Financing Arrangements

Term Loans

During 2014, in order to finance its acquisitions of Hi-Tech Pharmacal Co Inc. and VersaPharm Inc., the Company entered into two term loan agreements (the “Term Loans”, or collectively, the “Existing Term Loan Facility”) with certain lenders and with JPMorgan Chase Bank, N.A., as administrative agent. On February 16, 2016, the Company made a voluntary prepayment of its Existing Term Loan Facility of $200.0 million which settled all future required quarterly principal repayments of the Term Loan Agreements as denoted above until the date of maturity of the Term Loan Agreements or April 16, 2021, although future voluntary principal repayments are permitted.

The aggregate principal amount financed was $1,045.0 million. As of December 31, 2018, outstanding debt under the Term Loans was $831.9 million and the Company was in compliance with all applicable covenants which included customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities. As of December 31, 2018, the Term Loan has a market price of $821 per $1,000 of principal amount. The Existing Term Loan Facility is scheduled to mature in April 16, 2021.

During the year ended December 31, 2018, the Company amortized $5.0 million of the total Term Loans-related costs, resulting in $11.5 million remaining balance of deferred financing costs at December 31, 2018. During the years ended December 31, 2017 and 2016, the Company amortized $5.0 million and $10.4 million, respectively, of Term Loans-related costs. The decrease in amortization of deferred financing fees in 2018 and 2017 as compared to 2016 was primarily the result of the deferred financing fee amortization associated with the voluntary principal repayment in 2016. The Company will amortize this balance using the straight-line method over the life of the Term Loan Agreements.

As of the date of the filing of this Form 10-K until the maturity of the Term Loans, our spread will be based upon the Ratings Level applicable on such date as documented below. As of the period ended December 31, 2018, the Company was a Ratings Level III for the Existing Term Loan Facility.



Ratings Level	Index Ratings (Moody’s/S&P)	Adjusted LIBOR (Eurodollar) Spread	Adjusted prime/federal funds rate (ABR) Spread
Level I	B1/B+ or higher	4.25%	3.25%
Level II	B2/B	4.75%	3.75%
Level III	B3/B- or lower	5.50%	4.50%

For the years ended December 31, 2018, 2017 and 2016, the Company recorded interest expense of $56.9 million, $45.5 million and $43.5 million, respectively in relation to the Term Loans. The increase in interest expense was in part due to a downgrading of the Company's Term loan credit rating.

JPMorgan Credit Facility

On April 17, 2014, the Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan as administrative agent, and Bank of America, N.A., as syndication agent for certain other lenders (at closing, Bank of America, N.A. and Wells Fargo Bank, N. A.) for a $150.0 million revolving credit facility (the “JPM Revolving Facility”).

The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At December 31, 2018, there were no outstanding borrowings under the JPM Revolving Facility, and availability was $135.0 million.

The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of the Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries. The JPM Credit Agreement is set to mature in April of 2019.

Subject to other conditions in the JPM Credit Agreement, advances under the JPM Revolving Facility will be made in accordance with a borrowing base consisting of the sum of the following:


(a)	85% of eligible accounts receivable;


(b)	The lesser of:


a.	65% of the lower of cost or market value of eligible raw materials and work in process inventory, valued on a first in first out basis, and


b.	85% of the orderly liquidation value of eligible raw materials and work in process inventory, valued on a first in first out basis;


(c)	The lesser of:


a.	75% of the lower of cost or market value of eligible finished goods inventory, valued on a first in first out basis, and


b.	85% of the orderly liquidation value of eligible finished goods inventory, valued on a first in first out basis up to 85% of the liquidation value of eligible inventory (or 75% of market value finished goods inventory); and


(d)	Less any reserves deemed necessary by the administrative agent, and allowed in its permitted discretion.

The total amount available under the JPM Revolving Facility includes a $10.0 million letter of credit facility.

Under the terms of the JPM Credit Agreement, if availability under the JPM Revolving Facility falls below 12.5% of commitments or $15.0 million for more than 30 consecutive days, the Company may be subject to cash dominion, additional reporting requirements, and additional covenants and restrictions. The Company may seek additional commitments to increase the maximum amount of the JPM Revolving Facility to $200.0 million.

