
|
|
Other factors referred to in this Form 10-Q, our Form 10-K and our other Securities and
Exchange Commission (SEC) filings. |
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO 2006
The following table sets forth, for the periods indicated, revenues by segment, excluding
intersegment sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED JUNE 30, |
|
|
|
2007 |
|
|
2006 |
|
Ophthalmic segment |
|
$ |
3,893 |
|
|
$ |
5,703 |
|
Hospital Drugs & Injectables segment |
|
|
5,178 |
|
|
|
5,104 |
|
Contract Services segment |
|
|
2,567 |
|
|
|
1,668 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
11,638 |
|
|
$ |
12,475 |
|
|
|
|
|
|
|
|
Consolidated revenues decreased by $837,000 or 6.7% in the quarter ended June 30, 2007
compared to the same period in 2006 mainly due to the decrease of ophthalmic revenues. Ophthalmic
segment revenues decreased by $1,810,000 or 31.7% due to lower sales of diagnostic ophthalmic
products. Ophthalmic revenues were also affected by customer backorders for IC-Green, which
totaled
17
$2,467,000 as of June 30, 2007. Hospital Drugs & Injectables segment revenues increased by
$74,000 or 1.4% mainly due to the increased sales of antidote products in 2007. Our contract
services segment revenues increased by $899,000 or 53.9% due to orders from new customers.
Consolidated gross profit was $2,886,000 or 24.8 % for the second quarter of 2007 as compared
to a gross profit of $4,955,000 or 39.7% in the same period a year ago mainly due to the sales
volume variation matters for each segment discussed above combined with increased unfavorable
manufacturing variances at our Decatur facility in the second quarter of 2007. We continue to seek
margin enhancement opportunities through our product offerings as well as through efficiencies and
cost reductions at our operating facilities.
Selling, general and administrative (SG&A) expenses increased by $520,000 or 11.1%, during
the quarter ended June 30, 2007 as compared to the same period in 2006. The key components of this
increase in 2007 were additional Field Sales personnel of $176,000, increased travel and
entertainment expense of $206,000, increased SFAS 123(R) stock option compensation expense of
$120,000, FDA facility fees of $118,000, partially offset by a decrease in management bonus expense
of $300,000.
Research and development (R&D) expense increased $40,000 or 1.9% in the quarter, to
$2,161,000 from $2,121,000 for the same period in 2006, mainly due to a reduction in testing and
development of our lyophilization processes which was partially offset by an increase in personnel
and spending for new product development.
Interest income for the second quarter of 2007 was $169,000 versus interest income of $234,000
for the same period in 2006 due to lower average balances on short-term investments.
For the three month period ended June 30, 2007, there was no federal income tax provision. A
state tax provision of $1,000 was recorded based on the timing of minimum state tax payments.
There was no federal or state tax provision in the same 2006 period.
We reported a net loss of $4,634,000 for the three months ended June 30, 2007, versus a net
loss of $1,963,000 for the same period in 2006 mainly due to the decreased sales volumes,
unfavorable plant manufacturing variances and higher SG&A expenses discussed above.
SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO 2006
The following table sets forth, for the periods indicated, revenues by segment, excluding
intersegment sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED JUNE 30, |
|
|
|
2006 |
|
|
2005 |
|
Ophthalmic segment |
|
$ |
8,110 |
|
|
$ |
9,510 |
|
Hospital Drugs & Injectables segment |
|
|
10,621 |
|
|
|
29,001 |
|
Contract Services segment |
|
|
4,642 |
|
|
|
3,694 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
23,373 |
|
|
$ |
42,205 |
|
|
|
|
|
|
|
|
Consolidated revenues decreased $18,832,000 or 44.6% for the six months ended June 30, 2007
compared to the same period in 2006, mainly due to the $21,962,000 of first quarter sales of DTPA
to HHS in 2006. Ophthalmic segment revenues decreased $1,400,000 or 14.7%, primarily due to
customer backorders for IC-Green, which totaled $2,467,000 as of June 30, 2007. Hospital Drugs &
Injectables segment revenues decreased by $18,380,000 or 63.4% mainly due to the 2006 DTPA sales as
mentioned above which was partially offset by increased sales of anesthetic products. Our contract
services segment revenues increased by $948,000 or 25.7% mainly due to orders from new customers.
