XNAS:AKRX Akorn Inc Quarterly Report 10-Q/A Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 1)
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
FOR THE TRANSITION PERIOD FROM ____________   TO ____________                    
 
COMMISSION FILE NUMBER: 001-32360
 
AKORN, INC.
(Exact Name of Registrant as Specified in its Charter)
 
LOUISIANA
72-0717400
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
   
1925 W. Field Court, Suite 300
 
Lake Forest, Illinois
60045
(Address of Principal Executive Offices)
(Zip Code)
 
(847) 279-6100
 (Registrant’s telephone number, including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes o            No þ
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes þ            No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company   o
       
(Do not check if a smaller
reporting company)
   
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o            No þ
 
At May 7, 2012 there were 95,095,860 shares of common stock, no par value, outstanding.
 
 
 

 
 
Explanatory Note

Overview

Akorn, Inc. (the Company), is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q (the Amendment) to restate and amend the Company’s previously issued and unaudited interim financial statements and related financial information as of March 31, 2012 and for the three months ended March 31, 2012, which was originally filed with the Securities and Exchange Commission on May 10, 2012.  As described below and in Note 1, the restatement adjusts the Company’s accounting for the acquisition of selected assets of Kilitch Drugs (India) Limited.
 
In addition, the Company's consolidated statement of cash flows for the three months ended March 31, 2012 and 2011 have been adjusted to correct a classification error. The error resulted in an understatement of net cash provided by operating activities of $1.4 million, with a corresponding understatement of net cash used in investing activities for the three months ended March 31, 2012 and an overstatement of net cash provided by operating activities of $0.5 million, with a corresponding overstatement of net cash used in investing activities for the three month period ended March 31, 2011.
 
Background
 
During the second quarter of 2012, the Company determined that that its preliminary accounting for the acquisitions of certain assets of Kilitch Drugs (India) Limited under ASC 805, Business Combinations (ASC 805), needed to be corrected.  Originally, the Company recorded all payments for the acquisition as purchase consideration, which included approximately $1.6 million related to transfer taxes paid and $6.7 million that was disproportionately paid and contingently payable to certain selling shareholders.  The $1.6 million related to transfer taxes represents acquisition-related costs which should have been expensed.  In addition, the $6.7 million that was disproportionate to the ownership percentages of Kilitch Drugs (India) Limited represent separate, compensatory arrangements that should not have been included as consideration and therefore was expensed at the date of closing as the services were completed and future amounts payable are probable of occurring.
 
Effects of Restatement

The tables below present the effect of the financial statement adjustments related to the restatement of our previously reported financial statements as of and for the three month period ended March 31, 2012.  The effect of the restatement on the condensed consolidated balance sheet as of March 31, 2012 is as follows:

March 31, 2012
 
As Reported
   
Adjustments
   
As Restated
 
Goodwill
  $ 41,282     $ (8,597 )   $ 32,685  
Total Other Long-Term Assets
    140,189       (8,597 )     131,592  
Total Assets
    323,958       (8,597 )     315,361  
Accrued expenses and other liabilities       7,494       (1,880     5,614  
Contingent consideration payable
    3,926       (3,926 )     -  
Accrued acquisition related compensation
    -       3,349       3,349  
Total Current Liabilities
    33,207       (2,457 )     30,750  
Deferred taxes – non-current
    4,846       (1,022 )     3,824  
Total Long-Term Liabilities
    122,979       (1,022 )     121,957  
Total Liabilities
    156,186       (3,479 )     152,707  
Accumulated deficit
    (63,882 )     (5,384 )     (69,266 )
Accumulated other comprehensive loss
    (2,469 )     266       (2,203 )
Total Shareholders’ Equity
    167,772       (5,118 )     162,654  
Total Liabilities and Shareholders’ Equity
    323,958       (8,597 )     315,361  
 
 
 

 
 
The effect of the restatement on the condensed consolidated income statement for the three months ended March 31, 2012 is as follows:

   
As Reported
   
Adjustments
   
As Restated
 
Selling, general and administrative expenses
  $ 10,475     $ (136 )   $ 10,339  
Acquisition related costs
    -       8,460       8,460  
Total Operating Expenses
    14,915       8,324       23,239  
Operating Income
    15,986       (8,324 )     7,662  
Income before income taxes
    13,566       (8,324 )     5,242  
Income tax provision
    5,074       (2,940 )     2,134  
Consolidated net income     8,492       (5,384 )     3,108  
Net Income Per Share
                       
Basic
    0.09       (0.06 )     0.03  
Diluted
    0.08       (0.05 )     0.03  
Comprehensive income
                       
Consolidated net income
    8,492       (5,384 )     3,108  
Foreign currency translation loss
    (2,469 )     266       (2,203 )
Comprehensive income
    6,023       (5,118 )     905  

The effect of the restatements on the condensed consolidated statement of cash flows for the three months ended March 31, 2012 and 2011 is as follows:

2012
 
As Reported
   
Adjustments
   
As Restated
 
Consolidated net income
  $ 8,492     $ (5,384 )   $ 3,108  
Deferred tax assets, net
    2,837       (1,060 )     1,777  
Changes in operating assets and liabilities, net of effects of acquisitions:
                       
  Trade accounts payable
    (3,788 )     1,412       (2,376 )
  Accrued expenses and other liabilities
    3,659       1,510       5,169  
Net cash provided by operating activities
    6,571       (3,522 )     3,049  
Payments for acquisitions
    (60,072 )     4,848       (55,224 )
Purchases of property plant and equipment
    (3,974 )     (1,412 )     (5,386 )
Net cash used in investing activities
    (64,046 )     3,436       (60,610 )
Effect of exchange rate changes on cash and cash equivalents
    (267 )     86       (181 )
(Decrease) increase in Cash and Cash Equivalents
    (55,624 )  
_
      (55,624 )
Cash and Cash Equivalents at End of Period
    28,338    
_
      28,338  

2011
 
As Reported
   
Adjustments
   
As Restated
 
Changes in operating assets and liabilities, net of effects of acquisitions:
                 
Trade accounts payable
    1,583       (495 )     1,088  
Net cash provided by operating activities
    2,322       (495 )     1,827  
Purchases of property plant and equipment
    (2,131 )     495       (1,636 )
Net cash (used in) provided by investing activities
    (339 )     495       156  
Increase (decrease) in Cash and Cash Equivalents
    41,623    
_
      41,623  
Cash and Cash Equivalents at End of Period
    45,712    
_
      45,712  

Consistent with the information above, the Company has revised the following items in this Form 10-Q/A:

Part I
Item 1- Financial Statements (Unaudited) including notes 1, 2, 8, 11, 13 and 16 to the condensed consolidated financial statements
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Additionally, in this Amendment, the Company is including currently dated certifications from the Company’s Principal Executive officer and Principal Financial officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 in Exhibits 31.1 and 31.2 and a currently dated certification from the Company’s Principal Executive Officer and Principal Financial Officer as require by Section 906 of the Sarbanes-Oxley Act of 2002 in Exhibit 32.1.

Except to the extent described above and set forth herein, the financial statements and other disclosures in the Form 10-Q initially filed on May 10, 2012 (the initial Form 10-Q) are unchanged and this amendment does not reflect any events that have occurred after the initial Form 10-Q was filed.  Accordingly, this amendment should be read in conjunction with the Company’s initial Form 10-Q and the Company’s subsequent filings with the United States Securities and Exchange Commission.

In light of the restatement, readers should not rely on the Company’s previously filed financial statements as of and for the three month period ended March 31, 2012.

