Stock Options, Employee Stock Purchase Plan and Restricted Stock

The Company maintains equity compensation plans that allow the Company’s Board of Directors to grant stock option and other equity awards to eligible employees, officers, directors and consultants. As of March 31, 2017, the active plan from which new awards could be granted was the Akorn, Inc. 2014 Stock Option Plan ("the 2014 Plan"), which was approved by shareholders at the Company's 2014 Annual Meeting of Shareholders on May 2, 2014 and subsequently amended by proxy vote of the Company’s shareholders on December 16, 2016. The 2014 Plan reserved 7.5 million shares for issuance upon the grant of stock options, restricted stock units (“RSUs”), or various other instruments to directors, employers and consultants. The 2014 Plan replaced the Amended and Restated Akorn, Inc. 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 share-based compensation expense for the three month periods ended March 31, 2017 and 2016 (in thousands):



	Three Months Ended March 31,
	2017		2016
Stock options	$	3,314	$	2,049
Employee stock purchase plan	262		—
Restricted stock units	1,133		872
Total stock-based compensation expense	$	4,709	$	2,921

Stock Option awards

From time to time, the Company grants stock option awards to certain employees and directors. The weighted-average assumptions used in estimating the grant date fair value of the stock options granted under the 2014 Plan during the three -month periods ended March 31, 2017 and 2016, respectively, along with the weighted-average grant date fair values, are set forth in the table below:



	Three Months Ended March 31,
	2017			2016
Expected volatility	50		%	47		%
Expected life (in years)	4.8			4.8
Risk-free interest rate	1.75		%	1.26		%
Dividend yield	—			—
Fair value per stock option	$	9.25		$	9.95
Forfeiture rate	8		%	8		%

The table below sets forth a summary of stock option activity within the 2014 Plan and the 2003 Plan for the three month period ended March 31, 2017:



	Number of Options (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands) (1)
Outstanding at December 31, 2016	4,766		$	27.27	5.03	$	5,714
Granted	66		21.28
Exercised	(88	)	12.68
Forfeited	(38	)	31.83
Outstanding at March 31, 2017	4,706		$	27.43	4.89	$	7,034
Exercisable at March 31, 2017	1,688		$	25.09	3.46	$	5,800

(1) 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. Stock options for which the exercise price exceeded the market price have been omitted. 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.

During the three month period ended March 31, 2017, 0.1 million stock options were exercised resulting in cash payments to the Company of $1.1 million. These stock option exercises generated tax deductible expense of $0.8 million. During the three month period ended March 31, 2016, no stock options were exercised.

Restricted Stock Unit awards

From time to time, the Company has granted RSUs to certain executives, employees and directors. During 2016, the Company adopted a new Long-Term Incentive Plan for salaried, non-executive employees. That plan called for annual grants of RSUs to all such eligible employees, and the first such grants took place on July 1, 2016. These grants were calculated based on the average pay by employee class and vest 25% per year on each of the first four anniversaries of the grant date. All RSUs 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 is recognized as expense ratably over the vesting period of the grants.

During the three month period ended March 31, 2017, there were no grants of new RSU awards, and no existing RSUs either vested or were released to holders. Set forth below is a summary of non-vested RSU activity during the three month period ended March 31, 2017:



	Number of Units (in thousands)	Weighted Average Per Share Grant Date Fair Value
Non-vested at December 31, 2016	416	$	31.52
Granted	—	$	—
Vested	—	$	—
Forfeited	(6)	$	29.50
Non-vested at March 31, 2017	410	$	31.55

Employee Stock Purchase Plan

The 2016 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 eligible wages toward the purchase of stock. Shares will be 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 is designed with 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 offering period, 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. 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 ESPP. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016.

The initial offering period under the ESPP began in January 2017 and is scheduled to run through the end of the year. During the quarter ended March 31, 2017, participants contributed approximately $0.9 million through payroll deductions toward the future purchase of shares under the ESPP.