Year-to-date consolidated gross profit was $5,375,000 or 23.0% for 2007 as compared to a gross
profit of $16,688,000 or 39.5% for the same period a year ago mainly due to the sales volume
variation matters for each segment discussed above and unfavorable plant variances at our Decatur
facility. We continue to seek margin enhancement opportunities through our product offerings as
well as through cost reductions at our operating facilities.
SG&A expenses increased by $1,278,000 or 14.0%, for the year to date period ended June 30,
2007 as compared to the same period in 2006. The key components of this increase in 2007 were SFAS
123(R) stock option compensation expense of $808,000,
18
additional Field Sales personnel of $321,000 and increased related travel and entertainment
expense of $109,000, increased FDA facility fees of $247,000, increased administrative travel and
entertainment expense of $217,000, and increased restricted stock compensation expense of $91,000,
offset by a decrease in management bonus expense of $851,000.
R&D expense increased $6,000 or 0.1% for the six months ended June 30, 2007, to $4,172,000
from $4,166,000 for the same period in 2006.
Interest income for the six month period ended June 30, 2007 was $428,000 versus interest
expense of $1,085,000 for the same period in 2006 as we retired our subordinated and convertible
debt instruments in early 2006 and invested our cash proceeds from our operations and the March
2006 common stock and warrant offering in short-term interest bearing certificates of deposit.
For the six-month period ended June 30, 2007, there was no federal income tax provision. A
state tax provision of $1,000 was recorded based on the timing of minimum state tax payments.
There was no federal or state tax provision for the same period in 2006.
We reported a net loss of $9,477,000 for the six months ended June 30, 2007, versus net income
of $1,163,000 for the same period in 2006 mainly due to the decreased sales volumes, unfavorable
plant manufacturing variances and higher SG&A expenses discussed above.
FINANCIAL CONDITION AND LIQUIDITY
Overview
During the six-month period ended June 30, 2007, we used $10,416,000 in cash from operations,
primarily due to the $9,477,000 net loss, a $4,163,000 build in inventories, primarily materials
for new products, and reduced compensation, royalty, and other liabilities of $3,198,000. This was
partially offset by non-cash expenses of $4,065,000 for the period and lower receivables of
$2,794,000. Investing activities generated a $1,031,000 reduction in cash flow mainly due to
capital expenditures for production equipment. Financing activities provided $2,514,000 in cash,
primarily due to the $2,492,000 in proceeds from warrant exercises.
During the six-month period ended June 30, 2006, we generated $2,029,000 in cash provided from
operations, primarily due to $1,163,000 in net income generated by the increase in sales, a
$2,816,000 change in working capital items mainly due to lower receivables levels with wholesalers
and non-cash expenses of $3,682,000 for the period. Investing activities generated a $1,388,000
reduction in cash flow mainly due to capital expenditures for production equipment. Financing
activities provided $16,349,000 in cash, due to the $18,078,000 net proceeds from the March 2006
common stock and warrants offering (see Item 1. Financial Statements, Note I Common Stock
Issuance), offset by $2,917,000 repayment of long-term debt. In addition, on March 31, 2006
$7,298,000 in principal and accrued interest on the convertible notes was retired by conversion
into 3,540,281 shares of our common stock (see Item 1. Financial Statements, Note H Financing
Arrangements).
As of June 30, 2007, we had $12,885,000 in cash and $8,057,000 of undrawn availability under
our Credit Facility with LaSalle Bank which is based on our level of accounts receivable and
inventory and certain equipment. There was no borrowing against the Revolver at June 30, 2007.
On August 8, 2007, we entered into an Amendment to Credit Agreement with LaSalle Bank (the
Amendment). Among other things, the Amendment added certain financial covenants and adjusted the
definitions EBITDA, Borrowing Base and Revolving Commitment Amount. The Amendment also includes
the option, subject to additional underwriting review, to increase the maximum borrowings under the
Revolver to $20 million over the life of the Credit Facility, which expires in September 2008. The
description of the Amendment herein is only a summary and is qualified in its entirety by the full
text of such Amendment, which is filed as an exhibit hereto and is incorporated by reference
herein.