 
 

 
 
   
 
Page
 
 
3
4
5
6
7
24
28
29
 
30
30
30
30
30
30
31
   
EX-31.1:
 
EX-31.2:
 
EX-32.1:
 
EX-32.2:
 
EX-101
 
 
 

 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE DATA
 
   
March 31,
2012
(unaudited)
   
December 31,
2011
 
ASSETS:
 
(restated)
       
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
28,338
   
$
83,962
 
Trade accounts receivable, net
   
31,508
     
25,307
 
Inventories, net
   
41,343
     
35,456
 
Deferred taxes, current
   
6,715
     
8,153
 
Prepaid expenses and other current assets
   
2,995
     
3,071
 
     TOTAL CURRENT ASSETS
   
110,899
     
155,949
 
PROPERTY, PLANT AND EQUIPMENT, NET
   
72,870
     
44,389
 
OTHER LONG-TERM ASSETS:
               
Goodwill
   
32,685
     
11,863
 
Product licensing rights, net
   
66,510
     
67,822
 
Other intangibles, net
   
18,360
     
13,016
 
Deferred financing costs, net
   
3,671
     
3,864
 
Long-term investments
   
10,254
     
10,137
 
Other
   
112
     
105
 
     TOTAL OTHER LONG-TERM ASSETS
   
131,592
     
106,807
 
     TOTAL ASSETS
 
$
315,361
   
$
307,145
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
               
CURRENT LIABILITIES:
               
Trade accounts payable
 
$
15,922
   
$
17,874
 
Accrued compensation
   
5,865
     
5,094
 
Accrued acquisition related compensation
   
3,349
     
 
Accrued expenses and other liabilities
   
5,614
     
5,321
 
     TOTAL CURRENT LIABILITIES
   
30,750
     
28,289
 
LONG-TERM LIABILITIES:
               
Long-term debt
   
101,740
     
100,808
 
Purchase consideration payable
   
14,091
     
13,841
 
Deferred taxes – non-current
   
3,824
     
3,742
 
Product warranty liability
   
1,299
     
1,299
 
Lease incentive obligation and other long-term liabilities
   
1,003
     
958
 
     TOTAL LONG-TERM LIABILITIES
   
121,957
     
120,648
 
     TOTAL LIABILITIES
   
152,707
     
148,937
 
SHAREHOLDERS EQUITY:
               
Common stock, no par value – 150,000,000 shares authorized; 95,095,860 and 94,936,282 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
   
  216,177
     
  212,636
 
Warrants to acquire common stock
   
17,946
     
17,946
 
Accumulated deficit
   
(69,266
)
   
(72,374
)
Accumulated other comprehensive loss
   
(2,203
)
   
 
     TOTAL SHAREHOLDERS’ EQUITY
   
162,654
     
158,208
 
     TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
315,361
   
$
307,145
 
  
See notes to condensed consolidated financial statements.
 
 
3

 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
IN THOUSANDS, EXCEPT PER SHARE DATA
 (UNAUDITED)
 
 
Three Months Ended
 
 
March 31,
 
 
2012
   
2011
 
 
 
(restated)
         
Revenues
$
51,717
   
$
25,444
 
Cost of sales
 
20,816
     
11,191
 
GROSS PROFIT
 
30,901
     
14,253
 
Selling, general and administrative expenses
 
10,339
     
6,291
 
Acquisition related costs
 
8,460
     
111
 
Research and development expenses
 
2,877
     
1,887
 
Amortization of intangibles
 
1,563
     
256
 
TOTAL OPERATING EXPENSES
 
23,239
     
8,545
 
OPERATING INCOME
 
7,662
     
5,708
 
Amortization of deferred financing costs
 
(193
)
   
(193
)
Non-cash interest expense
 
(1,183
)
   
 
Interest (expense) income, net
 
(1,044
)
   
11
 
Equity in earnings of unconsolidated joint venture
 
     
824
 
INCOME BEFORE INCOME TAXES
 
5,242
     
6,350
 
Income tax provision
 
2,134
     
540
 
CONSOLIDATED NET INCOME
$
3,108
   
$
5,810
 
NET INCOME PER SHARE:
             
BASIC
$
0.03
   
$
0.06
 
DILUTED
$
0.03
   
$
0.06
 
SHARES USED IN COMPUTING NET INCOME PER SHARE:
             
BASIC
 
95,011
     
94,197
 
DILUTED
 
109,169
     
103,985
 
               
COMPREHENSIVE INCOME:
             
Consolidated net income
$
3,108
   
$
5,810
 
Foreign currency translation loss
 
(2,203
)
   
 
COMPREHENSIVE INCOME
$
905
 
 
$
5,810
 
 
See notes to condensed consolidated financial statements.

 
4

 
 
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012
 IN THOUSANDS (UNAUDITED)
(Restated)
 
               
Warrants
                   
               
to acquire
         
Other
       
               
Common
   
Accumulated
   
Comprehensive
       
   
Shares
   
Amount
   
Stock
   
Deficit
   
Loss
   
Total
 
BALANCES AT DECEMBER 31, 2011
   
94,936
   
$
212,636
   
$
17,946
   
$
(72,374
)
 
$
   
$
158,208
 
Consolidated net income
   
     
     
     
3,108
     
     
3,108
 
Exercise of stock options
   
89
     
155
     
     
     
     
155
 
Employee stock purchase plan issuances
   
71
     
368
     
     
     
     
368
 
Amortization of deferred compensation related to restricted stock awards
   
     
4
     
     
     
     
4
 
Stock-based compensation expense
   
     
1,419
     
     
     
     
1,419
 
Foreign currency translation adjustment
   
     
     
     
     
(2,203
)
   
(2,203
)
    Excess tax benefit – stock compensation
   
     
1,595
     
     
     
     
1,595
 
                                                 
BALANCES AT MARCH 31, 2012
   
95,096
   
$
216,177
   
$
17,946
   
$
(69,266
)
 
$
(2,203
)
 
$
162,654
 

See notes to condensed consolidated financial statements.
 
 
5

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS (UNAUDITED)
 
   
Three months ended 
March 31,
 
   
2012
   
2011
 
   
(restated)
   
(restated)
 
OPERATING ACTIVITIES:
           
Consolidated net income
 
3,108
   
5,810
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
2,511
     
1,126
 
Write-off and amortization of deferred financing fees
   
193
     
193
 
Non-cash stock compensation expense
   
1,423
     
731
 
Non-cash interest expense
   
1,183
     
 
Deferred tax assets, net
   
1,777
     
 
Excess tax benefit from stock compensation
   
(1,595
)
   
 
Equity in earnings of unconsolidated joint venture
   
     
(824
)
Changes in operating assets and liabilities, net of effects from acquisitions:
               
Trade accounts receivable
   
(3,914
)
   
(3,183
)
Inventories
   
(4,155
)
   
(913
Prepaid expenses and other current assets
   
(275
)
   
(7
Trade accounts payable
   
(2,376
)
   
1,088
 
Accrued expenses and other liabilities
   
5,169
     
(2,194
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
3,049
     
1,827
 
INVESTING ACTIVITIES:
               
Payments for acquisitions
   
(55,224
)
   
 
Purchases of property, plant and equipment
   
(5,386
)
   
(1,636
)
Distribution from unconsolidated joint venture
   
     
1,792
 
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
   
(60,610
)
   
156
 
FINANCING ACTIVITIES:
               
Net proceeds from common stock and warrant offering
   
     
1,727
 
Excess tax benefit from stock compensation
   
1,595
     
 
Proceeds under stock option and stock purchase plans
   
523
     
379
 
NET CASH  PROVIDED BY FINANCING ACTIVITIES
   
2,118
     
2,106
 
Effect of exchange rate changes on cash and cash equivalents
   
(181)
     
 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
   
(55,624
)
   
4,089
 
Cash and cash equivalents at beginning of period
   
83,962
     
41,623
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
28,338
   
$
45,712
 
SUPPLEMENTAL DISCLOSURES:
               
Amount paid for interest
   
16
     
5
 
Amount paid for income taxes
   
63
     
206
 
 
See notes to condensed consolidated financial statements.
 
 
6

 
 
AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 — BUSINESS AND BASIS OF PRESENTATION
 
Business: Akorn, Inc. and its wholly owned subsidiaries (collectively, the “Company”) manufacture and market a full line of diagnostic and therapeutic ophthalmic pharmaceuticals as well as niche hospital drugs and injectable pharmaceuticals.  In addition, through its subsidiary Advanced Vision Research, Inc. (“AVR”), the Company manufactures and markets a line of over-the-counter (“OTC”) ophthalmic products for the treatment of dry eye, eyelid hygiene and macular degeneration primarily under the TheraTears® brand name.  The Company is a manufacturer and marketer of diagnostic and therapeutic pharmaceutical products in various specialty areas, including ophthalmology, antidotes, anti-infectives and controlled substances for pain management and anesthesia, among others.  The Company operates pharmaceutical manufacturing plants domestically in Decatur, Illinois and Somerset, New Jersey, and internationally in Paonta Sahib, Himachal Pradesh, India, a central distribution warehouse in Gurnee, Illinois, an R&D center in Skokie, Illinois and corporate offices in Lake Forest, Illinois.  Customers of the Company’s products include physicians, optometrists, chain drug stores, group purchasing organizations and their member hospitals, alternate site providers, wholesalers, distributors, retail chains, and other pharmaceutical companies.  In addition, the Company is a 50% investor in a limited liability company, Akorn-Strides, LLC (the “Joint Venture Company”), which formerly developed and manufactured injectable pharmaceutical products for sale in the United States.  The Joint Venture Company sold all of its Abbreviated New Drug Applications (“ANDAs”) to Pfizer, Inc. (“Pfizer”) in December 2010 and discontinued product sales in June 2011.  The Company accounts for the Joint Venture Company using the equity method of accounting.  The accompanying unaudited condensed consolidated financial statements include the accounts of Akorn, Inc. and its wholly owned subsidiaries.  Inter-company transactions and balances have been eliminated in consolidation.
 
