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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2007
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER: 0-13976
AKORN, INC.
(Exact Name of Registrant as Specified in its Charter)
     
LOUISIANA   72-0717400
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
     
2500 MILLBROOK DRIVE    
BUFFALO GROVE, ILLINOIS   60089
(Address of Principal Executive Offices)   (Zip Code)
(847) 279-6100
(Registrant’s telephone number)
     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ      No o
     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o
     Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes o       No þ
     At July 31, 2007 there were 87,588,055 shares of common stock, no par value, outstanding.
 
 

 


 

         
    Page  
PART I. FINANCIAL INFORMATION
       
ITEM 1. Financial Statements.
       
Condensed Consolidated Balance Sheets-June 30, 2007 and December 31, 2006
    3  
Condensed Consolidated Statements of Operations-Three and six months ended June 30, 2007 and 2006
    4  
Condensed Consolidated Statement of Shareholders’ Equity- Six months ended June 30, 2007 and 2006
    5  
Condensed Consolidated Statements of Cash Flows- Six months ended June 30, 2007 and 2006
    6  
Notes to Condensed Consolidated Financial Statements.
    7  
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    17  
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
    21  
ITEM 4. Controls and Procedures.
    21  
PART II. OTHER INFORMATION
       
ITEM 1. Legal Proceedings.
    21  
ITEM 1A. Risk Factors.
    21  
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    22  
ITEM 3. Defaults Upon Senior Securities.
    22  
ITEM 4. Submission of Matters to a Vote of Security Holders.
    23  
ITEM 5. Other Information.
    23  
ITEM 6. Exhibits.
    24  

2


 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE DATA
                 
    JUNE 30,     DECEMBER 31,  
    2007     2006  
    (UNAUDITED)     (AUDITED)  
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 12,885     $ 21,818  
Trade accounts receivable (less allowance for doubtful accounts of $1 and $3, respectively)
    1,987       4,781  
Inventories
    15,897       11,734  
Prepaid expenses and other current assets
    881       1,321  
 
           
TOTAL CURRENT ASSETS
    31,650       39,654  
PROPERTY, PLANT AND EQUIPMENT, NET
    32,956       33,486  
OTHER LONG-TERM ASSETS
               
Intangibles, net
    8,198       8,825  
Other
    103       118  
 
           
TOTAL OTHER LONG-TERM ASSETS
    8,301       8,943  
 
           
TOTAL ASSETS
  $ 72,907     $ 82,083  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Current installments of debt
  $ 408     $ 394  
Trade accounts payable
    3,827       4,719  
Accrued compensation
    726       1,849  
Customer accrued liabilities
    253       391  
Accrued expenses and other liabilities
    963       2,900  
 
           
TOTAL CURRENT LIABILITIES
    6,177       10,253  
LONG-TERM LIABILITIES
               
Long-term debt, less current installments
          208  
Product warranty liability
    1,308       1,308  
 
           
TOTAL LONG-TERM LIABILITIES
    1,308       1,516  
 
           
TOTAL LIABILITIES
    7,485       11,769  
 
           
SHAREHOLDERS’ EQUITY
               
Common stock, no par value — 150,000,000 shares authorized; 87,579,283 and 85,990,964 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively
    156,877       150,250  
Warrants to acquire common stock
    2,820       4,862  
Accumulated deficit
    (94,275 )     (84,798 )
 
           
TOTAL SHAREHOLDERS’ EQUITY
    65,422       70,314  
 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 72,907     $ 82,083  
 
           
See notes to condensed consolidated financial statements.

3


 

AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
                                 
    THREE MONTHS ENDED     SIX MONTHS ENDED  
    JUNE 30,     JUNE 30,  
    2007     2006     2007     2006  
Revenues
  $ 11,638     $ 12,475     $ 23,373     $ 42,205  
Cost of sales
    8,752       7,520       17,998       25,517  
 
                       
GROSS PROFIT
    2,886       4,955       5,375       16,688  
Selling, general and administrative expenses
    5,189       4,669       10,431       9,153  
Amortization and write-down of intangibles
    339       350       677       701  
Research and development expenses
    2,161       2,121       4,172       4,166  
 
                       
TOTAL OPERATING EXPENSES
    7,689       7,140       15,280       14,020  
 
                       
OPERATING (LOSS) INCOME
    (4,803 )     (2,185 )     (9,905 )     2,668  
Interest income/(expense) — net
    169       234       428       (1,085 )
Debt Retirement Expense
                      (391 )
Other income/(expense)
    1       (12 )     1       (29 )
 
                       
(LOSS)/INCOME BEFORE INCOME TAXES
    (4,633 )     (1,963 )     (9,476 )     1,163  
Income tax provision
    1             1        
 
                       
NET (LOSS)/INCOME
    (4,634 )     (1,963 )     (9,477 )     1,163  
Preferred stock dividends and adjustments
          (234 )           (560 )
 
                       
NET (LOSS)/INCOME AVAILABLE TO COMMON STOCKHOLDERS
  $ (4,634 )   $ (2,197 )   $ (9,477 )   $ 603  
 
                       
NET (LOSS)/INCOME PER SHARE:
                               
BASIC
  $ (0.05 )   $ (0.03 )   $ (0.11 )   $ 0.01  
 
                       
DILUTED
  $ (0.05 )   $ (0.03 )   $ (0.11 )   $ 0.01  
 
                       
SHARES USED IN COMPUTING NET (LOSS)/INCOME PER SHARE:
                               
BASIC
    86,982       74,853       86,619       68,321  
 
                       
DILUTED
    86,982       74,853       86,619       76,481  
 
                       
See notes to condensed consolidated financial statements.

4


 

AKORN, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
(In Thousands)
                                                         
                                    Warrants to     Retained        
Six Months Ended June 30, 2007         Series A     Series B     acquire     Earnings        
    Common Stock     Preferred     Preferred     Common     (Accumulated        
    Shares     Amount     Stock     Stock     Stock     Deficit)     Total  
BALANCES AT DECEMBER 31, 2006
    85,991     $ 150,250     $     $     $ 4,862     $ (84,798 )   $ 70,314  
Net loss
                                            (9,477 )     (9,477 )
Exercise of warrants into common stock
    1,285       4,534                   (2,042 )           2,492  
Exercise of stock options
    168       532                               532  
Employee stock purchase plan issuances
    20       129                               129  
Amortization of deferred compensation related to restricted stock awards
          368                               368  
Restricted Stock Awards withheld for payment of EE Tax Liability
    115       (445 )                             (445 )
FAS123R share based payment expense
          1,509                               1,509  
 
                                         
BALANCES AT JUNE 30, 2007
    87,579     $ 156,877     $     $     $ 2,820     $ (94,275 )   $ 65,422  
 
                                         
                                                         
                                    Warrants to     Retained        
Six Months Ended June 30, 2006         Series A     Series B     acquire     Earnings        
    Common Stock     Preferred     Preferred     Common     (Accumulated        
    Shares     Amount     Stock     Stock     Stock     Deficit)     Total  
BALANCES AT DECEMBER 31, 2005
    27,619     $ 67,339     $ 27,232     $ 10,758     $ 13,696     $ (77,992 )   $ 41,033  
Net income
                                  1,163       1,163  
Preferred stock dividends earned
                55       302             (357 )      
Intrinsic value of beneficial conversion features in convertible preferred stock
          203                         (203 )      
Conversion of preferred stock into common stock
    37,779       29,758       (27,287 )     (2,471 )                  
Exercise of warrants into common stock
    1,413       2,774                   (1,886 )           888  
Conversion of convertible notes into common stock
    3,540       7,298                               7,298  
Net proceeds from issuance of common stock and warrants
    4,312       16,257                   1,821             18,078  
Stock issuance under stock option and stock purchase plans
    622       300                               300  
Amortization of deferred compensation related to restricted stock awards
          277                               277  
FAS123R share based payment expense
          701                               701  
 
                                         
BALANCES AT JUNE 30, 2006
    75,285     $ 124,907     $     $ 8,589     $ 13,631     $ (77,389 )   $ 69,738  
 
                                         

5


 

AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS (UNAUDITED)

See notes to condensed consolidated financial statements
                 
    SIX MONTHS  
    ENDED JUNE 30  
    2007     2006  
OPERATING ACTIVITIES
               
Net (loss)/income
  $ (9,477 )   $ 1,163  
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities:
               