Facility Expansion
We are in the process of completing an expansion of our Decatur, Illinois manufacturing
facility to add capacity to provide lyophilization manufacturing services. As of June 30, 2007, we
had spent approximately $22,558,000 on the lyophilization expansion and anticipate the need to
spend approximately $100,000 of additional funds to complete the expansion. The additional spending
will be focused on lyophilization validation as the major capital equipment items are currently in
place. In December 2006, we placed the sterile solutions portion of this operation in service
which augments our existing production capacities. The remaining $5,321,000 of
19
construction in progress, which is specific to lyophilization (freeze-dry) operations, is
awaiting final review and a successful Pre-Approval Inspection (PAI) by the U.S. Food and Drug
Administration (FDA) for us to place this equipment into commercial production.
We are working toward the development of an internal ANDA lyophilized product pipeline and
expect manufacturing capabilities for lyophilized products to be in place during the second half of
2007. However, there is no guarantee that we will be successful in completing development of
lyophilization capability, or that other intervening events will not occur that reduce or eliminate
the anticipated benefits from such capability. For instance, the market for lyophilized products
could significantly diminish or be eliminated, or new technological advances could render the
lyophilization process obsolete, prior to our entry into the market. There can be no assurance that
we will realize the anticipated benefits from our significant investment into lyophilization
capability at our Decatur manufacturing facility, and our failure to do so could significantly
limit our ability to grow our business in the future.
Our ability to successfully remediate the issues raised in the Warning Letter will impact the
start date for commissioning the lyophilization facility. This will not occur until after a cGMP
inspection and will also be contingent upon a successful PAI to be conducted by the FDA.
Manufacturing capabilities for lyophilized products are subsequently projected to be in service
during the second half of 2007.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. A summary of our significant accounting policies is
included in Item 1. Financial Statements, Note B Summary of Significant Accounting Policies,
which are included in our Annual Report on Form 10-K for the year ended December 31, 2006. Certain
of our accounting policies are considered critical, as these policies require significant,
difficult or complex judgments by management, often employing the use of estimates about the
effects of matters that are inherently uncertain. Such policies are summarized in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations of our
Annual Report on Form 10-K for the year ended December 31, 2006. There have been no significant
changes in the application of the critical accounting policies since December 31, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a
two-step process for the financial statement measurement and recognition of a tax position taken or
expected to be taken in a tax return. The first step involves the determination of whether it is
more likely than not (greater than 50 percent likelihood) that a tax position will be sustained
upon examination, based on the technical merits of the position. The second step requires that any
tax position that meets the more-likely-than-not recognition threshold be measured and recognized
in the financial statements at the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. FIN 48 also provides guidance on the accounting for
related interest and penalties, accounting in interim periods, financial statement classification
and disclosure.
We have determined we do not have material uncertain tax positions or unrecognized tax
benefits and there is no material impact on our financial position, results of operations or cash
flows. The adoption of FIN 48 had no impact on our opening balance of retained earnings. We
classify interest on tax settlements as a component of interest expense and penalties on tax
settlements as a component of administrative expense in our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply
whenever another U.S. GAAP standard requires (or permits) assets or liabilities to be measured at
fair value but does not expand the use of fair value to any new circumstances. This standard will
also require additional disclosures in both annual and quarterly reports. SFAS 157 will be
effective for financial statements issued for fiscal years beginning after November 15, 2007. The
adoption of SFAS 157 is not expected to have a material impact on our results of operations or
financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value, which are currently not required to be measured
at fair value. Under SFAS 159, an entity may, at specified election dates, choose to measure
20
items at fair value on an instrument-by-instrument basis. Entities would be required to
report a cumulative adjustment to retained earnings for unrealized gains and losses at the adoption
date, and to recognize changes in fair value in earnings for any items for which the fair value
option has been elected. SFAS 159 will be effective for financial statements issued for fiscal
years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a
material impact on our results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are no longer affected by changes in market interest rates as our variable interest rate
debt has been paid off (See Item 1. Financial Statements, Note H Financing Arrangements). At
June 30, 2007, our only outstanding debt is the mortgage on our Decatur property which is set at a
fixed rate of 7.375%.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed, under the supervision and with the participation of Company
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of
the effectiveness of the design and operation of the Companys disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Act)).