Basis of Presentation: The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and accordingly do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in these financial statements. Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K filed March 15, 2012.
 
The Company has considered the accounting and disclosure of events occurring after the balance sheet date through the filing date of this Form 10-Q.
 
Restatement of March 31, 2012 Financial Statement: During the second quarter of 2012, the Company determined that its preliminary accounting for the acquisition of Kilitch Drugs (India) Limited under ASC 805, Business Combinations (ASC 805), needed to be corrected.  As a result, certain items that have been previously recorded as purchase price needed to be expensed as either compensation or other acquisition related costs under ASC 805.
 
In addition, the Company's consolidated statement of cash flows for the three months ended March 31, 2012 and 2011 have been adjusted to correct a classification error. The error resulted in an understatement of net cash provided by operating activities of $1.4 million, with a corresponding understatement of net cash used in investing activities for the three months ended March 31, 2012 and an overstatement of net cash provided by operating activities of $0.5 million, with a corresponding overstatement of net cash used in investing activities for the three month period ended March 31, 2011.
 
Background
 
During the second quarter of 2012, the Company determined that that its preliminary accounting for the acquisitions of certain assets of Kilitch Drugs (India) Limited under ASC 805, Business Combinations (ASC 805), needed to be corrected.  Originally, the Company recorded all payments for the acquisition as purchase consideration, which included approximately $1.6 million related to transfer taxes paid and $6.7 million that was disproportionately paid and contingently payable to certain selling shareholders.  The $1.6 million related to transfer taxes represents acquisition-related costs which should have been expensed.  In addition, the $6.7 million that was disproportionate to the ownership percentages of Kilitch Drugs (India) Limited represent separate, compensatory arrangements that should not have been included as consideration and therefore was expensed at the date of closing as the services were completed and future amounts payable are probable of occurring.
 
Effects of Restatement

The tables below present the effect of the financial statement adjustments related to the restatement of our previously reported financial statements as of and for the three month period ended March 31, 2012.  The effect of the restatement on the condensed consolidated balance sheet as of March 31, 2012 is as follows:
 
March 31, 2012
 
As Reported
   
Adjustments
   
As Restated
 
Goodwill
  $ 41,282     $ (8,597 )   $ 32,685  
Total Other Long-Term Assets
    140,189       (8,597 )     131,592  
Total Assets
    323,958       (8,597 )     315,361  
Accrued expenses and other liabilities       7,494       (1,880     5,614  
Contingent consideration payable
    3,926       (3,926 )     -  
Accrued acquisition related compensation
    -       3,349       3,349  
Total Current Liabilities
    33,207       (2,457 )     30,750  
Deferred taxes – non-current
    4,846       (1,022 )     3,824  
Total Long-Term Liabilities
    122,979       (1,022 )     121,957  
Total Liabilities
    156,186       (3,479 )     152,707  
Accumulated deficit
    (63,882 )     (5,384 )     (69,266 )
Accumulated other comprehensive loss
    (2,469 )     266       (2,203 )
Total Shareholders’ Equity
    167,772       (5,118 )     162,654  
Total Liabilities and Shareholders’ Equity
    323,958       (8,597 )     315,361  
 
 
7

 
 
The effect of the restatement on the condensed consolidated income statement for the three months ended March 31, 2012 is as follows:
 
   
As Reported
   
Adjustments
   
As Restated
 
Selling, general and administrative expenses
  $ 10,475     $ (136 )   $ 10,339  
Acquisition related costs
    -       8,460       8,460  
Total Operating Expenses
    14,915       8,324       23,239  
Operating Income
    15,986       (8,324 )     7,662  
Income before income taxes
    13,566       (8,324 )     5,242  
Income tax provision
    5,074       (2,940 )     2,134  
Consolidated net income     8,492       (5,384 )     3,108  
Net Income Per Share
                       
Basic
    0.09       (0.06 )     0.03  
Diluted
    0.08       (0.05 )     0.03  
Comprehensive income
                       
Consolidated net income
    8,492       (5,384 )     3,108  
Foreign currency translation loss
    (2,469 )     266       (2,203 )
Comprehensive income
    6,023       (5,118 )     905  
 
The effect of the restatements on the condensed consolidated statement of cash flows for the three months ended March 31, 2012 and 2011 is as follows:

2012
 
As Reported
   
Adjustments
   
As Restated
 
Consolidated net income
  $ 8,492     $ (5,384 )   $ 3,108  
Deferred tax assets, net
    2,837       (1,060 )     1,777  
Changes in operating assets and liabilities, net of effects of acquisitions:
                       
  Trade accounts payable
    (3,788 )     1,412       (2,376 )
  Accrued expenses and other liabilities
    3,659       1,510       5,169  
Net cash provided by operating activities
    6,571       (3,522 )     3,049  
Payments for acquisitions
    (60,072 )     4,848       (55,224 )
Purchases of property plant and equipment
    (3,974 )     (1,412 )     (5,386 )
Net cash used in investing activities
    (64,046 )     3,436       (60,610 )
Effect of exchange rate changes on cash and cash equivalents
    (267 )     86       (181 )
(Decrease) increase in Cash and Cash Equivalents
    (55,624 )  
_
      (55,624 )
Cash and Cash Equivalents at End of Period
    28,338    
_
      28,338  
 
2011
 
As Reported
   
Adjustments
   
As Restated
 
Changes in operating assets and liabilities, net of effects of acquisitions:
                 
  Trade accounts payable
    1,583       (495 )     1,088  
Net cash provided by operating activities
    2,322       (495 )     1,827  
Purchases of property plant and equipment
    (2,131 )     495       (1,636 )
Net cash (used in) provided by investing activities
    (339 )     495       156  
Increase (decrease) in Cash and Cash Equivalents
    41,623    
_
      41,623  
Cash and Cash Equivalents at End of Period
    45,712    
_
      45,712  
 
 
8

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
 
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 these third parties. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific contract is charged back to the Company by the wholesaler. The Company tracks sales and submitted chargebacks by product number and contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product. 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 Company’s provision for chargebacks is fully reserved for at the time when sales revenues are recognized.
 
Management obtains certain wholesaler inventory reports to aid in analyzing the reasonableness of the chargeback allowance. The Company assesses the reasonableness of its chargeback allowance by applying the product chargeback percentage based on historical activity to the quantities of inventory on hand 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 the period. In accordance with its accounting policy, the Company estimates the percentage amount of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a six-quarter trend of such sales through wholesalers. The Company uses this percentage estimate until historical trends indicate that a revision should be made. On an ongoing basis, the Company evaluates its actual chargeback rate experience, and new trends are factored into its estimates each quarter as market conditions change.  The Company used an estimate of 98.5% during the quarters ended March 31, 2012 and March 31, 2011.
 
 
9

 
 
Sales Returns: Certain of the Company’s products are sold with the customer having the right to return the product within specified periods and guidelines for a variety of reasons, including but not limited to, pending expiration dates. Provisions are made at the time of sale based upon tracked historical experience, by customer in some cases. The Company estimates its sales returns reserve based on a historical percentage of returns to sales by product. One-time historical factors, new product introductions 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 wholesaler’s 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 Company’s products and ultimately impact the level of sales returns. Actual returns experience and trends are factored into the Company’s estimates each quarter as market conditions change.

Coupons and Promotions:  The Company utilizes various types of coupons, as well as sales promotions through major retail chains to assist in selling its OTC eye care products.  At the time coupons are issued, the Company records a provision based on the dollar amount of the coupon offer and the estimated rate of redemption which is calculated based on historical experience.
 
Income taxes:  Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. 
 
Fair Valuation of Financial Instruments:  The Company applies ASC Topic 820, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC Topic 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC Topic 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability, and are to be developed based on the best information available in the circumstances.
 