Depreciation and amortization
    2,188       1,645  
Amortization of debt discounts
          1,059  
Non-cash stock compensation expense
    1,877       978  
Changes in operating assets and liabilities:
               
Trade accounts receivable
    2,794       (1,765 )
Inventories
    (4,163 )     (691 )
Prepaid expenses and other current assets
    455       (363 )
Trade accounts payable
    (892 )     (314 )
Product warranty liability
          1,159  
Accrued customer liability
    (138 )     197  
Accrued expenses and other liabilities
    (3,060 )     (1,039 )
 
           
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES
    (10,416 )     2,029  
INVESTING ACTIVITIES
               
Purchases of property, plant and equipment
    (981 )     (1,388 )
Purchase of intangible assets
    (50 )      
 
           
NET CASH USED IN INVESTING ACTIVITIES
    (1,031 )     (1,388 )
FINANCING ACTIVITIES (see Note 1 below)
               
Repayment of long-term debt
    (194 )     (2,917 )
Proceeds from common stock and warrant offering
          18,078  
Proceeds from warrants exercised
    2,492       888  
Proceeds under stock option and stock purchase plans
    216       300  
 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES
    2,514       16,349  
 
           
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (8,933 )     16,990  
Cash and cash equivalents at beginning of period
    21,818       791  
 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 12,885     $ 17,781  
 
           
Amount paid for interest
  $ 25     $ 561  
Amount paid for income taxes
  $ 3     $ 2  
Note 1: In March 2006, $7,298 in principal and interest related to convertible notes was retired by conversion to the common stock of Akorn, Inc. (See Note H – Financing Arrangements)

6


 

AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A — BUSINESS AND BASIS OF PRESENTATION
     Business: Akorn, Inc. and its wholly owned subsidiary, Akorn (New Jersey), Inc. (collectively, the “Company”), manufacture and market diagnostic and therapeutic pharmaceuticals in specialty areas such as ophthalmology, rheumatology, anesthesia and antidotes, among others. Customers, including physicians, optometrists, wholesalers, group purchasing organizations and other pharmaceutical companies, are served primarily from three operating facilities in the United States. In September 2004, the Company, along with a venture partner, Strides Arcolab Limited (“Strides”), formed a mutually owned limited liability company, Akorn-Strides, LLC (the “Joint Venture Company”). The accompanying unaudited condensed consolidated financial statements include the accounts of Akorn, Inc. and Akorn (New Jersey) Inc. Intercompany transactions and balances have been eliminated in consolidation.
     Basis of Presentation: These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and accordingly do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in these financial statements. Operating results for the six-month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for a full year. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant estimates and assumptions for the Company relate to the allowance for doubtful accounts, the allowance for chargebacks, the allowance for rebates, the allowance for product returns and discounts, the reserve for slow-moving and obsolete inventory, the carrying value of intangible assets and the carrying value of deferred income tax assets.
     Chargebacks: The Company enters into contractual agreements with certain third parties such as hospitals and group-purchasing organizations to sell certain products at predetermined prices. The parties have elected to have these contracts administered through wholesalers that buy the product from the Company and subsequently sell it to those third parties. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to the Company by the wholesaler and the price under the specific contract is charged back to the Company by the wholesaler. The Company tracks sales and submitted chargebacks by product number and contract for each wholesaler. Utilizing this information, the Company estimates a chargeback percentage for each product. The Company reduces gross sales and increases the chargeback allowance by the estimated chargeback amount for each product sold to a wholesaler. The Company reduces the chargeback allowance when it processes a request for a chargeback from a wholesaler. Actual chargebacks processed by the Company can vary materially from period to period based upon actual sales volume through the wholesalers. However, the Company’s provision for chargebacks is fully reserved for at the time when sales revenues are recognized.
     Management obtains certain wholesaler inventory reports to aid in analyzing the reasonableness of the chargeback allowance that will be paid out in the future. The Company assesses the reasonableness of its chargeback allowance by applying the product chargeback percentage based on historical activity to the quantities of inventory on hand per the wholesaler inventory reports and an estimate of in-transit inventory that is not reported on the wholesaler inventory reports at the end of each reporting period. In accordance with its accounting policy, the Company’s estimate of the percentage amount of wholesaler inventory that will ultimately be sold to a third party that is subject to a contractual price agreement is based on a six-quarter trend of such sales through wholesalers. The Company uses this percentage estimate (95% in 2007) until historical trends indicate that a revision should be made.

7


 

     On an ongoing basis, the Company evaluates its actual chargeback rate experience and new trends are factored into its estimates each quarter as market conditions change.
     Sales Returns: Certain of the Company’s products are sold with the customer having the right to return the product within specified periods and guidelines for a variety of reasons, including but not limited to, pending expiration dates. Provisions are made at the time of sale based upon tracked historical experience, by customer in some cases. The Company estimates its sales returns reserve based on a historical percentage of returns to sales utilizing a twelve month look back period. One-time historical factors or pending new developments that would impact the expected level of returns are taken into account to determine the appropriate reserve estimate at each balance sheet date.
     As part of the evaluation of the balance required, the Company considers actual returns to date that are in process, the expected impact of any product recalls and the wholesaler’s inventory information to assess the magnitude of unconsumed product that may result in a sales return to the Company in the future. The sales returns level can be impacted by factors such as overall market demand and market competition and availability for substitute products which can increase or decrease the end-user pull through for sales of the Company’s products and ultimately impact the level of sales returns. Actual returns experience and trends are factored into the Company’s estimates each quarter as market conditions change.
NOTE C — STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (SFAS 123(R)), applying the modified prospective method. Prior to the adoption of SFAS 123(R), the Company applied the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its stock-based awards, and accordingly, recognized no compensation cost for its stock plans other than for its restricted stock awards.
Under the modified prospective method, SFAS 123(R) applies to new awards and to awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the first six months of 2007 includes the portion vesting during the period for (1) all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model.
Stock option compensation expense of $619,000 and $1,509,000 was recognized during the three and six-month periods ended June 30, 2007. Stock option compensation expense of $498,000 and $701,000 was recognized during the three and six month periods ended June 30, 2006, of which $111,000 and $290,000 related to existing stock options granted prior to January 1, 2006 and $387,000 and $411,000 related to stock options granted during the three and six month periods ended June 30, 2006. For awards issued prior to January 1, 2006, the Company used the multiple award method for allocating the compensation cost to each period. For awards issued on or after January 1, 2006, concurrent with the adoption of SFAS 123(R), the Company has elected to use the single-award method for allocating the compensation cost to each period.
As of June 30, 2007, the total amount of unrecognized compensation cost related to nonvested stock options was $3,910,000 which is expected to be recognized as expense over a weighted-average period of 2.3 years.
The weighted-average 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:

8


 

                 
    THREE MONTHS   THREE MONTHS
    ENDED   ENDED
    JUNE 30, 2007   JUNE 30, 2006
    (SFAS 123(R))   (SFAS 123 (R))
     
Expected Volatility
    45 %     45 %
Expected Life (in years)
    4.0       3.6  
Risk-free interest rate
    4.8 %     5.0 %
Dividend yield
           
Fair value per stock option
  $ 2.72     $ 1.91  
Forfeiture Rate
    10 %     10 %
A summary of stock based compensation activity within the Company’s stock-based compensation plans for the six-month period ended June 30, 2007 is as follows:
                                 
                    Weighted Average        
    Number of     Weighted     Remaining        
    Shares     Average     Contractual Term     Aggregate  
    (in thousands)     Exercise Price     (Years)     Intrinsic Value  
 
Outstanding at January 1, 2007
    3,155     $ 3.22                  
Granted
    2,115     $ 6.29                  
Exercised
    (168 )   $ 3.18                  
Forfeited
    (48 )   $ 5.27                  
 