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls, fraud, the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can provide only reasonable, and not absolute,
assurance of achieving their control objectives. Based on that evaluation, management, including
the CEO and CFO, has concluded that, as of June 30, 2007, the Companys disclosure controls and
procedures were effective in all material respects at the reasonable assurance level to ensure that
information required to be disclosed in reports that the Company files or submits under the Act is
recorded, processed, summarized and timely reported in accordance with the rules and forms of the
SEC.
Changes in Internal Control Over Financial Reporting
In the second fiscal quarter ended June 30, 2007, there had been no change in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party in 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. Despite the inherent uncertainties of litigation, we at this time do not believe that
such proceedings will have a material adverse impact on the financial condition, results of
operations, or cash flows of us.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our
Form 10-K filed March 16, 2007.
21
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 23, 2005, we filed a Registration Statement on Form S-3 (File No. 333-127794) (the
S-3) with the SEC, which was declared effective on September 7, 2005. Pursuant to Rule 429 under
the Securities Act of 1933, the prospectus included in the S-3 is a combined prospectus and relates
to the previously filed Registration Statement on Form S-1 (File No. 333-119168) (the S-1), as to
which the S-3 constitutes Post-Effective Amendment No. 3. Such Post-Effective Amendment became
effective concurrently with the effectiveness of the S-3. The S-3 relates to the resale of
64,964,680 shares, no par value per share, of our common stock by the selling stockholders
identified in the S-3, which have been issued or reserved for issuance upon the conversion or
exercise of presently outstanding shares of our Series A 6.0% Participating Convertible Preferred
Stock (Series A Preferred Stock), shares of Series B 6.0% Participating Convertible Preferred
Stock (Series B Preferred Stock), warrants and convertible notes, including shares estimated to
be issuable in satisfaction of accrued and unpaid dividends and interest on shares of preferred
stock and convertible notes, respectively. Of the 64,964,680 shares of our common stock registered
under the S-3, 60,953,394 of such shares were registered under the S-1. The shares of common stock
registered by the S-3 and the S-1 represent the number of shares that have been issued or are
issuable upon the conversion or exercise of the Series A Preferred Stock, Series B Preferred Stock,
warrants and convertible notes described in the Registration Statement, including shares estimated
to be issuable in satisfaction of dividends accrued and unpaid through December 31, 2007 and
interest accrued and unpaid through December 20, 2006 on such securities.
With respect to the S-1, we estimated the aggregate offering price of the amount registered to
be $182,246,053, which was derived from the average of the bid and asked prices of our common stock
on September 17, 2004, as reported on the OTC Bulletin Board(R). With respect to the S-3, we
estimated the aggregate offering price of the amount registered to be $10,870,585, which was
derived from the average of the high and low prices of our common stock as reported on the American
Stock Exchange on August 18, 2005. Such amounts were estimated solely for the purpose of
calculating the amount of the registration fee pursuant to Rule 457(h) under the Securities Act of
1933. As of June 30, 2007, we are aware of the sale of 9,812,012 shares of common stock by selling
stockholders under the S-3 or the S-1. We do not know at what price such shares were sold, or how
many shares of common stock will be sold in the future or at what price. We have not and will not
receive any of the proceeds from the sale of the shares by the selling stockholders. The selling
stockholders will receive all of the proceeds from the sale of the shares and will pay all
underwriting discounts and selling commissions, if any, applicable to the sale of the shares. We
will, in the ordinary course of business, receive proceeds from the issuance of shares upon
exercise of the warrants described in the S-3 or the S-1, which we will use for working capital and
other general corporate purposes.
