Note 11 — Stock Options, Employee Stock Purchase Plan and Restricted Stock

Stock Option Plan

The Company maintains equity compensation plans that allow the Company’s Board of Directors to grant stock options to eligible employees, officers and directors. Under the 2003 Stock Option Plan, 2,519,000 options were granted, none of which remained outstanding as of December 31, 2011. On March 29, 2005, the Company’s Board of Directors approved the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “Amended 2003 Plan”), effective as of April 1, 2005, and this was subsequently approved by its stockholders on May 27, 2005. The Amended 2003 Plan was an amendment and restatement of the 2003 Stock Option Plan and provides the Company with the ability to grant other types of equity awards to eligible participants besides stock options. Starting on May 27, 2005, all new awards were granted under the Amended 2003 Plan. The aggregate number of shares of the Company’s common stock initially approved for issuance pursuant to awards granted under the Amended 2003 Plan was 5,000,000. On August 7, 2009, the Company’s stockholders voted to increase this figure to 11,000,000 at the recommendation of the Company’s Board of Directors, and on December 31, 2011 voted to increase the available shares by another 8,000,000, to a final total of 19,000,000 shares. Under the Amended 2003 Plan, 15,828,000 options have been granted to employees and directors, 9,048,000 options have been exercised, 4,336,000 options have been canceled, and 2,444,000 remain outstanding as of December 31, 2015. Options granted under the Amended 2003 Plan have exercise prices equivalent to the market value of the Company’s common stock on the date of grant and expire five years from date of issuance. All options granted under the Amended 2003 plan, during 2013 vest one quarter per year on each of the first four anniversaries of their grant dates. Options granted in earlier years generally had a three-year vesting schedule.

The Amended 2003 Plan reached its scheduled expiration date on November 6, 2013. Accordingly, no additional awards may be issued under the Amended 2003 Plan beyond that date. However, any awards outstanding as of November 6, 2013 issued under the Amended 2003 Plan will remain outstanding in accordance with their terms.

At the Company’s 2014 Annual Meeting of Shareholders, the Company’s shareholders approved the adoption of the Akorn, Inc. 2014 Stock Option Plan (the “2014 Plan”). The 2014 Plan reserves 7.5 million shares for issuance upon the grant of stock options, restricted stock units, or various other instruments to directors, employers and consultants.

Under the 2014 Plan, 2,491,000 options have been granted to employees and directors, no options have been exercised, 174,000 options have been canceled, and 2,317,000 remain outstanding as of December 31, 2015. Options granted under the 2014 Stock Option Plan have exercise prices equivalent to the market value of the Company’s common stock on the date of grant and expire from five to ten years from date of issuance depending on the option grant date. All options granted to employees during the years ended December 31, 2015 and 2014 vest one quarter per year on each of the first four anniversaries of their grant dates while all options granted to non-employee directors fully vest on the first anniversary date of their grant.

The Company accounts for stock-based compensation in accordance with ASC Topic 718 - Compensation — Stock Compensation. Accordingly, stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. The Company uses the Black-Scholes model for estimating the grant date fair value of stock options. Determining the assumptions that enter into the model is highly subjective and requires judgment. The Company uses an expected volatility that is based on the historical volatility of its stock. The expected life assumption is based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the quarter in which the options were granted. The dividend yield reflects historical experience as well as future expectations over the expected term of the option. The Company estimates forfeitures at the time of grant and revises in subsequent periods, as necessary, if actual forfeitures differ from those estimates.

The Company recorded share-based compensation expense of approximately $13.1 million, $7.8 million and $7.1 million during the years ended December 31, 2015, 2014 and 2013, respectively. The Company uses the single-award method for allocating the compensation cost to each period.

The assumptions used in estimating the fair value of the stock options granted during the period, along with the weighted-average grant date fair values, were as follows:

	2015			2014 (as Restated)			2013
Expected volatility	42%	—	47%	40%	—	71%	49%	—	68%
Expected life (in years)		4.8			4.1			4.0
Risk-free interest rate	1.5%	—	1.6%	0.9%	—	2.2%	0.7%	—	1.4%
Dividend yield		—			—			—
Fair value per stock option		$14.59			$12.89			$6.95

A summary of stock option activity within the Company’s stock-based compensation plans for the years ended December 31, 2015, 2014 and 2013 is as follows:

	Number of Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands) (1)
Outstanding at December 31, 2012	9,727		$	4.22
Granted	321		15.76
Exercised	(630	)	4.18
Forfeited or expired	(190	)	13.10

Outstanding at December 31, 2013	9,228		$	4.45
Granted	1,475		28.59
Exercised	(4,226	)	1.91
Forfeited or expired	(91	)	22.56

Outstanding at December 31, 2014	6,386		$	11.44
Granted	1,016		37.60
Exercised	(2,519	)	4.09
Forfeited or expired	(121	)	34.78

Outstanding at December 31, 2015	4,762		$	20.33	3.41	$	80,868

Exercisable at December 31, 2015	2,510		$	11.28	1.43	$	65,341

(1)

May include value from potentially anti-dilutive options whose exercise price exceeds the closing stock price.