Outstanding at June 30, 2007
    5,054     $ 4.49       3.3     $ 12,632  
 
Exercisable at June 30, 2007
    2,565     $ 3.21       2.3     $ 9,684  
 
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 end of the period and the exercise price of the stock options. The total intrinsic value of stock options exercised during the three and six-month periods ended June 30, 2007 was $306,000 and $545,000, respectively. As a result of the stock options exercised, the Company recorded cash received and additional paid-in-capital of $256,000 and $532,000 during the three and six-month periods ended June 30, 2007.
The Company also grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Company’s common stock on the day of grant and the total value of the award is recognized as expense ratably over the vesting period of the employees receiving the grants. The Company has not granted restricted stock awards during 2007. As of June 30, 2007, the total amount of unrecognized compensation expense related to nonvested restricted stock awards was $810,000. The Company recognized compensation expense of $147,000 and $368,000 during the three and six-month periods ended June 30 2007, related to outstanding restricted stock awards. The Company recognized compensation expense of $147,000 and $277,000 during the three and six-month periods ended June 30, 2006, respectively, related to outstanding restricted stock awards.
The following is a summary of nonvested restricted stock activity:
                       
    Number of Shares     Weighted Average  
    (in thousands)     Grant Date Fair Value  
 
Nonvested at December 31, 2006
    350     $ 5.05  
Granted
           
Vested
    (175 )   $ 5.05  
Canceled
           
 
Nonvested at June 30, 2007
    175     $ 5.05  
 

9


 

NOTE D — REVENUE RECOGNITION
     The Company recognizes product sales for its ophthalmic and hospital drugs & injectables business segments upon the shipment of goods or upon the delivery of goods, depending on the sales terms. Revenue is recognized when all obligations of the Company have been fulfilled and collection of the related receivable is probable.
     The contract services segment, which produces products for third party customers based upon their specifications and at pre-determined prices, also recognizes sales upon the shipment of goods or upon delivery of the product or service as appropriate. Revenue is recognized when all obligations of the Company have been fulfilled and collection of the related receivable is probable.
     Provision for estimated doubtful accounts, chargebacks, rebates, discounts and product returns is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
NOTE E — ACCOUNTS RECEIVABLE ALLOWANCES
     The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for doubtful accounts, product returns, chargebacks, rebates and discounts given to customers. This is a natural circumstance of the pharmaceutical industry and not specific to the Company and inherently lengthens the collection process. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the respective terms with end-user customers (which in turn depends on which end-user customer, with different pricing arrangements might be entitled to a particular deduction). This process can lead to “partial payments” against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.
     The provisions for the following customer reserves are reflected in the accompanying financial statements as reductions of revenues in the income statement with the exception of the allowance for doubtful accounts which is reflected as part of selling, general and administrative expense. The ending reserve amounts are included in the net trade accounts receivable and customer accrued liabilities in the balance sheet.
     Net trade accounts receivable consists of the following (in thousands):
                 
    JUNE 30,     DECEMBER 31,  
    2007     2006  
Gross Accounts Receivable
  $ 14,453     $ 15,827  
Less:
               
Allowance for Doubtful Accounts
    (1 )     (3 )
Returns Reserve
    (1,697 )     (2,437 )
Discount and Allowances Reserve
    (310 )     (236 )
Chargeback and Rebates Reserves
    (10,458 )     (8,370 )
 
           
Net Trade Accounts Receivable
  $ 1,987     $ 4,781  
 
           
     For the three-month periods ended June 30, 2007 and 2006, the Company recorded chargeback and rebate expense of $8,905,000 and $8,100,000, respectively. This increase was primarily due to increased sales to wholesalers in 2007. For the six-month periods ended June 30, 2007 and 2006, the Company recorded chargeback and rebate expense of $15,690,000 and $11,743,000, respectively. This increase was primarily due to increased sales to wholesalers.
     For the three-month periods ended June 30, 2007 and 2006, the Company recorded a provision for product returns of $(136,000) and $760,000, respectively. For the six-month periods ended June 30, 2007 and 2006, the Company recorded a provision for product returns of $490,000 and $1,607,000, respectively. The decrease in the provision was to recognize significantly improved customer returns experience in the period.

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     For the three-month periods ended June 30, 2007 and 2006, the Company recorded a net benefit for doubtful accounts of $8,000 and $21,000, respectively. For the six-month periods ended June 30, 2007 and 2006, the Company recorded a net benefit for doubtful accounts of $7,000 and $88,000, respectively.
     For the three-month periods ended June 30, 2007 and 2006, the Company recorded a provision for cash discounts of $328,000 and $362,000, respectively. For the six-month periods ended June 30, 2007 and 2006, the Company recorded a provision for cash discounts of $607,000 and $952,000, respectively. This decrease primarily related to a cash discount for a large sale of the Company’s antidote products in the March 2006 period.
NOTE F — INVENTORIES
     The components of inventories are as follows (in thousands):
                 
    JUNE 30,     DECEMBER 31,  
    2007     2006  
Finished goods
  $ 3,429     $ 2,923  
Work in process
    1,663       1,293  
Raw materials and supplies
    10,805       7,518  
 
           
 
  $ 15,897     $ 11,734  
 
           
     Inventory at June 30, 2007 and December 31, 2006 is reported net of reserves for slow-moving, unsalable and obsolete items of $648,000 and $510,000, respectively, primarily related to finished goods. For the three-month periods ended June 30, 2007 and 2006, the Company recorded a provision of $71,000 and $(33,000), respectively. For the six-month periods ended June 30, 2007 and 2006, the Company recorded a provision of $239,000 and $200,000, respectively.
NOTE G — PROPERTY, PLANT AND EQUIPMENT
     Property, plant and equipment consists of the following (in thousands):
                 
    JUNE 30,     DECEMBER 31,  
    2007     2006  
Land
  $ 396     $ 396  
Buildings and leasehold improvements
    18,089       18,071  
Furniture and equipment
    38,269       37,826  
Automobiles
    55       55  
 
           
Sub-total
    56,809       56,348  
Accumulated depreciation
    (30,148 )     (28,637 )
 
           
 
    26,661       27,711  
Construction in progress
    6,295       5,775  
 
           
Property, Plant, & Equipment, net
  $ 32,956     $ 33,486  
 
           
     Construction in progress primarily represents capital expenditures related to the Company’s lyophilization (freeze-dry) project. Future costs are estimated to be approximately $100,000. The Company is awaiting final review and a successful Pre-Approval Inspection (“PAI”) by the U.S. Food and Drug Administration (“FDA”) before this equipment can be placed into commercial production. The Company anticipates a successful inspection and placing the lyophilization equipment in service in the second half of 2007, however, the outcome of an FDA inspection cannot be determined ahead of time. There can be no assurance the Company will realize the anticipated benefits from its investment into lyophilization capability and, if not, material impairment charges may be required.
     NOTE H — FINANCING ARRANGEMENTS

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     The Company’s long-term debt consists of (in thousands):
                 
    JUNE 30,     DECEMBER 31,  
    2007     2006  
Mortgages payable
  $ 408     $ 602  
Less current installments of debt
    (408 )     (394 )
 
