Note 3 - Stock Based Compensation

9 Months Ended

Sep. 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 reserves 7.5 million shares for issuance upon the grant of stock options, restricted shares, or various other instruments to directors, employers and consultants.  The 2014 Plan replaced 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 nine month periods ended September 30, 2014 and 2013 (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Stock options and employee stock purchase plan	$	1,380	$	1,326	$	4,555	$	5,156
Restricted stock awards		285		104		438		518
Total stock-based compensation expense	$	1,665	$	1,430	$	4,993	$	5,674

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 nine month periods ended September 30, 2014, and 2013, respectively along with the weighted-average grant date fair values, are set forth in the table below.

	Three months ended September 30,					Nine months ended September 30,
	2014			2013		2014			2013
Expected volatility		70	%		N/A		58	%		59	%
Expected life (in years)		4.0			N/A		4.2			4.0
Risk-free interest rate		2.16	%		N/A		1.88	%		0.74	%
Dividend yield		—	%		N/A		—	%		—	%
Fair value per stock option	$	18.34			N/A	$	12.54		$	6.77
Forfeiture rate		8	%		N/A		8	%		8	%

The table below sets forth a summary of activity within the 2014 and 2003 Plans for the nine months ended September 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		1,295		26.92
Exercised		(3,481)		1.74
Forfeited		(43)		19.66
Outstanding at September 30, 2014		6,999	$	9.86		3.02	$	184,869
Exercisable at September 30, 2014		4,998	$	4.92		1.97	$	156,650

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 nine month periods ended September 30, 2014, approximately 3,242,000 and 3,481,000 stock options were exercised resulting in cash payments due to the Company of approximately $4.8 million and $6.0 million, respectively.   These stock option exercises generated tax-deductions totaling approximately $108.8 million and $113.8 million, respectively.  During the three and nine month periods ended September 30, 2013, approximately 145,000 and 415,000  stock options were exercised resulting in cash payments to the Company of approximately $1.2 million and $1.9 million, respectively.  These option exercises generated tax-deductions of approximately $1.4 million and $4.5 million, respectively.

From time to time the Company grants 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. Also on May 2, 2014, the Company modified approximately 2.3 million options to extend the option term of certain individuals in Senior Management. On September 5, 2014, the Company granted a total of 257,416 restricted shares 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 options each vest at 25% per year on the anniversary date of the grant ending September 5, 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		337		27.54
Forfeited		—		—
Vested		(16)		15.36
Non-vested at September 30, 2014		337	$	27.54