Note 17 — Unconsolidated Joint Venture

The Company has been a 50% partner in a joint venture agreement with an Indian drug development company since September 2004. This joint venture launched its first product in 2008 and generated revenue from 2008 until its business assets were sold and transferred in the second quarter of 2011. While the joint venture still exists legally, it ceased operations upon the completion of the sale and transfer of its operating assets to Pfizer, Inc. (“Pfizer”) in the second quarter of 2011.

Akorn-Strides, LLC, a Delaware limited liability company (the “Joint Venture Company”) was formed in 2004 upon the Company’s entry into a joint venture agreement with Strides Arcolab Limited (“Strides”) for the development, manufacturing and marketing of grandfathered products, patent-challenge products and ANDA products for sales to the U.S. hospital and retail markets. Strides was responsible for developing, manufacturing and supplying the products, while the Company was responsible for marketing and selling those products to customers in the U.S. in exchange for a fee equal to 7.5% of net sales. The Joint Venture Company launched its first commercialized product in 2008. In 2010 and 2011, the Company supplemented Strides’ manufacturing capabilities by producing one of the Joint Venture Company’s products at its plant in Decatur, Illinois. In 2011, the Company recorded revenue of $0.8 million related to sales of this product to the Joint Venture Company.

Strides and Akorn each own 50% of the Joint Venture Company with equal management representation. The Company accounts for the Joint Venture Company’s earnings and losses on the equity method of accounting in accordance with its 50% ownership interest. The Company’s share of the Joint Venture Company net income is reflected as “Equity in earnings of unconsolidated joint venture” on the Company’s consolidated statements of operations and consolidated statements of cash flows.

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 ANDAs to Pfizer for $63.2 million in cash (the “Pfizer ANDA Sale”). In accordance with an amendment to the joint venture operating agreement, the Company and Strides agreed to an uneven split of the proceeds, with the Company receiving $35.0 million, or approximately 55.4% of the sale proceeds, and Strides receiving $28.2 million, or approximately 44.6%. Costs of $0.1 million related to the sale were allocated to each partner in the same proportion as the sales proceeds. Transfer of ownership of the ANDAs took place in two steps, with dormant and in-development products transferred to Pfizer on December 29, 2010 and actively-marketed products transferred on May 1, 2011. This arrangement allowed the Joint Venture Company time to liquidate existing inventory of the actively-marketed products and allowed Pfizer the opportunity to manufacture and label its own stock. No assets or liabilities of the Joint Venture Company other than its ANDA rights were transferred to Pfizer. The Joint Venture Company essentially ceased operations in the second quarter of 2011, though it continues to exist as a legal entity. The Company does not expect any future activity of the Joint Venture Company to have a material impact on its results of operations in future periods.

The Joint Venture Company recorded a total gain of approximately $63.1 million from the Pfizer ANDA Sale, of which $38.9 million, or 61.7%, was recognized in the fourth quarter of 2010 and the remaining $24.2 million, or 38.3%, was recognized in the second quarter of 2011. During the years ended December 31, 2011 and 2010, the Company recorded $14.6 million and $23.4 million, respectively, as its equity in earnings of the Joint Venture Company. The net income recorded in 2013 was primarily related to adjustments to the Joint Venture Company’s reserves for product returns upon expiration of the period for which product returns could be made.

The following tables sets forth a condensed statements of income for the three years ended December 31, 2013 and condensed balance sheets as of December 31, 2013 and 2012 for Akorn-Strides, LLC, along with information regarding the amount of earnings allocated to each member-partner of the LLC (in thousands):

CONDENSED STATEMENTS OF INCOME

	(Unaudited)
	Year ended December 31,
	2013			2012		2011
REVENUES	$	163		$	-	$	6,364
Cost of sales		(1	)		-		3,562
GROSS PROFIT		164			-		2,802
Operating expenses		3			-		499
OPERATING INCOME		161			-		2,303
Gain from Pfizer ANDA Sale		-			-		24,160
INCOME BEFORE INCOME TAXES		161			-		26,463
Income tax (benefit) / provision		-			-		(38	)
NET INCOME	$	161		$	-	$	26,501

CONDENSED BALANCE SHEETS

	(Unaudited)
	December 31,
	2013		2012
ASSETS
Cash	$	25	$	794
Other current assets		1
TOTAL ASSETS	$	26	$	794

LIABILITIES & MEMBERS’ EQUITY (DEFICIT)
Trade accounts payable & other accrued liabilities	$	-	$	431
TOTAL LIABILITIES	-			431

Members’ equity		26		363
TOTAL LIABILITIES & MEMBERS’ EQUITY (DEFICIT)	$	26	$	794

Trade accounts payable & other accrued liabilities as of December 31, 2012 primarily consists of accruals for potential product returns. As of December 31, 2013, no future product returns are expected.