Note 9 — Stock Options, Employee Stock Purchase Plan and Restricted Stock

Stock Option Plan

The Company maintains stock options plans that allow the Company’s Board of Directors to grant stock options to eligible employees, officers and directors. The Akorn, Inc. 2003 Stock Option Plan (“2003 Stock Option Plan”) was approved by the Company’s Board of Directors on November 6, 2003 and approved by its stockholders on July 8, 2004. 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 is 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 have been 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, 2,304,000 options have been exercised, 4,296,000 options have been canceled, and 9,228,000 remain outstanding as of December 31, 2013. Options granted under the 2003 Stock Option Plan and 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 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. During the first quarter of 2014, the Company’s Board of Directors approved the new Akorn, Inc. 2014 Stock Option Plan. Adoption of this plan is contingent on receipt of shareholder approval at the Company’s 2014 Annual Meeting on May 2, 2014.

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation (formerly SFAS No. 123 (revised 2004), Share Based Payment (SFAS 123(R))). 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, if necessary, if actual forfeitures differ from those estimates.

The Company recorded stock option compensation expense of approximately $6.2 million, $6.4 million and $4.9 million during the years ended December 31, 2013, 2012 and 2011, respectively. The Company uses the single-award method for allocating the compensation cost to each period.

The Company uses the Black-Scholes model to determine the grant-date value of stock options. Expected volatility is based on the historical volatility of the Company’s 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 those estimates subsequently based on actual forfeitures.

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:

	2013			2012			2011

Expected Volatility		49%-68	%		77% -85	%		75% - 76	%
Expected Life (in years)		4.0			4.0			3.8
Risk-free interest rate		0.7% - 1.4	%		0.7% - 0.8	%		1.3% - 2.0	%
Dividend yield		-			-			-
Fair value per stock option	$	6.95		$	7.76		$	3.71

A summary of stock option activity within the Company’s stock-based compensation plans for the years ended December 31, 2013, 2012 and 2011 is as follows:

	Number of Shares (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		7,960		$	1.87
Granted		2,030			6.63
Exercised		(454	)		1.93
Forfeited		(137	)		2.30
Outstanding at December 31, 2011		9,399			2.89
Granted		1,221			12.96
Exercised		(806	)		1.87
Forfeited		(87	)		4.42
Outstanding at December 31, 2012		9,727			4.22
Granted		321			15.76
Exercised		(630	)		4.18
Forfeited		(190	)		13.10
Outstanding at December 31, 2013		9,228		$	4.45		1.61		186,169,000
Exercisable at December 31, 2013		7,594		$	3.02		1.27		164,018,000

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 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, 2013, 2012 and 2011 was approximately $8.9 million, $9.1 million and $3.1 million, respectively. As a result of the stock options exercised, the Company received cash and recorded additional paid-in-capital of approximately $2.6 million, $1.5 million and $0.9 million during the years ended December 31, 2013, 2012 and 2011, respectively.

As of December 31, 2013, the total amount of unrecognized compensation cost related to non-vested stock options was $8,251,000 which is expected to be recognized as expense over a weighted-average period of 2.4 years.

Under the Amended 2003 Plan, the Company 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. On May 3, 2013, the Company granted a total of 32,000 shares of restricted stock valued at approximately $0.5 million to members of its Board of Directors, of which half vested immediately and half will vest on the one year anniversary of grant. During 2012, the Company granted 35,000 shares of restricted stock 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. No restricted stock awards were granted in 2011. The Company recognized compensation expense of approximately $0.6 million, $0.4 million and less than $0.1 million during the years ended December 31, 2013, 2012 and 2011, respectively, related to restricted stock awards.

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

	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2010		28		$	1.89
Granted		-			-
Vested		(15	)		2.34
Canceled		-			-
Nonvested at December 31, 2011		13		$	1.34
Granted		35			14.63
Vested		(30	)		9.09
Canceled		-			-
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

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 1^st to December 31^st and the other running from July 1^st to December 31^st. 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.

A maximum of 2,000,000 shares of the Company’s common stock may be issued under the ESPP. Including shares issues in early 2014 related to employee participation in the ESPP during 2013, a total of 1,353,407 shares have been issued thus far under the ESPP, leaving 646,593 shares available for future issuance. The Company issued approximately 73,000, 61,000 and 71,000 shares of its common stock related to employee participation in the ESPP during 2013, 2012 and 2011, respectively. For the years ended December 31, 2013, 2012 and 2011, the Company recorded compensation expense of approximately $0.2 million in each period related to the ESPP.