The valuation hierarchy is composed of three categories.  The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The categories within the valuation hierarchy are described below:

-
Level 1—Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.  The carrying value of the Company’s cash and cash equivalents are considered Level 1 assets. 
   
-
Level 2—Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.  The Company does not have any Level 2 assets or liabilities.
   
-
Level 3—Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.  The contingent consideration related to the Company’s December 22, 2011 Lundbeck business acquisition are Level 3 liabilities.
 
The following table summarizes the basis used to measure the fair values of the Company’s financial instruments (amounts in thousands):
 
 
10

 
 
         
Fair Value Measurements at Reporting Date, Using:
         
Quoted Prices
 
Significant
   
         
in Active
 
Other
 
Significant
 (restated)
       
Markets for
 
Observable
 
Unobservable
   
March 31,
 
Identical Items
 
Inputs
 
Inputs
Description
 
2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
$
28,338
   
$
28,338
   
$
   
$
 
   Total assets
   
28,338
     
28,338
     
     
 
                                 
                                 
Purchase consideration payable, long-term
   
14,091
     
     
     
14,091
 
   Total liabilities
 
$
 14,091
   
$
   
$
   
$
14,091
 
 
         
Quoted Prices
 
Significant
     
         
in Active
 
Other
 
Significant
         
Markets for
 
Observable
 
Unobservable
   
December 31,
 
Identical Items
 
Inputs
 
Inputs
Description
 
2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
$
83,962
   
$
83,962
   
$
   
$
 
   Total assets
   
83,962
     
83,962
     
     
 
                                 
                                 
Purchase consideration payable, long-term
   
13,841
     
     
     
13,841
 
   Total liabilities
 
$
 13,841
   
$
   
$
   
$
13,841
 
 
The purchase consideration payable, long term, is primarily related to the Company’s obligation to pay additional consideration related to the acquisition of selected assets from H. Lundbeck A/S on December 22, 2011.  The carrying amounts were initially determined based on the terms of the underlying contracts and the Company’s subjective evaluation of the likelihood of the additional purchase consideration becoming payable.  These obligations are long-term in nature, and have therefore been discounted to present value based on an assumed discount rate of 9.0%.  The change in value from $13,841,000 at December 31, 2011 to $14,091,000 at March 31, 2012 was included within “Non-cash interest expense” on the Company’s condensed consolidated statements of comprehensive income for the quarter ended March 31, 2012, as this change was related to amortization of the discount to fair value.  The Company initially determined that there was a 100% likelihood of the purchase consideration ultimately becoming payable.  Should subjective and objective evidence lead the Company to change this assessment, an adjustment to the carrying value of the liability would be recorded as “other income” in the Company’s condensed consolidated statements of comprehensive income. There have been no significant changes within our assumptions that would impact the fair value of the contingent consideration during the period.
 
As of March 31, 2012 and December 31, 2011, the Company’s long-term investments were $10,254,000 and $10,137,000, respectively, and represent equity-method investments and cost-basis investments for which fair value is not readily determinable.
     
NOTE 3 — STOCK BASED COMPENSATION
     
Stock-based compensation cost is estimated at grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its common stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, if necessary, if actual forfeitures differ from initial estimates.
 
11

 
 
For the three-month period ended March 31, 2012, the Company recorded total stock-based compensation expense of $1,423,000, of which $1,419,000 was related to stock options.  In the prior year quarter ended March 31, 2011, the Company recorded stock-based compensation expense of $731,000, of which $727,000 was related to stock options.  The Company uses the single-award method for allocating compensation cost related to stock options to each period.
 
The weighted-average assumptions used in estimating the grant date fair value of the stock options granted during the three months ended March 31, 2012, along with the weighted-average grant date fair value, was as follows.  There were no stock options granted during the three months ended March 31, 2011:

   
Three months ended March 31,
 
   
2012
   
2011
 
Expected volatility
   
51.5
%
   
N/A
 
Expected life (in years)
   
3.79
     
N/A
 
Risk-free interest rate
   
0.84
%
   
N/A
 
Dividend yield
   
0.00
%
   
N/A
 
Fair value per stock option
 
$
5.07
     
N/A
 
Forfeiture rate
   
8
%
   
N/A
 
                 

The table below sets forth a summary of activity within the Company’s stock-based compensation plans for the quarter ended March 31, 2012: 
 
   
Number of
Options 
(in thousands)
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining Contractual
Term (Years)
   
Aggregate
Intrinsic Value
 
Outstanding at December 31, 2011
   
9,399
   
$
2.89
     
3.25
   
$
77,371,000
 
Granted
   
258
     
12.87
                 
Exercised
   
(89
)
   
1.67
                 
Forfeited
   
(6
)
   
5.29
                 
Outstanding at March 31, 2012
   
9,562
   
3.17
     
3.04
   
$
92,785,000
 
Exercisable at March 31, 2012
   
4,225
   
1.87
     
2.66
   
$
46,456,000
 
 
The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock as of the date indicated and the exercise price of the stock options. During the quarter ended March 31, 2012, 89,000 stock options were exercised resulting in cash payment to the Company of $155,000.  During the prior year quarter ended March 31, 2011, 74,000 stock options were exercised resulting in cash payment to the Company of $116,000. These option exercises generated tax-deductible expenses totaling $902,000 and $282,000, respectively.
 
The Company also may grant restricted stock awards to certain employees and members of its Board of Directors. Restricted stock awards are valued at the closing market value of the Company’s common stock on the day of grant and the total value of the award is recognized as expense ratably over the vesting period of the grants. The Company did not grant restricted stock awards during the first quarter of 2012.  The Company recognized compensation expense of $4,000 and $4,000 during the quarters ended March 31, 2012 and 2011, respectively, related to outstanding restricted stock awards.
 
The following is a summary of non-vested restricted stock activity:
 
   
Number of Shares
 
Weighted Average
   
(in thousands)
 
Grant Date Fair Value
Non-vested at December 31, 2011
   
13
   
$
1.34
 
Granted
   
     
 
Forfeited
   
     
 
Vested
   
     
 
Non-vested at March 31, 2012
   
13
   
$
1.34
 
 
 
12

 
 
NOTE 4 — REVENUE RECOGNITION
 
Revenue is recognized when all obligations of the Company have been fulfilled and collection of the related receivable is probable.  For sales of prescription and contract manufactured products, the Company recognizes sales upon the shipment of goods or completion of services as appropriate. For certain OTC eye care products and certain export sales into foreign countries, the Company recognizes sales upon receipt by the customer, consistent with the timing of transfer of title.
 
Provision for estimated chargebacks, rebates, discounts, product returns and doubtful accounts is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
 
NOTE 5 — ACCOUNTS RECEIVABLE ALLOWANCES
 
The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is a natural circumstance of the pharmaceutical industry and not specific to the Company and inherently lengthens the final net collections process. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the 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 statements of income with the exception of the provision for doubtful accounts which is reflected as part of selling, general and administrative expense. The ending reserve amounts are included in trade accounts receivable, net in the Company’s balance sheets.
 
Net trade accounts receivable consists of the following (in thousands):
 
   
MARCH 31,
   
DECEMBER 31,
 
   
2012
   
2011
 
Gross accounts receivable
 
$
46,493
   
$
39,330
 
Less:
               
Chargeback and rebates reserves
   
(5,762
)
   
(5,949
)
Returns reserve
   
(7,867
)
   
(6,846
)
Discount and allowances reserve
   
(759
)
   
(743
)
Advertising and promotion reserve
   
(493
)
   
(386
)
Allowance for doubtful accounts
   
(104
)
   
(99
)
Net trade accounts receivable
 
$
31,508
   
$
25,307
 
 
For the three-month periods ended March 31, 2012 and 2011, the Company recorded chargeback and rebate expense of $22,042,000 and $12,339,000, respectively.  For the three-month periods ended March 31, 2012 and 2011, the Company recorded provisions for product returns of $1,419,000 and $526,000, respectively.  For the three-month periods ended March 31, 2012 and 2011, the Company recorded provisions for cash discounts of $1,207,000 and $579,000, respectively.  The increases in each of these sales adjustment expenses over the prior year period were primarily due to increased sales in the Ophthalmic and Hospital drugs & Injectables segments.
  