Unless cash dominion is exercised by the lenders in connection with the JPM Revolving Facility, the Company will be required to repay the JPM Revolving Facility upon its expiration five years from issuance, subject to permitted extension, and will pay interest on the outstanding balance monthly based, at the Company’s election, on an adjusted prime/federal funds rate (“ABR”) or an adjusted LIBOR (“Eurodollar”), plus a margin determined in accordance with the Company’s consolidated fixed charge coverage ratio (EBITDA to fixed charges) as follows:



Fixed Charge Coverage Ratio	Revolver ABR Spread	Revolver Eurodollar Spread
Category 1 > 1.50 to 1.0	0.50%	1.50%
Category 2 > 1.25 to 1.00 but < 1.50 to 1.00	0.75%	1.75%
Category 3 < 1.25 to 1.00	1.00%	2.00%

In addition to interest on borrowings, the Company will pay an unused line fee of 0.25% per annum on the unused portion of the JPM Revolving Facility.

During an event of default, as defined in the JPM Credit Agreement, any interest rate will be increased by 2.0% per annum.

The JPM Revolving Facility is secured by all of the assets of Akorn Loan Parties, including springing control of the Company’s primary deposit account pursuant to a deposit account control agreement. The financial covenants require Akorn Loan Parties to maintain the following on a consolidated basis:


(a)	Minimum Liquidity, as defined in the JPM Credit Agreement, of not less than (a) $120.0 million plus (b) 25% of the JPM Revolving Facility commitments during the three-month period preceding the June 1, 2016 maturity date of the Company’s senior convertible notes.


(b)	Ratio of EBITDA to fixed charges of no less than 1.00 to 1.00 (measured quarterly for the trailing 4 quarters).

As of December 31, 2018, the Company was in compliance with all covenants applicable to the JPM Revolving Facility.

The Company may use any proceeds from borrowings under the JPM Revolving Facility for working capital needs and for the general corporate purposes of the Company and its subsidiaries. At December 31, 2018, there were no outstanding borrowings and no outstanding letter of credit under the JPM Revolving Facility.

The JPM Credit Agreement places customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities of Akorn Loan Parties in a manner designed to protect the collateral while providing flexibility for growth and the historic business activities of the Company and its subsidiaries.

Convertible Notes

On June 1, 2011, the Company issued $120.0 million aggregate principal amount of 3.50% Convertible Senior Notes due June 1, 2016 (the “Notes”) which included $20.0 million in aggregate principal amount of the Notes issued in connection with the full exercise by the initial purchasers of their over-allotment option. The Notes were governed by the Company’s indenture with Wells Fargo Bank, National Association, as trustee (the “Indenture”). The Notes were offered and sold only to qualified institutional buyers. The net proceeds from the sale of the Notes were approximately $115.3 million, after deducting underwriting fees and other related expenses.

The Notes paid interest at an annual rate of 3.50% semiannually in arrears on June 1 and December 1 of each year, with the first interest payment completed on December 1, 2011. The Notes were convertible into the Company’s common stock, cash or a combination thereof at an initial conversion price of $8.76 per share, which is equivalent to an initial conversion rate of approximately 114.1553 shares per $1,000 principal amount of the Notes, subject to adjustment for certain events described in the Indenture.

The Notes became convertible effective April 1, 2012 as a result of the Company’s common stock closing above the required price of $11.39 per share for 20 of the last 30 consecutive trading days in the quarter ended March 31, 2012. The Notes remained convertible for each successive quarter, up to and including the maturity date of June 1, 2016, as a result of meeting the trading price requirement at the end of each prior quarter. During the year ended December 31, 2015, $44.3 million in principal amount of Notes were converted at the holders' request which resulted in recognition of losses of $1.2 million, due to the conversions. On June 1, 2016, the remaining $43.2 million of Notes was converted at the holder's request, resulting in complete conversion of the Notes.

As a result of the complete conversion on June 1, 2016, during the year ended 2016, the Company recorded the following expenses in relation to the Notes (in thousands):



	2016
Interest expense at 3.50% coupon rate (1)	$	687
Debt discount amortization	750
Deferred financing cost amortization	136
	$	1,573

(1)

As a result of the restatement of the 2014 financial data and the resultant delays in filings of the 2015 financial statements, the Company was required to remit an additional 0.5% interest penalty to all holders of the convertible notes from January 1, 2016 to April 5, 2016 and a lump sum payment equal to 0.25% of the principal balance held by consenting holders of the convertible notes as of April 6, 2016.

Aggregate cumulative maturities of long-term obligations (including the Term Loans and the JPM Revolving Facility) as of December 31, 2018 are:



(In thousands)	2019		2020		2021		Thereafter
Maturities	$	—	$	—	$	831,938	$	—