           
Long-term debt
  $     $ 208  
 
           
     On September 30, 2005, the Company renewed its credit agreement (the “Credit Facility”) with LaSalle Bank National Association (“LaSalle Bank”). The renewal extended the existing Credit Facility until September 30, 2008 and increased the Revolving Commitment amount (the “Revolver”) from $5,000,000 to $10,000,000, as well as made modifications of prior existing covenants and the addition of a tangible net worth financial covenant. The borrowing rate was reduced to the LaSalle Bank prime rate (8.25% at June 30, 2007) plus 0.50%. On June 30, 2007, the Company had $8,057,000 of undrawn availability under the Credit Facility which is based on its level of accounts receivable and inventory and certain equipment as of June 30, 2007. There was no borrowing against the Revolver at June 30, 2007.
     On August 8, 2007, the Company entered into an Amendment to Credit Agreement with LaSalle Bank (the “Amendment”). Among other things, the Amendment added certain financial covenants and adjusted the definitions EBITDA, Borrowing Base and Revolving Commitment Amount. The Amendment also includes the option, subject to additional underwriting review, to increase the maximum borrowings under the Revolver to $20 million over the life of the Credit Facility, which expires in September 2008. The description of the Amendment herein is only a summary and is qualified in its entirety by the full text of such Amendment, which is filed as an exhibit hereto and is incorporated by reference herein.
     In 2003, the Company issued subordinated promissory notes in the aggregate principal amount of $2,767,000 (the “2003 Subordinated Notes”) along with warrants to purchase 276,714 shares of common stock at an exercise price of $1.10 per share. The Company retired the 2003 Subordinated Notes with cash payments totaling $3,288,000 on March 20, 2006. The 2003 Subordinated Notes warrants to purchase 276,714 shares of common stock were exercised on a cashless basis during 2006. The net common stock issuance was 199,412 shares.
     In 2001, the Company entered into a $5,000,000 convertible subordinated debt agreement, which included a $3,000,000 Tranche A note (“Tranche A Note”) and a $2,000,000 Tranche B note (“Tranche B Note”), (collectively, the “Convertible Note Agreement”). Under the terms of the Convertible Note Agreement, both the Tranche A Note and the Tranche B Note were due on December 20, 2006 and were issued with detachable warrants (the “Tranche A Warrants” and the “Tranche B Warrants”) to purchase shares of common stock.
     The convertible feature of the Convertible Note Agreement, as amended, allowed for conversion of the subordinated debt plus interest into the Company’s common stock, at a price of $2.28 per share of common stock for the Tranche A Note and $1.80 per share of common stock for the Tranche B Note.
     The Company negotiated an early settlement of the Tranche A Note and the Tranche B Note in March 2006. The associated principal and accumulated interest of approximately $7,298,000 was retired by conversion into 3,540,281 shares of the Company’s common stock on March 31, 2006. A debt retirement fee of approximately $391,000 was paid as an inducement to retire these notes prior to the original maturity date of December 20, 2006. The detachable warrants to purchase 1,667,000 shares of common stock were exercised on a cashless basis on November 15, 2006 and the associated net common stock issuance was 807,168 shares.
     In June 1998, the Company entered into a $3,000,000 mortgage agreement with Standard Mortgage Investors, LLC of which there were outstanding borrowings of $408,000 and $602,000 at June 30, 2007 and December 31, 2006, respectively. The principal balance is payable over 10 years, with the final payment due in June 2008. The mortgage note bears a fixed interest rate of 7.375% and is secured by the real property located in Decatur, Illinois.

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NOTE I — COMMON STOCK ISSUANCE
     On March 8, 2006 the Company issued 4,311,669 shares of its common stock in a private placement with various investors at a price of $4.50 per share which included warrants to purchase 1,509,088 additional shares of common stock. The warrants are exercisable for a five year period at an exercise price of $5.40 per share and may be exercised by cash payment of the exercise price or by means of a cashless exercise. The aggregate offering price of the private placement was approximately $19,402,000 and the net proceeds to the Company, after payment of approximately $1,324,000 of commissions and expenses, was approximately $18,078,000. The net proceeds of $18,078,000 were allocated based on the relative fair market values of the common stock and warrants with $16,257,000 allocated to the common stock and $1,821,000 allocated to the warrants.
NOTE J — EARNINGS PER COMMON SHARE
     Basic net income (loss) per common share is based upon weighted average common shares outstanding. Diluted net income (loss) per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect of convertible preferred stock, stock options, warrants and convertible debt using the treasury stock and if converted methods. However, for the three-month periods ended June 30, 2007 and 2006 and the six-month period ended June 30, 2007, the assumed exercise or conversion of any of these securities would have been anti-dilutive; and, accordingly, the diluted loss per share equals the basic loss per share for that period. A reconciliation of the earnings per share data from a basic to a fully diluted basis is detailed below:
                                 
    THREE MONTHS ENDED     SIX MONTHS ENDED  
    JUNE 30,     JUNE 30,     JUNE 30,     JUNE 30,  
Fully Diluted Earnings Per Share Data   2007     2006     2007     2006  
 
Net income (loss) available to common stockholders — basic
  $ (4,634 )   $ (2,197 )   $ (9,477 )   $ 603  
Dividend adjustment for dilutive preferred stock
                       
 
                       
Adjusted earnings — fully diluted basis
  $ (4,634 )   $ (2,197 )   $ (9,477 )   $ 603  
 
                       
 
                               
Basic Shares
    86,982       74,853       86,619       68,321  
Warrants
                      6,610  
Options
                      1,550  
 
                       
Fully Diluted Shares
    86,982       74,853       86,619       76,481  
 
                       
     The number of such shares as of June 30, 2007 and June 30, 2006 subject to warrants, convertible debt, and convertible preferred stock was 525,000 and 13,106,000, respectively. The number of such shares as of June 30, 2007 and June 30, 2006 subject to stock options was 5,054,000 and 3,771,000, respectively.
NOTE K — INDUSTRY SEGMENT INFORMATION
     The Company classifies its operations into three business segments: ophthalmic, hospital drugs & injectables and contract services. The ophthalmic segment manufactures, markets and distributes diagnostic and therapeutic pharmaceuticals. The hospital drugs & injectables segment manufactures, markets and distributes drugs and injectable pharmaceuticals, primarily in niche markets. The contract services segment manufactures products for third party pharmaceutical and biotechnology customers based on their specifications. Selected financial information by industry segment is presented below (in thousands).

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    THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,  
    2007     2006     2007     2006  
REVENUES
                               
Ophthalmic
  $ 3,893     $ 5,703     $ 8,110     $ 9,510  
Hospital Drugs & Injectables
    5,178       5,104       10,621       29,001  
Contract Services
    2,567       1,668       4,642       3,694  
 
                       
Total revenues
  $ 11,638     $ 12,475     $ 23,373     $ 42,205  
 
                       
GROSS PROFIT
                               
Ophthalmic
  $ 648     $ 2,287     $ 1,322     $ 3,285  
Hospital Drugs & Injectables
    1,468       2,190       2,986       12,367  
Contract Services
    770       478       1,067       1,036  
 
                       
Total gross profit
    2,886       4,955       5,375       16,688  
Operating expenses
    7,689       7,140       15,280       14,020  
 
                       
Operating (loss)/income
    (4,803 )     (2,185 )     (9,905 )     2,668  
Interest & Other income (expense)
    170       222       429       (1,114 )
Debt Retirement expense
                      (391 )
 
                       
(Loss)/Income before income taxes
  $ (4,633 )   $ (1,963 )   $ (9,476 )   $ 1,163  
 
                       
     The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. Intersegment activity at the gross profit level is minimal. The Company does not identify assets by segment for internal purposes, as certain manufacturing and warehouse facilities support more than one segment.
NOTE L — COMMITMENTS AND CONTINGENCIES
     On March 29, 2007, the Company received an FDA Warning Letter (the “Warning Letter”) following a routine inspection of its Decatur, Illinois manufacturing facility conducted from September 12 through September 29, 2006. The Warning Letter cited deviations from current Good Manufacturing Practice (“cGMP”) Regulations. According to the Warning Letter, failure to promptly correct the violations cited in the Warning Letter may result in legal action without further notice, including, without limitation, seizure and injunction. While the Warning Letter has not interrupted or delayed the manufacture and distribution of the Company’s Decatur products currently approved by the FDA, the FDA may withhold approval of pending new drug applications delisting the Decatur manufacturing facility as a manufacturer until the violations are corrected. The Warning Letter states that a reinspection may be necessary.
     The Company hand-delivered its response to the Warning Letter within the 15 working days prescribed therein. This response clarified associated actions that had been initiated and completed prior and subsequent to the receipt of the Warning Letter. Remaining action items were completed during the second quarter of 2007 and a cGMP inspection of the Decatur facility by the FDA commenced July 23, 2007.
     The Warning Letter has delayed the PAI process and the Company’s in-service date for its lyophilizers and relaunch of IC-Green. The impact on revenues in the first half of 2007 due to lack of IC-Green sales was approximately $2,500,000 in reduced sales. The Company is working with a contract manufacturer for IC-Green until the Decatur lyophilization operation receives approval. The Company believes that the FDA inspection which commenced July 23, 2007 will also cover the PAI of its lyophilization facility. The commissioning of the lyophilization facility is contingent upon a successful PAI and is anticipated to occur in the second half of 2007.
     The Company recorded product warranty expense of zero for the three months ended June 30, 2007 and June 30, 2006. For the six months ended June 30, 2007 and June 30, 2006, the Company recorded product warranty expense of zero and $1,159,000, respectively, and recognized the corresponding long-term liability for its obligation pertaining to the sale of two injectable antidotes to the United States Department of Health and Human Services (“HHS”). This obligation provides that the Company will guarantee the stability of the injectable antidotes to HHS for a period of ten years from the shipment date. In the event either of these two products does not retain its stability during this ten year period, the Company is obligated to replace the product at no cost to HHS. Our supplier, Hameln Pharmaceuticals, will also share this cost if we do not meet the DTPA stability requirement. If the ongoing product testing confirms the ten-year stability for DTPA we will not incur a replacement cost and this reserve will be eliminated with a corresponding reduction to cost of sales after the ten-year period.