For the quarter ended June 30, 2007, we issued the following equity securities: (i) On April
2, 2007, a warrantholder exercised warrants to purchase 200,000 shares of our common stock at an
exercise price of $0.75 per share in exchange for cash of $150,000, (ii) On June 20, 2007, a
warrantholder exercised warrants to purchase 555,556 shares of our common stock at an exercise
price of $3.50 per share in exchange for cash of $1,944,446, (iii) On June 29, 2007, a
warrantholder exercised warrants to purchase 20,000 shares of our common stock at an exercise
price of $0.75 per share in exchange for cash of $15,000. The issuance of the common stock upon
exercise of the warrants described herein was exempt from registration requirements under the
Securities Act pursuant to Section 4(2) thereof, because none of the transactions thereof involved
a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2007 annual meeting of shareholders was held on May 24, 2007. At that meeting, the following
proposals were approved:
1. The election of the following seven directors to our Board of Directors:
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Nominee |
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Votes For |
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Votes Withheld |
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John N. Kapoor, Ph.D. |
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74,126,928 |
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538,002 |
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Arthur S. Przybyl |
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74,136,039 |
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528,891 |
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Jerry N. Ellis |
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74,568,408 |
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96,522 |
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Ronald M. Johnson |
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74,483,019 |
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181,911 |
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Jerry I. Treppel |
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74,430,100 |
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234,830 |
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Subhash Kapre, Ph.D. |
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73,988,541 |
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676,389 |
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Randall J. Wall |
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74,570,608 |
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94,322 |
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2. The ratification of the selection by the Audit Committee of the Board of Directors of BDO
Seidman, LLP as our registered public accounting firm for the fiscal year ending December 31, 2007.
A total of 74,615,440 votes were cast in favor of this proposal, 36,206 votes were cast against,
and there were 13,284 abstentions.
ITEM 5. OTHER INFORMATION
None.
23
ITEM 6. EXHIBITS
Those exhibits marked with an asterisk (*) refer to exhibits filed herewith. The other exhibits are
incorporated herein by reference, as indicated in the following list.
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Exhibit No. |
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Description |
(3.1)
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Restated Articles of Incorporation of Akorn, Inc. dated September 16, 2004, incorporated by reference to
Exhibit 3.1 to Akorn, Inc.s Registration Statement on Form S-1 filed on September 21, 2004. |
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(3.2)
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Amended and Restated By-laws of Akorn, Inc. incorporated by reference to Exhibit 3.2 to Akorn, Inc.s
Registration Statement on Form S-1 filed on June 14, 2005. |
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(3.3)
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Amendment to By-laws of Akorn, Inc. incorporated by reference to Exhibit 3.1 to the Akorn, Inc.s report on
Form 8-K filed on March 31, 2006. |
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(3.4)
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Amendment to Bylaws of Akorn, Inc., incorporated by reference to Exhibit 3.1 to Akorn, Inc.s report on Form
8-K filed on December 14, 2006. |
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(3.5)
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Amendment to Bylaws of Akorn, Inc., incorporated by reference to Exhibit 3.1 to Akorn, Inc.s report on Form
8-K filed on April 16, 2007. |
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(4.1)
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First Amendment dated October 7, 2003 to Registration Rights Agreement dated July 12, 2001 between Akorn,
Inc. and The John N. Kapoor Trust dated 9/20/89, incorporated by reference to Exhibit 4.1 to Akorn, Inc.s
report on Form 8-K filed on October 24, 2003. |
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(4.2)
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Form of Warrant Certificate, incorporated by reference to Exhibit 4.2 to Akorn, Inc.s report on Form 8-K
filed on October 24, 2003. |
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(4.3)
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Form of Warrant Agreement dated October 7, 2003 between Akorn, Inc. and certain investors, incorporated by
reference to Exhibit 4.3 to Akorn, Inc.s report on Form 8-K filed on October 24, 2003. |
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(4.4)
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Warrant Agreement dated October 7, 2003 between Akorn, Inc. and The John N. Kapoor Trust dated 9/20/89
issued with respect to New Credit Facility guaranty, incorporated by reference to Exhibit 4.4 to Akorn,
Inc.s report on Form 8-K filed on October 24, 2003. |
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(4.5)
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Warrant Agreement dated October 7, 2003 between Akorn, Inc. and Arjun C. Waney issued with respect to New