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s common stock at the end of the period and the exercise price of the in-the-money stock options. The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014 and 2013 was approximately $97.4 million, $141.7 million and $8.9 million, respectively. As a result of the stock options exercised, the Company received cash and recorded additional paid-in-capital of approximately $10.2 million, $8.1 million and $2.6 million during the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, the total amount of unrecognized compensation cost related to non-vested stock options was approximately $27.2 million which is expected to be recognized as expense over a weighted-average period of 2.8 years.

From time to time the Company grants restricted stock units to certain employees and members of its Board of Directors (“Directors”). Restricted share awards are valued at the closing market price of the Company’s common stock on the day of grant and the total value of the award is recognized as expense ratably over the vesting period of the grants.

On May 2, 2014, the Company granted a total of 71,582 restricted stock units to senior management which vest at 25% per year on the anniversary date of the grant ending May 2, 2018. Also on May 2, 2014, the Company modified approximately 2.3 million options to extend the option term for grants to certain individuals in senior management. On September 5, 2014, the Company granted a total of 257,416 restricted stock units to senior management and 8,034 shares to a Director to make the individuals who received extended option terms on May 2, 2014 whole given increased tax liabilities. The shares each vest at 25% per year on the anniversary date of the grant ending September 5, 2018. On May 3, 2013, the Company granted a total of 31,899 restricted stock units to its Directors, of which 15,946 shares vested immediately upon issuance and the remaining 15,953 shares vested on May 3, 2014. During 2012, the Company granted 35,000 shares of restricted stock units valued at approximately $0.5 million to members of its Board of Directors, of which half vested immediately and half vested on the one year anniversary of grant. The Company recognized compensation expense of approximately $3.9 million, $1.2 million and $0.6 million during the years ended December 31, 2015, 2014 and 2013, respectively, related to restricted stock units.

The following is a summary of non-vested restricted stock activity:

	Number of Units (in thousands)		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2012	18		$	14.63
Granted	32		15.36
Vested	(34	)	14.98
Canceled	—		—

Nonvested at December 31, 2013	16		$	15.36
Granted	337		35.31
Vested	(16	)	15.36
Canceled	—		—

Nonvested at December 31, 2014	337		$	35.31
Granted	—		—
Vested (1)	(84	)	35.31
Canceled	—		—

Nonvested at December 31, 2015	253		$	35.31

(1)

As a result of the delay in filing the 2015 financials, approximately 66,000 units of restricted stock vested but have not yet been issued to grantees as of and for the year ended December 31, 2015.

As of December 31, 2015, the total amount of unrecognized compensation cost related to restricted stock units was approximately $7.6 million which is expected to be recognized as expense over a weighted-average period of 2.3 years.

Employee Stock Purchase Plan

The Akorn, Inc. Employee Stock Purchase Plan (the “ESPP”) permits eligible employees to acquire shares of the Company’s common stock through payroll deductions. The ESPP has been structured to qualify under Section 423 of the Internal Revenue Code (“IRC”). Employees who elect to participate in the ESPP may withhold from 1% to 15% of base wages toward the purchase of stock. Shares are purchased at a 15% discount off the lesser of the market price at the beginning or the ending of the applicable offering period. The ESPP has two offering periods each year, one running from January 1st to December 31st and the other running from July 1st to December 31st. In a given year, employees may enroll in either plan, but not both. Per IRC rules, annual purchases per employee are limited to $25,000 worth of stock, valued as of the beginning of the offering period. Accordingly, with the 15% discount, employees may withhold no more than $21,250 per year toward the purchase of stock under the ESPP. During the year ended December 31, 2015 the Company suspended the ESPP plan as a direct result of the restatement and the delayed filing of 2015 quarterly and annual statements, although the Company made whole employees consistent with the plan discount based on amounts withheld through the year.

A maximum of 2 million shares of the Company’s common stock may be issued under the ESPP. Including shares issues in early 2015 related to employee participation in the ESPP during 2014, a total of 1,420,438 shares have been issued thus far under the ESPP, leaving 579,562 shares available for future issuance.

Accordingly, the Company issued approximately 0 (zero), 67,000 and 73,000 shares of its common stock related to employee participation in the ESPP during 2015, 2014 and 2013, respectively. For the year ended December 31, 2015, 2014 and 2013, the Company recorded compensation expense of approximately $0.6 million, $0.4 million and $0.2 million, respectively in each period related to the ESPP.