NOTE 6 — INVENTORIES
 
The components of inventories are as follows (in thousands):
 
   
MARCH 31,
   
DECEMBER 31,
 
   
2012
   
2011
 
Finished goods
 
$
12,174
   
$
11,588
 
Work in process
   
5,820
     
5,841
 
Raw materials and supplies
   
23,349
     
18,027
 
   
$
41,343
   
$
35,456
 
 
 
13

 
 
The Company maintains reserves and records provisions for slow-moving and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value. Inventory at March 31, 2012 and December 31, 2011 was reported net of these reserves of $1,645,000 and $1,239,000, respectively, primarily related to finished goods.

As of March 31, 2012 and December 31, 2011, the Company’s inventory balances included $4,226,000 and $4,035,000, respectively, related to products which have not yet received approval from the U.S. Food and Drug Administration (“FDA”).  The Company established a reserve of $1,676,000 in the year ended December 31, 2011 against this inventory for products approaching expiration.  This reserve remained at $1,676,000 as of March 31, 2012.
 
NOTE 7 — PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of the following (in thousands):
 
   
MARCH 31,
   
DECEMBER 31,
 
   
2012
   
2011
 
Land
 
$
3,975
   
$
396
 
Buildings and leasehold improvements
   
24,675
     
20,337
 
Furniture and equipment
   
55,044
     
50,833
 
Sub-total
   
83,694
     
71,566
 
Accumulated depreciation
   
(44,007
)
   
(43,060
)
    Property, plant and equipment placed in service, net
   
39,687
     
28,506
 
                 
Construction in progress
   
33,183
     
15,883
 
Property, plant and equipment, net
 
$
72,870
   
$
44,389
 
 
      Property, plant and equipment as of March 31, 2012 includes assets acquired through the Kilitch Acquisition in India, completed on February 28, 2012.  The increases in property, plant and equipment placed in service, net, is primarily related to the Kilitch Acquisition.  Of the increase in construction in progress, approximately $13.7 million was related to the Kilitch Acquisition, while the remaining $3.6 million was related to construction projects at the Company’s domestic production facilities.  See Note 13,  Business Combinations , for further discussion of the Kilitch Acquisition.
 
NOTE 8 — INTANGIBLE ASSETS

      The following table sets forth information about the changes in the net book value of the Company’s intangible assets during the quarter ended March 31, 2012 and the weighted average remaining amortization period as of March 31, 2012 (in thousands):

   
 
Goodwill
   
Product
Licensing
Rights
   
Other
Intangibles
   
 
TOTAL
 
DECEMBER 31, 2011
 
$
11,863
   
$
67,822
   
$
13,016
   
$
92,701
 
Kilitch Acquisition (Restated)
   
21,609
     
     
5,806
     
27,415
 
Currency translation adjustment (Restated)
   
(787
)
   
     
(211
)
   
(998
)
Amortization of intangibles
   
     
(1,312
)
   
(251
)
   
(1,563
)
MARCH 31, 2012 (Restated)
 
$
32,685
   
$
66,510
   
$
18,360
   
$
117,555
 
                                 
Weighted average remaining amortization period
   
N/A
   
14.3 years
   
18.7 years
         
 
NOTE 9 — FINANCING ARRANGEMENTS
 
Convertible Notes
 
     On June 1, 2011, the Company closed its offering of $120,000,000 aggregate principal amount of 3.50% Convertible Senior Notes due 2016 (the “Notes”) which includes $20,000,000 in aggregate principal amount of the Notes issued in connection with the full exercise by the initial purchasers of their over-allotment option. The Notes are governed by the Company’s indenture with Wells Fargo Bank, National Association, as trustee (the “Indenture”).  The Notes were offered and sold only to qualified institutional buyers.  The net proceeds from the sale of the Notes were approximately $115,317,000, after deducting underwriting fees and other related expenses.

 
14

 
 
The Notes have a maturity date of June 1, 2016 and pay interest at an annual rate of 3.50% semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2011.  The Notes are convertible into Akorn’s common stock, cash or a combination thereof at an initial conversion price of $8.76 per share, which is equivalent to an initial conversion rate of approximately 114.1553 shares per $1,000 principal amount of Notes.  The conversion price is subject to adjustment for certain events described in the Indenture, including certain corporate transactions which will increase the conversion rate and decrease the conversion price for a holder that elects to convert its Notes in connection with such corporate transaction.
 
The Notes may be converted at any time prior to the close of business on the business day immediately preceding December 1, 2015 only under the following circumstances:  (1) during any calendar quarter commencing after September 30, 2011, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price in effect on each applicable trading day; (2) during the five consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes per $1,000 principal amount of Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; or (3) upon the occurrence of specified corporate events.  On or after December 1, 2015 until the close of business on the business day immediately preceding the stated maturity date, holders may surrender all or any portion of their Notes for conversion at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, at the Company’s option, cash, shares of the Company’s common stock, or a combination thereof.  If a fundamental change (as defined in the Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or a portion of their Notes.
 
The Notes became convertible for the quarter ending June 30, 2012 as a result of the Company’s common stock closing above the required price of $11.39 per share for 20 of the last 30 consecutive trading days in the quarter ended March 31, 2012.
 
The Notes are accounted for in accordance with ASC 470-20.  Under ASC 470-20, issuers of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components.
 
The application of ASC 470-20 resulted in the recognition of $20,470,000 as the value for the equity component.  At March 31, 2012 and December 31, 2011, the net carrying amount of the liability component and the remaining unamortized debt discount were as follows (in thousands):
 
   
MARCH 31,
 
DECEMBER 31,
 
   
2012
 
2011
 
Carrying amount of equity component
$
20,470
 
$
20,470
 
Carrying amount of the liability component
 
101,740
   
100,808
 
Unamortized discount of the liability component
 
18,260
   
19,192
 
Unamortized deferred financing costs
 
3,302
   
3,470
 
 
The Company incurred debt issuance costs of $4,683,000 related to its issuance of the Notes.  In accordance with ASC 470-20, the Company allocated this debt issuance cost ratably between the liability and equity components of the Notes, resulting in $3,852,000 of debt issuance costs allocated to the liability component and $831,000 allocated to the equity component.  The portion allocated to the liability component was classified as deferred financing costs and is being amortized by the effective interest method through the earlier of the maturity date of the Notes or the date of conversion, while the portion allocated to the equity component was recorded as an offset to additional paid-in capital upon issuance of the Notes.

For the three months ended March 31, 2012, the Company recorded the following expenses in relation to the Notes (in thousands):
 
 
Expense Description
 
Line Item on Condensed Consolidated
Statements of Comprehensive Income
 
Expense
Amount
 
Interest expense at 3.50% coupon rate
 
Interest (expense) income, net
 
$
1,050
 
Debt discount amortization
 
Non-cash interest expense
   
932
 
Deferred financing cost amortization
 
Amortization of deferred financing costs
   
168
 
       
$
2,150
 
 
 
15

 
 
Upon issuing the Notes, the Company established a deferred tax liability of $8,597,000 related to the debt discount of $21,301,000, with an offsetting debit of $8,597,000 to Common stock.  The deferred tax liability was established because the amortization of the debt discount generates non-cash interest expense that is not deductible for income tax purposes.  Since the Company’s net deferred tax assets were fully reserved by valuation allowance at the time the Notes were issued, the Company reduced its valuation allowance by $8,597,000 upon recording the deferred tax liability related to the debt discount with an offsetting credit of $8,597,000 to Common stock.  As a result, the net impact of these entries was a debit of $8,597,000 to the valuation reserve against the Company’s deferred tax assets and a credit of $8,597,000 to deferred tax liability.  The deferred tax liability is being amortized monthly as the Company records non-cash interest from its amortization of the debt discount on the Notes.
 
Bank of America Credit Facility
 
On October 7, 2011, the Company and its domestic subsidiaries (the “Borrowers”) entered into a Loan and Security Agreement (the “B of A Credit Agreement”) with Bank of America, N.A. (the “Agent”) and other financial institutions (collectively with the Agent, the “B of A Lenders”) through which it obtained a $20.0 million revolving line of credit (the “Facility”), which includes a $2.0 million letter of credit facility.  The Company may request expansion of the Facility from time to time in increments of at least $5.0 million up to a maximum commitment of $35.0 million, so long as no default or event of default has occurred and is continuing.  The facility matures in March 2016.  The Company may early terminate the B of A Lenders’ commitments under the Facility upon 90 days’ notice to the Agent at any time after the first year.
 