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     The Company is a party in legal proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, management of the Company at this time does not believe that such proceedings will have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.
NOTE M — CUSTOMER AND SUPPLIER CONCENTRATION
     AmerisourceBergen Health Corporation (“Amerisource”), Cardinal Health, Inc. (“Cardinal”) and McKesson Drug Company (“McKesson”) are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. These three customers accounted for 69% and 74% of the Company’s gross revenues and 55% and 58% of net revenues for the three months ended June 30, 2007 and 2006, respectively. They accounted for approximately 78% and 82% of the gross accounts receivable balances as of June 30, 2007 and 2006, respectively. These three customers accounted for 73% and 40% of the Company’s gross revenues and 52% and 24% of net revenues for the six months ended June 30, 2007 and 2006, respectively. The Company’s major customer for the six month period ended June 30, 2006 was the United States Department of Health and Human Services (“HHS”) which purchased $21,962,000 of the Company’s injectable antidote products during the first quarter of 2006.
     If sales to any of Amerisource, Cardinal or McKesson were to diminish or cease, the Company believes that the end users of its products would find little difficulty obtaining the Company’s products either directly from the Company or from another distributor.
     Colbert Packaging Corporation accounted for 11% of the Company’s purchases in the three months ended June 30, 2007 while no supplier of products accounted for more than 10% of the Company’s purchases in the three months ended June 30, 2006. For the six months ended June 30, 2007, Alcan Inc. accounted for 14% of the Company’s purchases. Hameln Pharmaceuticals GmbH accounted for 20% of the Company’s purchases for the six months ended June 30, 2006.
     The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical products for its own use and for third parties with which it has contracted. The principal components of the Company’s products are active and inactive pharmaceutical ingredients and certain packaging materials. Certain of these ingredients and components are available from only a single source and, in the case of certain of the Company’s Abbreviated New Drug Applications (“ANDAs”) and New Drug Applications (“NDAs”), only one supplier of raw materials has been identified. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay the Company’s development and marketing efforts. If for any reason the Company is unable to obtain sufficient quantities of any of the raw materials or components required to produce and package its products, it may not be able to manufacture its products as planned, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
NOTE N — RECENT ACCOUNTING PRONOUNCEMENTS
     On January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a two-step process for the financial statement measurement and recognition of a tax position taken or expected to be taken in a tax return. The first step involves the determination of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will be sustained upon examination, based on the technical merits of the position. The second step requires that any tax position that meets the more-likely-than-not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on the accounting for related interest and penalties, accounting in interim periods, financial statement classification and disclosure.
     The Company has determined it does not have material uncertain tax positions or unrecognized tax benefits and there is no material impact on its financial position, results of operations or cash flows. The adoption of FIN 48 by the Company had no impact on its opening balance of retained earnings. The Company classifies interest on tax settlements as a component of interest expense and penalties on tax settlements as a component of administrative expense in its financial statements.

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     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another U.S. GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard will also require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 is not expected to have a material impact on the Company’s results of operations or financial position.
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value, which are currently not required to be measured at fair value. Under SFAS 159, an entity may, at specified election dates, choose to measure items at fair value on an instrument-by-instrument basis. Entities would be required to report a cumulative adjustment to retained earnings for unrealized gains and losses at the adoption date, and to recognize changes in fair value in earnings for any items for which the fair value option has been elected. SFAS 159 will be effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company’s results of operations or financial position.

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Item 2.
AKORN, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS
     Certain statements in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. When used in this document, the words “anticipate,” “believe,” “estimate” and “expect” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statements, including statements regarding the intent, belief or expectations of Akorn or its management are not guarantees of future performance. These statements involve risks and uncertainties and actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to:
    Our ability to comply with all of the requirements of the FDA, including current Good Manufacturing Practices regulations;
 
    Our ability to resolve our Food and Drug Administration compliance issues at our Decatur, Illinois facilities;
 
    Our ability to obtain regulatory approvals of, commence operations at and obtain business for our new lyophilization facility;
 
    Our ability to generate cash from operations sufficient to meet our working capital requirements;
 
    The effects of federal, state and other governmental regulation on our business;
 
    Our success in developing, manufacturing, acquiring and marketing new products;
 
    The success of our strategic partnerships for the development and marketing of new products;
 
    Our ability to bring new products to market and the effects of sales of such products on our financial results;
 
    The effects of competition from generic pharmaceuticals and from other pharmaceutical companies;
 
    Availability of raw materials needed to produce our products; and
 
    Other factors referred to in this Form 10-Q, our Form 10-K and our other Securities and Exchange Commission (“SEC”) filings.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO 2006
     The following table sets forth, for the periods indicated, revenues by segment, excluding intersegment sales (in thousands):
                 
    THREE MONTHS ENDED JUNE 30,  
    2007     2006  
Ophthalmic segment
  $ 3,893     $ 5,703  
Hospital Drugs & Injectables segment
    5,178       5,104  
Contract Services segment
    2,567       1,668  
 
           
Total revenues
  $ 11,638     $ 12,475  
 
           
     Consolidated revenues decreased by $837,000 or 6.7% in the quarter ended June 30, 2007 compared to the same period in 2006 mainly due to the decrease of ophthalmic revenues. Ophthalmic segment revenues decreased by $1,810,000 or 31.7% due to lower sales of diagnostic ophthalmic products. Ophthalmic revenues were also affected by customer backorders for IC-Green, which totaled

17


 

$2,467,000 as of June 30, 2007. Hospital Drugs & Injectables segment revenues increased by $74,000 or 1.4% mainly due to the increased sales of antidote products in 2007. Our contract services segment revenues increased by $899,000 or 53.9% due to orders from new customers.
     Consolidated gross profit was $2,886,000 or 24.8 % for the second quarter of 2007 as compared to a gross profit of $4,955,000 or 39.7% in the same period a year ago mainly due to the sales volume variation matters for each segment discussed above combined with increased unfavorable manufacturing variances at our Decatur facility in the second quarter of 2007. We continue to seek margin enhancement opportunities through our product offerings as well as through efficiencies and cost reductions at our operating facilities.
     Selling, general and administrative (“SG&A”) expenses increased by $520,000 or 11.1%, during the quarter ended June 30, 2007 as compared to the same period in 2006. The key components of this increase in 2007 were additional Field Sales personnel of $176,000, increased travel and entertainment expense of $206,000, increased SFAS 123(R) stock option compensation expense of $120,000, FDA facility fees of $118,000, partially offset by a decrease in management bonus expense of $300,000.
     Research and development (“R&D”) expense increased $40,000 or 1.9% in the quarter, to $2,161,000 from $2,121,000 for the same period in 2006, mainly due to a reduction in testing and development of our lyophilization processes which was partially offset by an increase in personnel and spending for new product development.
     Interest income for the second quarter of 2007 was $169,000 versus interest income of $234,000 for the same period in 2006 due to lower average balances on short-term investments.
     For the three month period ended June 30, 2007, there was no federal income tax provision. A state tax provision of $1,000 was recorded based on the timing of minimum state tax payments. There was no federal or state tax provision in the same 2006 period.
     We reported a net loss of $4,634,000 for the three months ended June 30, 2007, versus a net loss of $1,963,000 for the same period in 2006 mainly due to the decreased sales volumes, unfavorable plant manufacturing variances and higher SG&A expenses discussed above.
SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO 2006
     The following table sets forth, for the periods indicated, revenues by segment, excluding intersegment sales (in thousands):
                 
    SIX MONTHS ENDED JUNE 30,  
    2006     2005  
Ophthalmic segment
  $ 8,110     $ 9,510  
Hospital Drugs & Injectables segment
    10,621       29,001  
Contract Services segment
    4,642       3,694  
 
