Stock Options, Restricted Stock Units and Employee Stock Purchase Plan

3 Months Ended

Mar. 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

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”), performance share unit awards ("PSUs") 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 March 31, 2019, there were approximately 3.2 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. No awards remain outstanding under the 2003 Plan.

Under the Omnibus Plan, there were approximately 3.8 million RSU shares, 1.0 million PSU shares and 0.5 million stock option award shares outstanding as of March 31, 2019. As of March 31, 2019, approximately 2.2 million shares remained available for future award grants under the Omnibus Plan.

Also granted in, and outstanding as of the three month period ended March 31, 2019, were inducement awards consisting of 0.5 million RSU shares, 0.2 million PSU shares and 0.4 million stock option award shares.

The Company accounts for stock-based compensation in accordance with ASC Topic 718 - Compensation — Stock Compensation. Accordingly, stock-based compensation cost for stock options and RSUs 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.

PSU awards granted with vesting subject to market conditions are valued at date of grant through a Monte Carlo simulation model. The calculated grant-date fair value is recognized ratably over the vesting period, subject to forfeiture estimates. PSU awards granted with vesting subject to, and determined by, performance conditions are valued at grant based on the closing price of the Company’s stock and anticipated vesting level at grant date. The awards are re-evaluated quarterly to determine the vesting level that is more likely than not to be achieved, and cumulative expense is adjusted accordingly.

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 period ended March 31, 2019 and 2018 (in thousands):



	Three Months Ended March 31,
	2019		2018
Stock options	$	1,381	$	3,159
Employee stock purchase plan	229		—
Restricted stock units and Performance share units	3,110		2,349
Total stock-based compensation expense	$	4,720	$	5,508

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 three month period ended March 31, 2019, along with the weighted-average grant date fair values:



	Three Months Ended March 31,
	2019			2018
Expected volatility	67		%	—		%
Expected life (in years)	6.2			—
Risk-free interest rate	2.52		%	—		%
Dividend yield	—			—
Fair value per stock option	$	2.44		$	—
Forfeiture rate	8		%	—		%

The table below sets forth a summary of stock option activity within the Company’s stock-based compensation plans for the three month period ended March 31, 2019:



	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, 2018	3,418		$	28.55	3.69	$	—
Granted	860		3.90
Exercised	—		—
Forfeited	(196	)	27.61
Outstanding at March 31, 2019	4,082		$	23.40	4.38	$	—
Exercisable at March 31, 2019	2,599		$	28.64	2.61	$	—

(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.

Restricted Stock Unit awards

From time to time, the Company has granted RSUs to certain employees, executives and directors. Historically, the majority of RSU grants to employees and executives have been 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 three month period ended March 31, 2019, the Company granted 3.2 million RSUs to certain employees, executives and directors. Of this total, 2.7 million RSUs were granted to certain employees as a retention incentive. These awards vest in full two years after grant date. The remaining 0.5 million RSUs were granted as an inducement award to the Company’s new CEO.

Set forth below is a summary of unvested RSU activity during the three month period ended March 31, 2019:



	Number of Units (in thousands)	Weighted Average Per Share Grant Date Fair Value
Unvested at December 31, 2018	1,643	$	19.85
Granted	3,197	$	4.02
Vested	(273)	$	23.75
Forfeited	(153)	$	16.44
Unvested at March 31, 2019	4,414	$	9.52

During the three month period ended March 31, 2019, approximately 0.3 million RSU shares vested and were released, generating tax-deductible expenses totaling $1.0 million, while no RSU shares vested during the three month period ended March 31, 2018.

Performance Share Unit awards

During the quarter ended March 31, 2019, the Company granted 1.2 million PSU award shares to certain executives. Of this total, 1.0 million vest two years after grant with vesting level contingent upon meeting various performance conditions, while the remaining 0.2 million vest four years after grant with vesting level contingent on various market conditions. No PSU awards were granted by the Company prior to the quarter ended March 31, 2019.

Set forth below is a summary of unvested PSU activity during the three month period ended March 31, 2019:



	Total Number of Units (in thousands)	Weighted Average Grant Date Fair Value per Unit		Vesting Based on Performance Conditions	Weighted Average Grant Date Fair Value per Unit		Vesting Based on Market Conditions	Weighted Average Grant Date Fair Value per Unit
Unvested at December 31, 2018	—	$	—	—	$	—	—	$	—
Granted	1,239	3.99		985	4.06		254	3.73
Vested	—	—		—	—		—	—
Forfeited	—	—		—	—		—	—
Unvested at March 31, 2019	1,239	$	3.99	985	$	4.06	254	$	3.73

Set forth below is a summary of the valuation inputs for PSUs granted with vesting subject to market conditions during the three month period ended March 31, 2019:



Valuation Inputs for PSUs with Vesting Subject to Market Conditions:
PSUs Issued (units in thousands)	254
Risk Free Rate	2.58		%
Volatility	55.10		%
Dividend	—		%
Valuation Per Share	$	3.73
Total Fair Value (in thousands)	$	947

Expected Term (years)	4

Forfeiture Rate Assumed	8.00		%

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. The ESPP was approved by vote of the Company’s shareholders on December 16, 2016. 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.

During the quarter ended March 31, 2019, participants contributed approximately $0.5 million through payroll deductions toward the future purchase of shares under the ESPP.