Note 3 - Stock Based Compensation

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

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 to be used in 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 of similar term in effect during the quarter in which the options were granted. The dividend yield reflects the Company’s 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 the estimate in subsequent periods, if necessary, if actual forfeitures differ from initial estimates.

At the Company’s 2014 Annual Meeting of Shareholders, which took place May 2, 2014, the Company’s shareholders approved the adoption of the Akorn, Inc. 2014 Stock Option Plan (the “2014 Plan”).  The 2014 Plan set aside up to 7.5 million shares for issuance based on the grant of stock options, restricted shares, or various other instruments to directors, employers and consultants.  The 2014 Plan replaces the 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6, 2013 although previously granted awards remain outstanding under the 2003 Plan.

The Company uses the single-award method for allocating compensation cost related to stock options to each period.  The following table sets forth the components of the Company’s stock-based compensation expense for the three and six month periods ended June 30, 2014 and 2013 (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Stock options and employee stock purchase plan		1,954		2,191		3,175		3,830
Restricted stock awards		92		350		153		414
Total stock-based compensation expense		2,047		2,541		3,329		4,244

The weighted-average assumptions used in estimating the grant date fair value of the stock options granted under the 2014 Plan and the 2003 plan during the three and six month periods ended June 30, 2014, and 2013, respectively along with the weighted-average grant date fair values, are set forth in the table below.

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Expected volatility		54	%		58	%		54	%		59	%
Expected life (in years)		4.2			4.0			4.2			4.0
Risk-free interest rate		1.79	%		0.73	%		1.79	%		0.74	%
Dividend yield		—	%		—	%		—	%		—	%
Fair value per stock option	$	10.77		$	6.81		$	10.77		$	6.77
Forfeiture rate		8	%		8	%		8	%		8	%

The table below sets forth a summary of activity within the 2014 and 2003 Plan for the six months ended June 30, 2014: 

	Number of Options  (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2013		9,228	$	4.45		1.61	$	186,169
Granted		991		24.75
Exercised		(238)		5.26
Forfeited		(19)		15.48
Outstanding at June 30, 2014		9,962	$	6.42		2.75	$	267,200
Exercisable at June 30, 2014		8,136	$	3.47		2.24	$	242,324

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 three and six month periods ended June 30, 2014, approximately 182,000 and 238,000 stock options were exercised resulting in cash payments due to the Company of approximately $1.1 million and $ 1.3 million, respectively.   These stock option exercises generated tax-deductible expenses totaling approximately $3.9 million and $5.0 million, respectively.  During the three and six month periods ended June 30, 2013, 93,000 and 270,000  stock options were exercised resulting in cash payments to the Company of approximately $0.4 million and $0.7 million, respectively.  These option exercises generated tax-deductible expenses of approximately $1.0 million and $3.1 million, respectively.

The Company also may grant restricted stock awards to certain employees and members of its Board of Directors (“Directors”). Restricted stock 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 4, 2013, the Company granted a total of 31,899 restricted shares to its Directors, of which 15,946 shares vested immediately upon issuance and the remaining 15,953 shares vested on May 4, 2014.  On May 2, 2014, the Company granted a total of 71,582 restricted shares to senior management which vest at 25% per year on the anniversary date of the grant ending May 2, 2018.

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

	Number of Shares (in thousands)		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2013		16	$	15.36
Granted		72		24.74
Forfeited		—		—
Vested		(16)		15.36
Non-vested at June 30, 2014		72	$	24.74