Under the terms of the B of A Credit Agreement, amounts outstanding will bear interest at the Company’s election at (a) LIBOR or (b) the bank’s Base Rate (which is the greatest of: (i) the prime rate, (ii) the federal funds rate plus 0.50%, or (iii) LIBOR plus 1.0%), plus an applicable margin, which margin is based on the consolidated fixed charge coverage ratio of the Company and its subsidiaries from time to time. Additionally, the Borrowers will pay an unused line fee of 0.250% per annum on the unused portion of the Facility.  Interest and unused line fees will be accrued and paid monthly.  In addition, with respect to any letters of credit that may be issued, the Borrowers will pay: (i) a fee equal to the applicable margin times the average amount of outstanding letters of credit, (ii) a fronting fee equal to 0.125% per annum on the stated amount of each letter of credit, and (iii) any additional fees incurred by the applicable issuer in connection with issuing the letter of credit.  During an event of default, any interest or fees payable will be increased by 2% per annum.
 
Availability under the revolving credit line is equal to the lesser of (a) $20.0 million reduced by outstanding letter of credit obligations or (b) the amount of a Borrowing Base (as defined in accordance with the terms of the B of A Credit Agreement) determined by reference to the value of the Borrowers’ eligible accounts receivable, eligible inventory and fixed assets as of the closing date and the end of each calendar month thereafter.
 
Obligations under the B of A Credit Agreement are secured by substantially all of the assets of each of the Borrowers and a pledge by the Borrowers of their respective equity interest in each domestic subsidiary of the Company and 65% of their respective equity interests in any foreign subsidiary of the Company. The B of A Credit Agreement contains representations and warranties, and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on:  distributions while we have any outstanding commitments or obligations under the B of A Credit Agreement; additional borrowings and liens; additional investments and asset sales; and fundamental changes to corporate structure or organization documents.  The financial covenants require the Borrowers to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 during any period commencing on the date that an event of default occurs or availability under the B of A Credit Agreement is less than 15% of the aggregate B of A Lenders’ commitments under the B of A Credit Agreement.  During the term of the agreement, the Company must provide the Agent with monthly, quarterly and annual financial statements, monthly compliance certificates, annual budget projections and copies of press releases and SEC filings.
 
As of March 31, 2012, the Company had $3.0 million in an outstanding letter of credit under the B of A Credit Agreement, and no borrowing.  Accordingly, the remaining borrowing availability under the B of A Credit Agreement was $17.0 million as of March 31, 2012.

EJ Funds Credit Facility
 
From January 7, 2009 to June 17, 2011, the Company was party to a credit facility originally entered into with General Electric Capital Corporation, and subsequently assigned to EJ Funds, LP on March 31, 2009.  The Company early terminated this credit facility on June 17, 2011.
 
On January 7, 2009, the Company entered into a $25,000,000 Credit Agreement (the “EJ Funds Credit Agreement”) with General Electric Capital Corporation (“GE Capital”) as agent for several financial institutions (the “Lenders”).  On February 19, 2009, as a result of GE Capital’s concerns about the Company’s financial performance and ability to comply with certain covenants contained in the EJ Funds Credit Agreement, GE Capital informed the Company that it was applying a reserve against availability which effectively restricted the Company’s borrowings under the EJ Funds Credit Agreement to the balance outstanding as of February 19, 2009, which was $5,523,620.  On March 31, 2009, the Company consented to an Assignment Agreement (“Assignment”) between GE Capital and EJ Funds LP (“EJ Funds”), an entity controlled by the Company’s chairman, which transferred to EJ Funds all of GE Capital’s rights and obligations under the EJ Funds Credit Agreement.  Pursuant to the Assignment, EJ Funds became the agent and lender under the EJ Funds Credit Agreement. The Company’s chairman, John N. Kapoor, Ph.D., is the President of EJ Financial Enterprises, Inc., a healthcare consulting investment company (“EJ Financial”) and EJ Financial is the general partner of EJ Funds.
 
 
16

 
 
In connection with the Assignment, on April 13, 2009, the Company entered into a Modification, Warrant and Investor Rights Agreement (the “Modification Agreement”) with EJ Funds that, among other things, (i) reduced the revolving loan commitment under the EJ Funds Credit Agreement to $5,650,000, and (ii) set the interest rate for all amounts outstanding under the EJ Funds Credit Agreement at an annual rate of 10% with interest payable monthly.  The Modification Agreement also granted EJ Funds the right to require the Company to nominate two directors to serve on its Board of Directors. The Kapoor Trust is entitled to require the Company to nominate a third director under its Stock Purchase Agreement dated November 15, 1990 with the Kapoor Trust. In addition, the Company agreed to pay all accrued legal fees and other expenses of EJ Funds that relate to the EJ Funds Credit Agreement and other loan documents, including legal expenses incurred with respect to the Modification Agreement and the Assignment.
 
Pursuant to the Modification Agreement, on April 13, 2009, the Company granted EJ Funds a warrant (the “Modification Warrant”) to purchase 1,939,639 shares of its common stock at an exercise price of $1.11 per share, subject to certain adjustments. The Modification Warrant expires five years after its issuance and is exercisable upon payment of the exercise price in cash or by means of a cashless exercise yielding a net share figure.
 
On August 17, 2009, the Company completed negotiations with EJ Funds for additional capacity on the EJ Funds Credit Facility, increasing the loan commitment from $5,650,000 to $10,000,000. In consideration of this amendment, EJ Funds was granted a warrant to acquire 1,650,806 shares of the Company’s common stock at $1.16 per share, the closing market price on August 14, 2009. The EJ Funds Credit Facility was secured by the assets of the Company and was not subject to debt covenants until April 1, 2010.  

        On January 13, 2010, the parties entered into an amendment to the EJ Funds Credit Agreement which, among other things, reduced the number of financial covenants to two: (1) a limit on capital expenditures of $7,500,000 in 2010, $5,000,000 in 2011, and $5,000,000 in 2012 and (2) a requirement to have positive liquidity throughout the life of the EJ Funds Credit Agreement.  Positive liquidity was defined as the revolving line of credit borrowing base (up to $10,000,000) plus cash and cash equivalents less the outstanding principal on the revolving line of credit, the total of which was required to be greater than zero.  The capital expenditures limit allowed that any unused portion from one year could be carried over and added to the next year’s limit.  On January 27, 2011, EJ Funds and the Company signed a Waiver and Consent that waived the Company’s obligation to comply with the capital expenditure limit for 2011.

        On June 17, 2011, the Company elected to early terminate the EJ Funds Credit Agreement.  The Company had not borrowed against the EJ Funds Credit Agreement since repaying its outstanding balance in the first quarter of 2010.  Upon terminating the EJ Funds Credit Agreement, the Company expensed $1.2 million in remaining unamortized deferred financing costs incurred related to entering into the EJ Funds Credit Agreement. The Company incurred no fees or penalties related to its early termination of the EJ Funds Credit Agreement.
 
NOTE 10 — COMMON STOCK ISSUANCE
 
During the quarter ended March 31, 2011, the Company issued 365,157 shares of its common stock pursuant to warrant exercises.  On March 8, 2006, the Company had 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 “PIPE Warrants”). The PIPE Warrants were exercisable for a five-year period at an exercise price of $5.40 per share and could be exercised by cash payment of the exercise price or by means of a cashless exercise.  The total 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 were allocated based on the relative fair values of the common stock and warrants, with $16,257,000 allocated to the common stock and $1,821,000 allocated to the warrants.

In December 2010, holders submitted 77,779 PIPE Warrants for cashless exercise, resulting in the Company issuing 9,195 shares of its common stock.  There were 1,431,309 PIPE Warrants outstanding as of December 31, 2010.  During the quarter ended March 31, 2011, (a) 319,863 of these warrants were cash exercised generating proceeds of $1,727,000, (b) 878,112 warrants were cashless exercised resulting in the issuance of 45,294 shares, and (c) 233,334 warrants expired unexercised on March 8, 2011.
 
NOTE 11 — EARNINGS PER COMMON SHARE

Basic net income per common share is based upon the weighted average common shares outstanding during the period. Diluted net income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect, if any, of stock options and warrants using the treasury stock method.
 
 
17

 
 
Certain shares that are potentially dilutive in the future have been excluded from the diluted net income per share computation as they would have been anti-dilutive for the period. The number of such shares subject to stock options as of March 31, 2012 and March 31, 2011 was 126,000 and 364,000, respectively.  There were no such shares subject to warrants as of March 31, 2012 or March 31, 2011.

