Stock Options, Restricted Stock and Employee Stock Purchase Plan

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. 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, officers, 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 December 31, 2018, there were approximately 3.4 million stock options and 0.1 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 December 31, 2018, no awards remain outstanding under the 2003 Plan.

Under the Omnibus Plan, 2.0 million RSUs have been granted to employees and directors, of which 0.3 million have vested and 0.2 million have been forfeited, leaving 1.5 million RSUs outstanding as of December 31, 2018. No stock options were granted under the Omnibus Plan from inception through December 31, 2018. As of December 31, 2018, approximately 6.2 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 recorded stock-based compensation expense of approximately $21.5 million, $21.0 million and $15.4 million during the years ended December 31, 2018, 2017 and 2016, respectively. The Company uses the single-award method for allocating compensation cost to each period.

As of December 31, 2018, the Company agreed to the modification of various stock-based awards of its former Chief Executive Officer and Chief Operating Officer to accelerate vesting to March 31, 2019 and December 31, 2018, respectively. The Company recognized stock-based compensation expense of $2.1 million in the year ended December 31, 2018 related to the accelerated vesting of these awards.

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. 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:



	2017			2016
Expected volatility	50%	—	50%	46%	—	50%
Expected life (in years)		4.8			4.7
Risk-free interest rate	1.7%	—	1.7%	0.9%	—	1.8%
Dividend yield		—			—
Weighted-average grant date fair value per stock option		$9.25			$11.13

The table below sets forth a summary of stock option activity within the Company’s stock-based compensation plans for the years ended December 31, 2018, 2017 and 2016:



	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, 2015	4,762		$	20.33
Granted	2,089		26.61
Exercised	(1,794	)	7.78
Forfeited or expired	(291	)	28.96
Outstanding at December 31, 2016	4,766		$	27.27
Granted	66		21.28
Exercised	(623	)	15.53
Forfeited or expired	(156	)	28.20
Outstanding at December 31, 2017	4,053		$	28.95
Granted	—		—
Exercised	(22	)	24.99
Forfeited or expired	(613	)	31.28
Outstanding at December 31, 2018	3,418		$	28.55	3.69	$	—
Exercisable at December 31, 2018	2,350		$	29.00	3.41	$	—


(1)	Includes only those options that were in-the-money as of December 31, 2018. 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, 2018, 2017 and 2016 was approximately $0.2 million, $9.8 million and $40.3 million, respectively. As a result of the stock options exercised, the Company received cash and recorded additional paid-in-capital of approximately $0.5 million, $9.7 million and $14.0 million during the years ended December 31, 2018, 2017 and 2016, respectively.

As of December 31, 2018, the total amount of unrecognized compensation cost related to non-vested stock options was approximately $7.0 million, which is expected to be recognized as expense over a weighted-average period of 1.3 years.

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, executives and directors 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 years ended December 31, 2018, 2017 and 2016 the Company granted 1.7 million, 0.7 million and 0.3 million RSUs to certain employees, executives and directors.

Set forth below is a summary of unvested RSU activity for the three years ended December 31, 2018:



	Number of Shares (in thousands)		Weighted Average Per Share Grant Date Fair Value
Unvested at December 31, 2015	253		$	35.31
Granted	303		29.50
Vested	(118	)	34.95
Forfeited	(22	)	28.85
Unvested at December 31, 2016	416		$	31.52
Granted	666		33.10
Vested	(137	)	32.55
Forfeited	(57	)	31.34
Unvested at December 31, 2017	888		$	32.55
Granted (1)	1,711		16.07
Vested	(408	)	30.22
Forfeited (1)	(548	)	24.00
Unvested at December 31, 2018	1,643		$	19.85


(1)	RSUs granted and forfeited include 0.4 million RSUs held by the Company’s former CEO and COO that were modified to accelerate vesting. This modification was treated as forfeiture of the old awards and granting of new awards with modified vesting terms.

As of December 31, 2018, the total amount of unrecognized compensation cost related to RSU awards was approximately $25.4 million which is expected to be recognized as expense over a weighted-average period of 2.9 years.

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. 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 ran through the end of the year. The Company did not have an ESPP offering period starting on July 1, 2017 and did not have any offering periods in 2018 pursuant to terms of the Merger Agreement. During the year ended December 31, 2017, participants contributed approximately $2.8 million through payroll deductions toward the purchase of shares under the ESPP. The Company recorded stock-based compensation expense of $1.1 million during the year ended December 31, 2017 related to the ESPP.

A total of 2.0 million shares of stock were set aside for issuance under the ESPP. Participants in the 2017 offering period acquired a total of 0.1 million shares, leaving 1.9 million shares remaining available for future issuance as of December 31, 2018.