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 and other equity awards to eligible employees, officers, directors and consultants. The active plan from which new awards may be granted is the 2014 Stock Option Plan (the “2014 Plan”). The adoption of the 2014 Plan was approved by the Company’s shareholders at the 2014 Annual Meeting of Shareholders. The 2014 Plan was subsequently amended and restated by vote of the Company’s shareholders on December 16, 2016, with the approved amendments imposing limits on the number of shares, other equity awards or cash that may be granted in a calendar year to various recipients, and clarifying the terms and conditions related to the Company’s issuance of RSUs under the plan. The 2014 Plan reserved 7.5 million shares for issuance upon the grant of stock options, RSUs, or various other instruments, to directors, employees and consultants. Under the 2014 Plan, 4.6 million options have been granted to employees and directors, 0.1 million options have been exercised, 0.4 million options have been canceled and 4.1 million remain outstanding as of December 31, 2016. 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. Options vest contingent on the terms of their grant consistent with the plan.

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 Akorn Inc. 2003 Stock Option Plan and provided the Company with the ability to grant other types of equity awards to eligible participants beside stock options. 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 5.0 million. On August 7, 2009, the Company’s stockholders voted to increase this figure to 11.0 million at the recommendation of the Company’s Board of Directors, and on December 31, 2011 voted to increase the available shares by another 8.0 million, to a final total of 19.0 million shares. The Amended 2003 Plan expired on November 6, 2013. Accordingly, no additional awards were issued under the Amended 2003 Plan beyond that date. However, any awards outstanding as of November 6, 2013 issued under the Amended 2003 Plan remained outstanding in accordance with their terms. Under the Amended 2003 Plan, 15.8 million options were granted to employees and directors, 10.8 million options have been exercised, 4.4 million options have been canceled, and 0.7 million remain outstanding as of December 31, 2016. 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 in 2013 under the Amended 2003 plan 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 period.

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 stock-based compensation expense of approximately $15.4 million, $13.1 million and $7.8 million during the years ended December 31, 2016, 2015 and 2014, respectively. The Company uses the single-award method for allocating the compensation cost to each period.

Stock Option awards

From time to time the Company grants stock option awards to certain employees and directors. 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:



	2016			2015			2014
Expected volatility	46%	—	50%	42%	—	47%	40%	—	71%
Expected life (in years)		4.7			4.8			4.1
Risk-free interest rate	0.9%	—	1.8%	1.5%	—	1.6%	0.9%	—	2.2%
Dividend yield		—			—			—
Fair value per stock option		$11.13			$14.59			$12.89

A summary of stock option activity within the Company’s stock-based compensation plans for the years ended December 31, 2016, 2015 and 2014 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, 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
Granted	2,089		26.61
Exercised	(1,794	)	7.78
Forfeited or expired	(292	)	28.96
Outstanding at December 31, 2016	4,766		$	27.27	5.03	$	5,714
Exercisable at December 31, 2016	1,495		$	23.51	3.10	$	5,272


(1)	Includes only those options that were in-the-money as of December 31, 2016. Fluctuations in the intrinsic value of both outstanding and exercisable options may result from changes in underlying stock price and the timing and volume of option grants, exercises and forfeitures.

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 stock options. The total intrinsic value of stock options exercised during the years ended December 31, 2016 , 2015 and 2014 was approximately $40.3 million, $97.4 million and $141.7 million, respectively. As a result of the stock options exercised, the Company received cash and recorded additional paid-in-capital of approximately $14.0 million, $10.2 million and $8.1 million during the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, the total amount of unrecognized compensation cost related to non-vested stock options was approximately $28.1 million which is expected to be recognized as expense over a weighted-average period of 2.8 years.

Restricted Stock Unit awards

From time to time the Company grants restricted stock units to certain employees and directors. Restricted stock units are valued at the closing market price of the Company’s common stock on the day of grant and the total value of the units are recognized as expense ratably over the vesting period of the grants.

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



	Number of Shares (in thousands)		Weighted Average Per Share Grant Date Fair Value
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	(84	)	35.31
Canceled	—		—
Nonvested at December 31, 2015	253		$	35.31
Granted	302		29.50
Vested	(118	)	34.95
Canceled	(21	)	28.85
Nonvested at December 31, 2016	416		$	31.52

As of December 31, 2016, the total amount of unrecognized compensation cost related to restricted stock awards was approximately $10.2 million which is expected to be recognized as expense over a weighted-average period of 2.8 years.

Employee Stock Purchase Plan

The 2016 Akorn, Inc. Employee Stock Purchase Plan (the “2016 ESPP”) permits eligible employees to acquire shares of the Company’s common stock through payroll deductions. The 2016 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 2016 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 2016 ESPP. Employees are further limited to purchasing no more than 15,000 shares of stock per year. A total of 2.0 million shares of the Company’s stock have been set aside for issuance under the 2016 ESPP. The 2016 ESPP was approved by vote of the Company’s shareholders on December 16, 2016. Accordingly, the initial offering period under the 2016 ESPP began in January 2017.

In 2014 and prior years, the Company had maintained an Amended and Restated Akorn, Inc. Employee Stock Purchase Plan (the “Prior ESPP”) structured very similar to the 2016 ESPP except that it did not place a limit on the number of shares that could be purchased in one year by a participant. In January 2016, the Company elected to terminate the Prior ESPP since shares could not be issued due to the ongoing financial restatement process. In January 2016, the Company refunded all contributions made in 2015 by participants in the Prior ESPP, and paid an additional amount to compensate participants for their lost 15% discount.

A maximum of 2.0 million shares of the Company’s common stock were set aside for issuance under the Prior ESPP. A total of 1.4 million shares were issued under the Prior ESPP before its termination in January 2016. Due to the termination of the Prior ESPP, no shares were issued under this plan in either 2016 or 2015. The Company issued approximately 67 thousand shares of stock in 2014 related to employee participation in the Prior ESPP.

For the years ended December 31, 2016, 2015 and 2014, the Company recorded compensation expense of approximately $(0.3) million, $0.6 million and $0.4 million, respectively, related to the Prior ESPP. The $(0.3) million net credit to compensation expense in 2016 was related to reversing expenses that had been recorded during 2015 after the decision was made in January 2016 to terminate the Prior ESPP.