           
Total revenues
  $ 23,373     $ 42,205  
 
           
     Consolidated revenues decreased $18,832,000 or 44.6% for the six months ended June 30, 2007 compared to the same period in 2006, mainly due to the $21,962,000 of first quarter sales of DTPA to HHS in 2006. Ophthalmic segment revenues decreased $1,400,000 or 14.7%, primarily due to customer backorders for IC-Green, which totaled $2,467,000 as of June 30, 2007. Hospital Drugs & Injectables segment revenues decreased by $18,380,000 or 63.4% mainly due to the 2006 DTPA sales as mentioned above which was partially offset by increased sales of anesthetic products. Our contract services segment revenues increased by $948,000 or 25.7% mainly due to orders from new customers.
     Year-to-date consolidated gross profit was $5,375,000 or 23.0% for 2007 as compared to a gross profit of $16,688,000 or 39.5% for the same period a year ago mainly due to the sales volume variation matters for each segment discussed above and unfavorable plant variances at our Decatur facility. We continue to seek margin enhancement opportunities through our product offerings as well as through cost reductions at our operating facilities.
     SG&A expenses increased by $1,278,000 or 14.0%, for the year to date period ended June 30, 2007 as compared to the same period in 2006. The key components of this increase in 2007 were SFAS 123(R) stock option compensation expense of $808,000,

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additional Field Sales personnel of $321,000 and increased related travel and entertainment expense of $109,000, increased FDA facility fees of $247,000, increased administrative travel and entertainment expense of $217,000, and increased restricted stock compensation expense of $91,000, offset by a decrease in management bonus expense of $851,000.
     R&D expense increased $6,000 or 0.1% for the six months ended June 30, 2007, to $4,172,000 from $4,166,000 for the same period in 2006.
     Interest income for the six month period ended June 30, 2007 was $428,000 versus interest expense of $1,085,000 for the same period in 2006 as we retired our subordinated and convertible debt instruments in early 2006 and invested our cash proceeds from our operations and the March 2006 common stock and warrant offering in short-term interest bearing certificates of deposit.
     For the six-month period ended June 30, 2007, there was no federal income tax provision. A state tax provision of $1,000 was recorded based on the timing of minimum state tax payments. There was no federal or state tax provision for the same period in 2006.
     We reported a net loss of $9,477,000 for the six months ended June 30, 2007, versus net income of $1,163,000 for the same period in 2006 mainly due to the decreased sales volumes, unfavorable plant manufacturing variances and higher SG&A expenses discussed above.
FINANCIAL CONDITION AND LIQUIDITY
Overview
     During the six-month period ended June 30, 2007, we used $10,416,000 in cash from operations, primarily due to the $9,477,000 net loss, a $4,163,000 build in inventories, primarily materials for new products, and reduced compensation, royalty, and other liabilities of $3,198,000. This was partially offset by non-cash expenses of $4,065,000 for the period and lower receivables of $2,794,000. Investing activities generated a $1,031,000 reduction in cash flow mainly due to capital expenditures for production equipment. Financing activities provided $2,514,000 in cash, primarily due to the $2,492,000 in proceeds from warrant exercises.
     During the six-month period ended June 30, 2006, we generated $2,029,000 in cash provided from operations, primarily due to $1,163,000 in net income generated by the increase in sales, a $2,816,000 change in working capital items mainly due to lower receivables levels with wholesalers and non-cash expenses of $3,682,000 for the period. Investing activities generated a $1,388,000 reduction in cash flow mainly due to capital expenditures for production equipment. Financing activities provided $16,349,000 in cash, due to the $18,078,000 net proceeds from the March 2006 common stock and warrants offering (see Item 1. Financial Statements, Note I – Common Stock Issuance), offset by $2,917,000 repayment of long-term debt. In addition, on March 31, 2006 $7,298,000 in principal and accrued interest on the convertible notes was retired by conversion into 3,540,281 shares of our common stock (see Item 1. Financial Statements, Note H – Financing Arrangements).
     As of June 30, 2007, we had $12,885,000 in cash and $8,057,000 of undrawn availability under our Credit Facility with LaSalle Bank which is based on our level of accounts receivable and inventory and certain equipment. There was no borrowing against the Revolver at June 30, 2007.
     On August 8, 2007, we entered into an Amendment to Credit Agreement with LaSalle Bank (the “Amendment”). Among other things, the Amendment added certain financial covenants and adjusted the definitions EBITDA, Borrowing Base and Revolving Commitment Amount. The Amendment also includes the option, subject to additional underwriting review, to increase the maximum borrowings under the Revolver to $20 million over the life of the Credit Facility, which expires in September 2008. The description of the Amendment herein is only a summary and is qualified in its entirety by the full text of such Amendment, which is filed as an exhibit hereto and is incorporated by reference herein.
Facility Expansion
     We are in the process of completing an expansion of our Decatur, Illinois manufacturing facility to add capacity to provide lyophilization manufacturing services. As of June 30, 2007, we had spent approximately $22,558,000 on the lyophilization expansion and anticipate the need to spend approximately $100,000 of additional funds to complete the expansion. The additional spending will be focused on lyophilization validation as the major capital equipment items are currently in place. In December 2006, we placed the sterile solutions portion of this operation in service which augments our existing production capacities. The remaining $5,321,000 of

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construction in progress, which is specific to lyophilization (freeze-dry) operations, is awaiting final review and a successful Pre-Approval Inspection (“PAI”) by the U.S. Food and Drug Administration (“FDA”) for us to place this equipment into commercial production.
     We are working toward the development of an internal ANDA lyophilized product pipeline and expect manufacturing capabilities for lyophilized products to be in place during the second half of 2007. However, there is no guarantee that we will be successful in completing development of lyophilization capability, or that other intervening events will not occur that reduce or eliminate the anticipated benefits from such capability. For instance, the market for lyophilized products could significantly diminish or be eliminated, or new technological advances could render the lyophilization process obsolete, prior to our entry into the market. There can be no assurance that we will realize the anticipated benefits from our significant investment into lyophilization capability at our Decatur manufacturing facility, and our failure to do so could significantly limit our ability to grow our business in the future.
     Our ability to successfully remediate the issues raised in the Warning Letter will impact the start date for commissioning the lyophilization facility. This will not occur until after a cGMP inspection and will also be contingent upon a successful PAI to be conducted by the FDA. Manufacturing capabilities for lyophilized products are subsequently projected to be in service during the second half of 2007.
CRITICAL ACCOUNTING POLICIES
     The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Item 1. Financial Statements, Note B – Summary of Significant Accounting Policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2006. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2006. There have been no significant changes in the application of the critical accounting policies since December 31, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
     On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a two-step process for the financial statement measurement and recognition of a tax position taken or expected to be taken in a tax return. The first step involves the determination of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will be sustained upon examination, based on the technical merits of the position. The second step requires that any tax position that meets the more-likely-than-not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on the accounting for related interest and penalties, accounting in interim periods, financial statement classification and disclosure.
     We have determined we do not have material uncertain tax positions or unrecognized tax benefits and there is no material impact on our financial position, results of operations or cash flows. The adoption of FIN 48 had no impact on our opening balance of retained earnings. We classify interest on tax settlements as a component of interest expense and penalties on tax settlements as a component of administrative expense in our financial statements.
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another U.S. GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard will also require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 is not expected to have a material impact on our results of operations or financial position.
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value, which are currently not required to be measured at fair value. Under SFAS 159, an entity may, at specified election dates, choose to measure