Credit Facility guaranty, incorporated by reference to Exhibit 4.5 to Akorn, Inc.s report on Form 8-K filed
on October 24, 2003. |
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(4.6)
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Warrant Agreement dated October 7, 2003 between Akorn, Inc. and The John N. Kapoor Trust dated 9/20/89
issued with respect to the Notes, incorporated by reference to Exhibit 4.6 to Akorn, Inc.s report on Form
8-K filed on October 24, 2003. |
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(4.7)
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Warrant Agreement dated October 7, 2003 between Akorn, Inc. and Arjun C. Waney issued with respect to the
Notes, incorporated by reference to Exhibit 4.7 to the Akorn, Inc.s report on Form 8-K filed on October 24,
2003. |
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(4.8)
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Warrant Agreement dated October 7, 2003 between Akorn, Inc. and Argent Fund Management Ltd. issued with
respect to the Notes, incorporated by reference to Exhibit 4.8 to Akorn, Inc.s report on Form 8-K filed on
October 24, 2003. |
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(4.9)
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Registration Rights Agreement dated October 7, 2003 among Akorn, Inc. and certain investors, incorporated by
reference to Exhibit 4.9 to Akorn, Inc.s report on Form 8-K filed on October 24, 2003. |
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(4.10)
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Form of Subscription Agreement between Akorn, Inc. and certain investors, incorporated by reference to
Exhibit 4.1 to Akorn, Inc.s report on Form 8-K filed on August 24, 2004. |
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(4.11)
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Form of Common Stock Purchase Warrant between Akorn, Inc. and certain investors, incorporated by reference
to |
24
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Exhibit No. |
|
Description |
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Exhibit 4.2 to Akorn, Inc.s report on Form 8-K filed on August 24, 2004. |
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(4.12)
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Warrant Purchase and Registration Agreement dated June 18, 2003 between Akorn Inc. and AEG Partners LLC,
incorporated by reference to Exhibit 4.1 to Akorn, Inc.s report on Form 8-K filed on August 27, 2004. |
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(4.13)
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Stock Registration Rights Agreement dated November 15, 1990 between Akorn, Inc. and The John N. Kapoor Trust
dated 9/20/89, incorporated by reference to Exhibit 4.12 to Akorn, Inc.s Registration Statement on Form S-1
filed on September 21, 2004. |
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(4.14)
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Stock Purchase Agreement dated November 15, 1990 between Akorn, Inc. and The John N. Kapoor Trust dated
9/20/89, incorporated by reference to Exhibit 4.13 to Akorn, Inc.s Registration Statement on Form S-1 filed
on September 21, 2004. |
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(4.15)
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Form of Securities Purchase Agreement dated March 1, 2006 between Akorn, Inc. and certain investors,
incorporated by reference to Exhibit 4.1 to Akorn Inc.s report on Form 8-K filed March 7, 2006. |
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(4.16)
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Form of Warrant issued in connection with the Securities Purchase Agreement dated March 1, 2006,
incorporated by reference to Exhibit 4.2 to Akorn, Inc.s report on Form 8-K filed on March 7, 2006. (All
warrants are dated March 8, 2006. Please see Exhibit 99.1 of Akorn, Inc.s report on Form 8-K filed March
14, 2006, which is hereby incorporated by reference, for a schedule setting forth the other material details
for each of the warrants.) |
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(4.17)
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Securities Purchase Agreement dated September 13, 2006, between Akorn, Inc. and Serum Institute of India,
incorporated by reference to Exhibit 4.1 to Akorn Inc.s report on Form 8-K filed September 14, 2006. |
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(10.1)
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2007 Management Bonus Objectives, incorporated by reference to Exhibit 10.1 to Akorn Inc.s report on Form
8-K filed April 23, 2007. |
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(10.2)*
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Amendment to Credit Agreement dated August 8, 2007 between Akorn, Inc., LaSalle Bank, the financial
institutions party thereto and Akorn (New Jersey), Inc. |
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(31.1)*
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
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(31.2)*
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
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(32.1)*
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Certification of Chief Executive Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of
the Sarbanes-Oxley Act of 2002 |
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(32.2)*
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Certification of Chief Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of
the Sarbanes-Oxley Act of 2002 |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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AKORN, INC.
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/s/ JEFFREY A. WHITNELL
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Jeffrey A. Whitnell |
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Sr. Vice President, Chief Financial Officer
(Duly Authorized and Principal Financial Officer) |
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Date:August 8, 2007
26