The Company’s potentially dilutive shares consist of: (i) vested and unvested stock options that are in-the-money, (ii) warrants that are in-the-money, and (iii) unvested restricted stock awards (“RSAs”).  A reconciliation of the earnings per share data from a basic to a fully diluted basis is detailed below: 

   
Three months ended March 31,
 
   
2012
   
2011
 
   
(restated)
       
Net income
 
$
3,108
   
$
5,810
 
Net income per share:
               
     Basic
 
$
0.03
   
$
0.06
 
     Diluted
 
$
0.03
   
$
0.06
 
                 
Shares used in computing net income per share:
               
Weighted average basic shares outstanding
   
95,011
     
94,197
 
Dilutive securities:
               
     Stock options and unvested RSA’s
   
4,097
     
4,091
 
     Stock warrants
   
6,502
     
5,697
 
     Shares issuable upon conversion of convertible notes (1)
   
3,559
     
 
Total dilutive securities
   
14,158
     
9,788
 
                 
Weighted average diluted shares outstanding
   
109,169
     
103,985
 
 
(1)
Shares issuable upon conversion of convertible notes assumes that that Company would repay the principal of the notes in cash and pay any incremental value in shares of the Company’s common stock.
 
NOTE 12 — INDUSTRY SEGMENT INFORMATION
 
 
During the quarters ended March 31, 2012 and March 31, 2011, the Company reported results for three segments:
 
Ophthalmic
     
 
Hospital Drugs & Injectables
     
 
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.

The Company’s reportable segments are based upon internal financial reports that aggregate certain operating information. The Company’s chief operating decision maker, as defined in ASC Topic 280,  Segment Reporting  (formerly SFAS No. 131,  Disclosures about Segments of an Enterprise and Related Information ), is its chief executive officer, or CEO. The Company’s CEO oversees operational assessments and resource allocations based upon the results of the Company’s reportable segments, all of which have available discrete financial information.
  
The Company’s basis of accounting in preparing its segment information is consistent with that used in preparing its consolidated financial statements.
 
The revenue and gross profit of the business acquired through the Kilitch Acquisition has been included within the Contract Services segment for the three months ended March 31, 2012.  The manufacture and sale of pharmaceutical products for contract customers in India represents a substantial majority of their business.

 
18

 

Selected financial information by industry segment is presented below (in thousands).
 
 
THREE MONTHS ENDED
MARCH 31,
 
 
2012
 
2011
 
REVENUES:
 
 (Restated)
       
Ophthalmic
$
21,811
 
$
11,018
 
Hospital Drugs & Injectables
 
27,376
   
9,055
 
Contract Services
 
2,530
   
5,371
 
Total revenues
$
51,717
 
$
25,444
 
GROSS PROFIT:
           
Ophthalmic
$
12,719
 
$
7,186
 
Hospital Drugs & Injectables
 
17,041
   
4,861
 
Contract Services
 
1,141
   
2,206
 
Total gross profit
 
30,901
   
14,253
 
Operating expenses
 
23,239
   
8,545
 
Operating profit
 
7,662
   
5,708
 
Other (expense) income
 
(2,420)
   
642
 
Income before income taxes
$
5,242
 
$
6,350
 
 
The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. Inter-segment activity at the gross profit level is minimal. The Company does not identify assets by segment for internal purposes, as certain of the Company’s manufacturing and warehouse facilities support more than one segment.
 
NOTE 13 — BUSINESS COMBINATIONS (Restated)
 
As discussed fully in footnote 1, the Company has restated its financial statements related to the first quarter acquisition of Kilitch Drugs (India) Limited.  This footnote has been restated to reflect the adjustments.
 
On February 28, 2012, Akorn India Private Limited (“AIPL”), a wholly owned subsidiary of Akorn, Inc. (the “Company”) completed and closed on its previously announced acquisition of selected assets of Kilitch Drugs (India) Limited (“KDIL”).  This acquisition (the “Kilitch Acquisition”) was pursuant to the terms of the Business Transfer Agreement (the “BTA”) entered into among the Company, KDIL and the members of the promoter group of KDIL on October 5, 2011.  In accordance with terms contained in the BTA, the Company also closed on a related Product Transfer Agreement between the Company and NBZ Pharma Limited (“NBZ”), a company associated with KDIL.  The primary asset transferred was KDIL’s manufacturing plant in Paonta Sahib, Himachal Pradesh, India, along with its existing book of business.  KDIL was engaged in the manufacture and sale of pharmaceutical products for contract customers in India and for export to various unregulated world markets.  While the Paonta Sahib manufacturing facility is not currently certified by the U.S. Food and Drug Administration (the “FDA”) for exporting drugs to the U.S., the facility was designed with future FDA certification in mind.  Accordingly, the Kilitch Acquisition provided the Company with the potential for future capacity expansion for products to be sold in the U.S., as well as, the opportunity to expand the Company’s footprint into markets outside the U.S.  The Company has determined that the assets acquired through the Kilitch Acquisition constitute a “business” as defined by Rule 11-01(d) of Regulation S-X and ASC 805,  Business Combinations .  Accordingly, the Company has accounted for the Kilitch Acquisition as a business combination.
           
AIPL paid the equivalent of approximately USD $60.1 million at closing.  Total purchase consideration was approximately $55.2 million which consisted of approximately $51.2 million in base consideration, $4.0 million in reimbursement for capital expenditures made by KDIL between April 1, 2011 and the closing date. In addition AIPL paid $3.4 million related to compensation earned from the achievement of acquisition related milestones by the closing date, and $1.6 million in other acquisition costs related to taxes and duties to transfer of the land and the business.  In addition to the amounts paid at closing, AIPL expects to owe the full contractual amount of $3.3 million in additional compensation, which are payable based on certain milestones that the Company determined were probable of achievement, and therefore, has recorded this amount as “accrued acquisition related compensation” in the condensed consolidated balance sheet as of March 31, 2012. The compensation for acquisition-related milestones and other acquisition costs have been recorded as “acquisition costs” as part of operating expenses in the condensed consolidated income statement. The BTA also contains a working capital guarantee that calls for KDIL or AIPL to reimburse the other party for any shortfall or excess, respectively, in the actual acquired working capital compared to the target established in the BTA.
 
The Company may pay up to an additional $1.0 million for future services which will be expensed prospectively as the services are provided.
 
The following table sets forth the purchase price for the Kilitch Acquisition translated into U.S. dollars as of the date of acquisition (amounts in thousands):
 
 
19

 
 
PURCHASE PRICE:
       
Cash paid
 
$
55,224
 
Estimated working capital true-up
   
(890)
 
Assumed liabilities
   
2,099
 
Deferred tax liabilities
   
1,368
 
Total purchase price
 
$
57,801
 
         
ALLOCATION OF THE FAIR VALUE OF THE ACQUISITION:
       
         
   Accounts receivable
   
2,130
 
Inventory
   
1,799
 
Land
   
3,714
 
Property, plant and equipment
   
8,474
 
Construction in progress
   
14,231
 
Goodwill, non-deductible
   
21,609
 
Other intangible assets, non-deductible
   
5,806
 
Other assets
   
38
 
Total allocation of fair value
 
$
57,801
 
 
The allocation of fair value presented above is preliminary pending final valuation of the acquired tangible and intangible assets.
 
Goodwill represents expected synergies and intangible assets that do not qualify for separate recognition.  The Company does not anticipate being able to deduct the value of goodwill or other intangible assets for income tax purposes in India.  Accordingly, the Company recorded a deferred tax liability of $1,368,000 as part of purchase accounting.  For book purposes, the other intangible assets acquired are being amortized over lives of four to five years. Goodwill is not amortized for book purposes but is subject to impairment testing, per Company policy.  The tangible assets acquired consist primarily of construction in progress of approximately $14,231,000, property plant and equipment of approximately $8,474,000, Land of approximately $3,714,000 accounts receivable of approximately $2,130,000 and Inventory of approximately $1,799,000.
 
The unaudited pro forma results presented below reflect the consolidated results of the operations of the Company as if the Kilitch Acquisition had taken place at the beginning the period presented below.  The pro forma results include amortization associated with the acquired intangible assets and interest on funds used for the acquisition.  The unaudited pro forma financial information presented below does not reflect the impact of any actual or anticipated synergies expected to result from the acquisition.  Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date (amounts in thousands, except per share data):
 
   
Three months ended
March 31, 2012
 
Revenue
 
$
55,721
 
Net income
   
1,572
 
Net income per diluted share
 
$
0.01
 
 
During the quarter ended March 31, 2012, the Company recorded no adjustments to the purchase accounting for its acquisitions completed during 2011, which included Advanced Vision Research, Inc., and the acquisition of certain pharmaceutical product rights from the U.S. subsidiary of H. Lundbeck A/S.
 