20


 

items at fair value on an instrument-by-instrument basis. Entities would be required to report a cumulative adjustment to retained earnings for unrealized gains and losses at the adoption date, and to recognize changes in fair value in earnings for any items for which the fair value option has been elected. SFAS 159 will be effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on our results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     We are no longer affected by changes in market interest rates as our variable interest rate debt has been paid off (See Item 1. Financial Statements, Note H – Financing Arrangements). At June 30, 2007, our only outstanding debt is the mortgage on our Decatur property which is set at a fixed rate of 7.375%.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
     An evaluation was performed, under the supervision and with the participation of Company management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including cost limitations, judgments used in decision making, assumptions regarding the likelihood of future events, soundness of internal controls, fraud, the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable, and not absolute, assurance of achieving their control objectives. Based on that evaluation, management, including the CEO and CFO, has concluded that, as of June 30, 2007, the Company’s disclosure controls and procedures were effective in all material respects at the reasonable assurance level to ensure that information required to be disclosed in reports that the Company files or submits under the Act is recorded, processed, summarized and timely reported in accordance with the rules and forms of the SEC.
Changes in Internal Control Over Financial Reporting
     In the second fiscal quarter ended June 30, 2007, there had been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     We are a party in legal proceedings and potential claims arising in the ordinary course of our business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, we at this time do not believe that such proceedings will have a material adverse impact on the financial condition, results of operations, or cash flows of us.
ITEM 1A. RISK FACTORS
     There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Form 10-K filed March 16, 2007.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     On August 23, 2005, we filed a Registration Statement on Form S-3 (File No. 333-127794) (the “S-3”) with the SEC, which was declared effective on September 7, 2005. Pursuant to Rule 429 under the Securities Act of 1933, the prospectus included in the S-3 is a combined prospectus and relates to the previously filed Registration Statement on Form S-1 (File No. 333-119168) (the “S-1”), as to which the S-3 constitutes Post-Effective Amendment No. 3. Such Post-Effective Amendment became effective concurrently with the effectiveness of the S-3. The S-3 relates to the resale of 64,964,680 shares, no par value per share, of our common stock by the selling stockholders identified in the S-3, which have been issued or reserved for issuance upon the conversion or exercise of presently outstanding shares of our Series A 6.0% Participating Convertible Preferred Stock (“Series A Preferred Stock”), shares of Series B 6.0% Participating Convertible Preferred Stock (“Series B Preferred Stock”), warrants and convertible notes, including shares estimated to be issuable in satisfaction of accrued and unpaid dividends and interest on shares of preferred stock and convertible notes, respectively. Of the 64,964,680 shares of our common stock registered under the S-3, 60,953,394 of such shares were registered under the S-1. The shares of common stock registered by the S-3 and the S-1 represent the number of shares that have been issued or are issuable upon the conversion or exercise of the Series A Preferred Stock, Series B Preferred Stock, warrants and convertible notes described in the Registration Statement, including shares estimated to be issuable in satisfaction of dividends accrued and unpaid through December 31, 2007 and interest accrued and unpaid through December 20, 2006 on such securities.
     With respect to the S-1, we estimated the aggregate offering price of the amount registered to be $182,246,053, which was derived from the average of the bid and asked prices of our common stock on September 17, 2004, as reported on the OTC Bulletin Board(R). With respect to the S-3, we estimated the aggregate offering price of the amount registered to be $10,870,585, which was derived from the average of the high and low prices of our common stock as reported on the American Stock Exchange on August 18, 2005. Such amounts were estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(h) under the Securities Act of 1933. As of June 30, 2007, we are aware of the sale of 9,812,012 shares of common stock by selling stockholders under the S-3 or the S-1. We do not know at what price such shares were sold, or how many shares of common stock will be sold in the future or at what price. We have not and will not receive any of the proceeds from the sale of the shares by the selling stockholders. The selling stockholders will receive all of the proceeds from the sale of the shares and will pay all underwriting discounts and selling commissions, if any, applicable to the sale of the shares. We will, in the ordinary course of business, receive proceeds from the issuance of shares upon exercise of the warrants described in the S-3 or the S-1, which we will use for working capital and other general corporate purposes.
     For the quarter ended June 30, 2007, we issued the following equity securities: (i) On April 2, 2007, a warrantholder exercised warrants to purchase 200,000 shares of our common stock at an exercise price of $0.75 per share in exchange for cash of $150,000, (ii) On June 20, 2007, a warrantholder exercised warrants to purchase 555,556 shares of our common stock at an exercise price of $3.50 per share in exchange for cash of $1,944,446, (iii) On June 29, 2007, a warrantholder exercised warrants to purchase 20,000 shares of our common stock at an exercise price of $0.75 per share in exchange for cash of $15,000. The issuance of the common stock upon exercise of the warrants described herein was exempt from registration requirements under the Securities Act pursuant to Section 4(2) thereof, because none of the transactions thereof involved a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     None.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2007 annual meeting of shareholders was held on May 24, 2007. At that meeting, the following proposals were approved:
1. The election of the following seven directors to our Board of Directors:
                 
Nominee   Votes “For”     Votes “Withheld”  
John N. Kapoor, Ph.D.
    74,126,928       538,002  
Arthur S. Przybyl
    74,136,039       528,891  
Jerry N. Ellis
    74,568,408       96,522  
Ronald M. Johnson
    74,483,019       181,911  
Jerry I. Treppel
    74,430,100       234,830  
Subhash Kapre, Ph.D.
    73,988,541       676,389  
Randall J. Wall
    74,570,608       94,322  
2. The ratification of the selection by the Audit Committee of the Board of Directors of BDO Seidman, LLP as our registered public accounting firm for the fiscal year ending December 31, 2007. A total of 74,615,440 votes were cast in favor of this proposal, 36,206 votes were cast against, and there were 13,284 abstentions.
ITEM 5. OTHER INFORMATION
     None.

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ITEM 6. EXHIBITS
Those exhibits marked with an asterisk (*) refer to exhibits filed herewith. The other exhibits are incorporated herein by reference, as indicated in the following list.
     
Exhibit No.   Description
(3.1)
  Restated Articles of Incorporation of Akorn, Inc. dated September 16, 2004, incorporated by reference to Exhibit 3.1 to Akorn, Inc.’s Registration Statement on Form S-1 filed on September 21, 2004.
 
   
(3.2)
  Amended and Restated By-laws of Akorn, Inc. incorporated by reference to Exhibit 3.2 to Akorn, Inc.’s Registration Statement on Form S-1 filed on June 14, 2005.
 
   
(3.3)
  Amendment to By-laws of Akorn, Inc. incorporated by reference to Exhibit 3.1 to the Akorn, Inc.’s report on Form 8-K filed on March 31, 2006.
 
   
(3.4)
  Amendment to Bylaws of Akorn, Inc., incorporated by reference to Exhibit 3.1 to Akorn, Inc.’s report on Form 8-K filed on December 14, 2006.
 
   
(3.5)
  Amendment to Bylaws of Akorn, Inc., incorporated by reference to Exhibit 3.1 to Akorn, Inc.’s report on Form 8-K filed on April 16, 2007.
 
   
(4.1)
  First Amendment dated October 7, 2003 to Registration Rights Agreement dated July 12, 2001 between Akorn, Inc. and The John N. Kapoor Trust dated 9/20/89, incorporated by reference to Exhibit 4.1 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.2)
  Form of Warrant Certificate, incorporated by reference to Exhibit 4.2 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.3)
  Form of Warrant Agreement dated October 7, 2003 between Akorn, Inc. and certain investors, incorporated by reference to Exhibit 4.3 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.4)
  Warrant Agreement dated October 7, 2003 between Akorn, Inc. and The John N. Kapoor Trust dated 9/20/89 issued with respect to New Credit Facility guaranty, incorporated by reference to Exhibit 4.4 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.5)
  Warrant Agreement dated October 7, 2003 between Akorn, Inc. and Arjun C. Waney issued with respect to New Credit Facility guaranty, incorporated by reference to Exhibit 4.5 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.6)
  Warrant Agreement dated October 7, 2003 between Akorn, Inc. and The John N. Kapoor Trust dated 9/20/89 issued with respect to the Notes, incorporated by reference to Exhibit 4.6 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.7)
  Warrant Agreement dated October 7, 2003 between Akorn, Inc. and Arjun C. Waney issued with respect to the Notes, incorporated by reference to Exhibit 4.7 to the Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.8)
  Warrant Agreement dated October 7, 2003 between Akorn, Inc. and Argent Fund Management Ltd. issued with respect to the Notes, incorporated by reference to Exhibit 4.8 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.9)
  Registration Rights Agreement dated October 7, 2003 among Akorn, Inc. and certain investors, incorporated by reference to Exhibit 4.9 to Akorn, Inc.’s report on Form 8-K filed on October 24, 2003.
 
   
(4.10)
  Form of Subscription Agreement between Akorn, Inc. and certain investors, incorporated by reference to Exhibit 4.1 to Akorn, Inc.’s report on Form 8-K filed on August 24, 2004.
 
   
(4.11)
  Form of Common Stock Purchase Warrant between Akorn, Inc. and certain investors, incorporated by reference to

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Exhibit No.   Description
 
  Exhibit 4.2 to Akorn, Inc.’s report on Form 8-K filed on August 24, 2004.
 
