Stock Options, Restricted Stock Units and Employee Stock Purchase 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. On April 27, 2017, the Company’s shareholders voted to approve the Akorn, Inc. 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). Under the Omnibus Plan, 8.0 million shares of the Company’s common stock were made available for issuance pursuant to equity awards. The Omnibus Plan replaced 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 had reserved 7.5 million shares for issuance upon the grant of stock options, restricted stock units (“RSUs”), or various other instruments to directors, employees and consultants. Following shareholder approval of the Omnibus Plan, no new awards could be granted under the 2014 Plan, although previously granted awards remain outstanding pursuant to their original terms. As of June 30, 2018, there were approximately 3.7 million stock options and 0.2 million RSU shares outstanding under the 2014 Plan. The 2014 Plan had replaced the Amended and Restated Akorn, Inc. 2003 Stock Option Plan (the “2003 Plan”), which expired on November 6, 2013. As of June 30, 2018, approximately sixteen thousand stock options were outstanding under the 2003 Plan.

Under the Omnibus Plan, 2.0 million RSUs have been granted to employees and directors, of which approximately 0.2 million have vested and been released, and 0.1 million have been forfeited, leaving 1.7 million RSUs outstanding as of June 30, 2018. No stock options have been granted under the Omnibus Plan. As of June 30, 2018, approximately 6.1 million shares remain available for future award grants under the Omnibus Plan.

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 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 and six month periods ended June 30, 2018 and 2017 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Stock options	$	2,477	$	2,956	$	5,636	$	6,270
Employee stock purchase plan	—		275		—		537
Restricted stock units	3,468		1,904		5,817		3,037
Total stock-based compensation expense	$	5,945	$	5,135	$	11,453	$	9,844

Stock Option awards

From time to time, the Company has granted stock option awards to certain employees, executives and directors. No stock options were granted in 2018. Set forth in the following table are the weighted-average assumptions used in estimating the grant date fair value of the stock options granted under the Company's equity compensation plans during the six month period ended June 30, 2017, along with the weighted-average grant date fair values:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Expected volatility	—		%	—		%	—		%	50		%
Expected life (in years)	—			—			—			4.8
Risk-free interest rate	—		%	—		%	—		%	1.75		%
Dividend yield	—			—			—			—
Fair value per stock option	$	—		$	—		$	—		$	9.25
Forfeiture rate	—		%	—		%	—		%	8		%

The table below sets forth a summary of stock option activity within the Company’s stock-based compensation plans for the six month period ended June 30, 2018:



	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, 2017	4,053		$	28.95	4.56	$	21,459
Granted	—		—
Exercised	(22	)	24.99
Forfeited	(298	)	24.76
Outstanding at June 30, 2018	3,733		$	29.30	4.04	$	—
Exercisable at June 30, 2018	2,164		$	30.08	3.44	$	—

(1) The Aggregate Intrinsic Value of 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 June 30, 2018, no stock options were exercised, while during the six month period ended June 30, 2018, approximately twenty-two thousand stock options were exercised resulting in cash payments to the Company of $0.5 million. These stock option exercises generated tax deductible expense of $0.2 million. During the three and six month periods ended June 30, 2017, 0.4 million and 0.5 million stock options were exercised resulting in cash payments to the Company of $5.9 million and $7.1 million, respectively. These stock option exercises generated tax deductible expense of $6.1 million and $6.9 million, respectively.

Restricted Stock Unit awards

From time to time, the Company has granted RSUs to certain employees, executives and directors. The majority of the grants to employees and executives are pursuant to the Company's Long-Term Incentive Plans (the "LTIPs"), which call for annual grants of RSUs to all eligible employees and executives. The RSU awards 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 grant. During the six month period ended June 30, 2018, the Company granted 1.3 million RSUs to certain employees, executives and directors.

Set forth below is a summary of unvested RSU activity during the six month period ended June 30, 2018:



	Number of Units (in thousands)	Weighted Average Per Share Grant Date Fair Value
Unvested at December 31, 2017	888	$	32.56
Granted	1,308	$	19.28
Vested	(170)	$	32.40
Forfeited	(63)	$	25.09
Unvested at June 30, 2018	1,963	$	23.96

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 only one offering period, 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, of which 146,247 shares have been issued to date. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016.

Pursuant to terms of the Merger Agreement, the Company has not initiated any new offering periods subsequent to entering into the Merger Agreement. Accordingly, no offering periods are currently active under the ESPP.