NOTE 14 — COMMITMENTS AND CONTINGENCIES
 
Product Warranty Reserve

        The Company has an outstanding product warranty reserve which relates to a ten-year expiration guarantee on injectable radiation antidote products (“DTPA”) sold to the United States Department of Health and Human Services in 2006. The Company is performing yearly stability studies for this product and, if the annual stability study does not support the ten-year product life, it will replace the product at no charge. The Company’s supplier, Hameln Pharmaceuticals, will also share one-half of this cost if the product does not meet the stability requirement. If the ongoing product testing confirms the ten-year stability for DTPA, the Company 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.  All studies to date have confirmed the product’s stability. This reserve balance was $1,299,000 at March 31, 2012 and December 31, 2011.

 
20

 

Payments Due under Strategic Business Agreements
 
The Company has entered into strategic business agreements for the development and marketing of finished dosage form pharmaceutical products with various pharmaceutical development companies.  Each strategic business agreement includes a future payment schedule for contingent milestone payments.  The Company will be responsible for contingent milestone payments to these strategic business partners based upon the occurrence of future events.  Each strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development progress timelines, successful product testing and validation, successful clinical studies, various FDA and other regulatory approvals and other factors as negotiated in each agreement.  None of the contingent milestone payments is expected to be individually material to the Company.  These costs, when realized, will be reported as part of research and development expense in the Company’s Condensed Consolidated Statement of Comprehensive Income.  As of March 31, 2012, the Company has agreements with strategic business partners committing it to pay the approximate dollar amounts listed below (in thousands):
 
Year of Payment
 
Amount
 
2012
 
$
4,532
 
2013
   
5,952
 
Total
 
$
10,484
 

Business Combinations

        The Company entered into an agreement with H. Lundbeck A/S on December 22, 2011 to acquire its rights to the NDAs of three off-patent, branded injectable products (the “Lundbeck Agreement”).  Pursuant to the terms of the underlying Asset Sale and Purchase Agreement, in addition to the $45.0 million paid in cash at closing, the Company is obligated to pay $15.0 million in additional consideration on the third anniversary of the closing date.  The initial $45.0 million and subsequent $15.0 million are subject to claw-back provisions should sales of the acquired products fail to reach the required levels.  The Company recorded the present value of the $15.0 million as a long-term liability on its balance sheet as of December 31, 2011, and is accruing interest on this obligation at its approximate cost of capital, determined to be 9.0%.

        Also in relation to the Lundbeck Agreement, the Company assumed minimum annual purchase obligations under a pharmaceutical manufacturing supply agreement covering two of the three acquired products.  The supply agreement commits the Company to purchase $12.9 million in product during the period from 2012 through 2015. The Company determined that its commitment under this contract required it to purchase more product than it anticipates being able to sell.  According, the Company recorded as part of purchase accounting a long-term liability of $2.5 million which equals the estimated present value of the unfavorable contract terms.

NOTE 15 — CUSTOMER AND SUPPLIER CONCENTRATION
 
AmerisourceBergen Health Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. These three customers accounted for 57% and 64% of the Company’s gross revenues for the three months ended March 31, 2012 and 2011, and 32% and 48% of net revenues for the three months ended March 31, 2012 and 2011, respectively.   They accounted for approximately 50% and 72% of the Company’s gross accounts receivable balance as of March 31, 2012 and December 31, 2011, respectively. No other customers accounted for more than 10% of gross sales, net revenues or gross trade receivables for the indicated dates and periods.
 
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 Company’s products either directly from the Company or from another distributor.
 
        The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical products for its own use and for third parties with which it has contracted. The principal components of the Company’s products are active and inactive pharmaceutical ingredients and certain packaging materials. Certain of these ingredients and components are available from only a single source and, in the case of certain of the Company’s ANDAs and New Drug Applications, only one supplier of raw materials has been identified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay the Company’s development and marketing efforts. If for any reason the Company is unable to obtain sufficient quantities of any of the raw materials or components required to produce and package its products, it may not be able to manufacture its products as planned, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
 
21

 
 
NOTE 16 — INCOME TAXES
 
The following table sets forth the Company’s income tax provision for the periods indicated (dollar amounts in thousands):

   
March 31,
 
   
2012
   
2011
 
   
(restated)
       
Income before income taxes
 
$
5,242
   
$
6,350
 
Income tax provision
   
2,134
     
540
 
Net income
 
$
3,108
   
$
5,810
 
                 
Income tax provision as a percentage of income before income taxes
   
40.7
%
   
8.5
%

      The Company’s provision for income taxes for the quarter ended March 31, 2012 was equal to 40.7% of income before income taxes.  This figure equals the blended effective income tax rate expected for the year 2012, taking into consideration certain costs related to the acquisition of KDIL that have been expensed for book and are not expected to be deductible.  This tax provision rate factors in various domestic deductions and the impact of foreign operations on the Company’s overall tax rate.  The Company’s income tax provision rate was 8.5% in the quarter ended March 31, 2011, equaling the Company’s effective state income tax rate.  For the quarter ended March 31, 2011, the Company's Federal tax provision on current period earnings was offset by net operating losses that had previously been subject to a valuation allowance.  The Company’s remaining valuation allowances against deferred tax assets were reversed in their entirety in the quarter ended September 30, 2011.

      As of December 31, 2011, the Company had not identified any uncertain tax positions that required establishment of a reserve.  The Company identified no material change in the quarter ended March 31, 2012 that would require it to establish a reserve for uncertain tax positions.
 
NOTE 17 — UNCONSOLIDATED JOINT VENTURE
 
On September 22, 2004, the Company entered into a 50/50 joint venture agreement (the “Joint Venture Agreement”) with Strides Arcolab Limited (“Strides”), a pharmaceutical manufacturer based in India, for the development, manufacturing and marketing of various generic pharmaceutical products for sale in the United States.  The joint venture, known as Akorn-Strides LLC (the “Joint Venture Company”), launched its first commercialized product during 2008.  The Joint Venture Company operated until May 2011, ceasing operations after the sale and transfer of its operating assets to Pfizer, Inc. pursuant to an Asset Purchase Agreement entered into on December 29, 2010.  It is anticipated that the Joint Venture Company will continue to exist until all product that it sold is beyond the potential product return period.
 
Under the joint venture arrangement entered into between the Company and Strides on September 22, 2004, Strides was primarily responsible for developing and manufacturing products, while the Company was responsible for marketing and selling the products.  To supplement Strides’ manufacturing capabilities, the Company began manufacturing one Joint Venture Company product in the second quarter of 2010.  For its sales and marketing efforts, the Company earned revenue from the Joint Venture Company in the form of a fee calculated as a percentage of the Joint Venture Company’s monthly net sales revenue.
 
On December 29, 2010, the Joint Venture Company entered into an Asset Purchase Agreement with Pfizer, Inc. (“Pfizer”) to sell the rights to all of its abbreviated new drug applications (“ANDAs”) to Pfizer for $63.2 million in cash.  In accordance with an amendment to the Joint Venture Agreement, the proceeds were split unevenly, with the Company receiving $35.0 million and Strides receiving $28.2 million.  The Asset Purchase Agreement included an initial closing date of December 29, 2010 and a final closing date of May 1, 2011.  The ANDAs for dormant and in-development products were transferred on the initial closing date, while the ANDAs for actively-marketed products were transferred to Pfizer on the final closing date.  The Joint Venture Company recognized a gain of $63.1 million from the sale, of which $38.9 million was recognized in the fourth quarter of 2010 and the remaining $24.2 million was be recognized in the second quarter of 2011.  Having sold all of its ANDAs, the Joint Venture Company discontinued product sales in the second quarter of 2011 and its operations ceased.
 
The following tables set forth a condensed statement of income of the Joint Venture Company for the quarters ended March 31, 2012 and 2011, as well as condensed balance sheets as of March 31, 2012 and December 31, 2011.
 
 
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CONDENSED STATEMENTS OF INCOME
 
(IN THOUSANDS)
 
   
   
Three months ended March 31,
 
   
2012
   
2011