   
(4.12)
  Warrant Purchase and Registration Agreement dated June 18, 2003 between Akorn Inc. and AEG Partners LLC, incorporated by reference to Exhibit 4.1 to Akorn, Inc.’s report on Form 8-K filed on August 27, 2004.
 
   
(4.13)
  Stock Registration Rights Agreement dated November 15, 1990 between Akorn, Inc. and The John N. Kapoor Trust dated 9/20/89, incorporated by reference to Exhibit 4.12 to Akorn, Inc.’s Registration Statement on Form S-1 filed on September 21, 2004.
 
   
(4.14)
  Stock Purchase Agreement dated November 15, 1990 between Akorn, Inc. and The John N. Kapoor Trust dated 9/20/89, incorporated by reference to Exhibit 4.13 to Akorn, Inc.’s Registration Statement on Form S-1 filed on September 21, 2004.
 
   
(4.15)
  Form of Securities Purchase Agreement dated March 1, 2006 between Akorn, Inc. and certain investors, incorporated by reference to Exhibit 4.1 to Akorn Inc.’s report on Form 8-K filed March 7, 2006.
 
   
(4.16)
  Form of Warrant issued in connection with the Securities Purchase Agreement dated March 1, 2006, incorporated by reference to Exhibit 4.2 to Akorn, Inc.’s report on Form 8-K filed on March 7, 2006. (All warrants are dated March 8, 2006. Please see Exhibit 99.1 of Akorn, Inc.’s report on Form 8-K filed March 14, 2006, which is hereby incorporated by reference, for a schedule setting forth the other material details for each of the warrants.)
 
   
(4.17)
  Securities Purchase Agreement dated September 13, 2006, between Akorn, Inc. and Serum Institute of India, incorporated by reference to Exhibit 4.1 to Akorn Inc.’s report on Form 8-K filed September 14, 2006.
 
   
(10.1)
  2007 Management Bonus Objectives, incorporated by reference to Exhibit 10.1 to Akorn Inc.’s report on Form 8-K filed April 23, 2007.
 
   
(10.2)*
  Amendment to Credit Agreement dated August 8, 2007 between Akorn, Inc., LaSalle Bank, the financial institutions party thereto and Akorn (New Jersey), Inc.
 
   
(31.1)*
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
 
   
(31.2)*
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
 
   
(32.1)*
  Certification of Chief Executive Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002
 
   
(32.2)*
  Certification of Chief Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  AKORN, INC.
 
 
  /s/ JEFFREY A. WHITNELL    
      Jeffrey A. Whitnell   
      Sr. Vice President, Chief Financial Officer
    (Duly Authorized and Principal Financial Officer) 
 
 
Date:August 8, 2007

26

exv10w2
 

EXHIBIT 10.2
Execution Copy
AMENDMENT TO CREDIT AGREEMENT
     THIS AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is executed and delivered as of this 8th day of August 2007 among LASALLE BANK NATIONAL ASSOCIATION, as administrative agent (the “Administrative Agent”), the financial institutions party hereto (the “Lenders”), AKORN, INC., a Louisiana corporation (“Akorn”) and AKORN (NEW JERSEY), INC., an Illinois corporation (“Akorn New Jersey”).
W I T N E S S E T H :
     A. The Administrative Agent, Akorn, Akorn New Jersey and the Lenders entered into a Credit Agreement dated as of October 7, 2003 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Capitalized terms used but not defined herein shall have the meanings attributed to them in the Credit Agreement.
     B. The Companies have requested that the Administrative Agent and the Required Lenders consent to certain terms of the Credit Agreement, subject to the terms and conditions set forth herein.
     NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto hereby agree as follows:
     1. Amendment. Upon the Effective Date (as defined below), the Credit Agreement shall be amended as follows:
     (a) Borrowing Base. The definition of “Borrowing Base” set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
Borrowing Base means an amount equal to the total of (a) 80% of the unpaid amount (net of (i) such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion and (ii) liabilities and reserves for chargebacks, returns, rebates and discounts) of all Eligible Accounts plus (b) the lesser of (i) 65% of the value of all Eligible Inventory valued at the lower of cost or market or (ii) $7,500,000 plus (c) the Adjusted Forced Liquidation Value (net of such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion).
     (b) EBITDA. The definition of “EBITDA” set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
EBITDA means, for any period, Consolidated Net Income for such period plus (a) to the extent deducted in determining such Consolidated Net Income, Interest Expense, income tax expense, depreciation and amortization for such period plus (b) solely for the purposes of

 


 

determining EBITDA for the Fiscal Year 2003, the Decatur Add Back and the Refinancing Expense Add Back plus (c) solely for determining EBITDA for the Computation Periods ending December 31, 2005 and March 31, 2006, research and development expenditures during such Computation Periods in an amount not to exceed $3,000,000 plus (d) solely for determining EBITDA for the Computation Periods ending December 31, 2006 and March 31, 2007 (but subject to the condition that the Companies have Cash Equivalent Investments at all times during each such applicable Computation Period equal to or in excess of $5,000,000), research and development expenses during such Computation Period in an amount not to exceed $10,000,000 plus (e) solely for determining EBITDA for the Computation Period ending June 30, 2007 and each Computation Period thereafter, research and development expenditures actually made during such Computation Period in an amount not to exceed $15,000,000, so long as the Companies have Cash Equivalent Investments (exclusive of any Cash Equivalent Investments attributable to or representing the proceeds of Revolving Loans) at all times during each such applicable Computation Period equal to or in excess of (x) if there were no Revolving Loans outstanding during such Computation Period, $5,000,000, or (y) otherwise, the greater of (i) $5,000,000 and (ii) 50% of the amount added pursuant to this clause (e).
     (c) Revolving Commitment Amount. The definition of Revolving Commitment Amount set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
     Revolving Commitment Amount means $10,000,000, as reduced or increased from time to time pursuant to Section 6.1 or 6.4.
     (d) Commitment Increase. The following is added to the Credit Agreement as Section 6.5:
     “6.5 Increase in Commitments.
6.5.1 Provided there exists no Unmatured Event of Default or Event of Default, upon notice to the Administrative Agent (which shall promptly notify the Lenders), the Companies may from time to time request an increase in the Revolving Commitment Amount by an amount (for all such requests) not exceeding $10,000,000; provided that (i) the Revolving Commitment may not exceed $20,000,000; and provided further that any such request for an increase shall be in a minimum amount of $5,000,000 and in multiples of $5,000,000 in excess thereof and (ii) the Companies may not request more than two increases. At the time of sending such notice, Companies (in consultation with the Administrative Agent) shall specify the time period within which each Lender is requested to respond

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(which shall in no event be less than twenty Business Days from the date of delivery of such notice to the Lenders).
6.5.2 Each Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Revolving Commitment Amount and, if so, whether by an amount equal to, greater than, or less than its Pro Rata Share of such requested increase. Any Lender not responding within such time period shall be deemed to have declined to increase its Revolving Commitment Amount.
6.5.3 The Administrative Agent shall notify the Companies and each Lender of the Lenders’ responses to each request made hereunder. If the Lenders do not agree to the full amount of a requested increase, subject to the approval of the Administrative Agent and the Issuing Lender (which approvals shall not be unreasonably withheld), the Companies may also invite additional Persons to become Lenders pursuant to a joinder agreement in form and substance satisfactory to the Administrative Agent and its counsel.
6.5.4 If the Revolving Commitment Amount is increased in accordance with this Section, the Administrative Agent and the Companies shall determine the effective date (the “Increase Effective Date”) and the final allocation of such increase. The Administrative Agent shall promptly notify the Companies and the Lenders of the final allocation of such increase, the Increase Effective Date and revised Pro Rata Shares.
6.5.5 As a condition precedent to such increase, the Companies shall deliver to the Administrative Agent:
(a) an Officer’s Certificate dated as of the Increase Effective Date (i) certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Section 9 and the other Loan Documents are true and correct on and as of the Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and (B) no Unmatured Event of Default or Event of Default exists or shall result from such increase to the Revolving Commitment Amount;
(b) a Note for each Lender to the extent required to evidence the new or increased Commitment of such Lender;
(c) each Company’s (i) charter (or similar formation document), certified by the appropriate governmental authority; (ii) good standing certificates in its state of incorporation (or formation) and in each other state requested

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by the Administrative Agent; (iii) bylaws (or similar governing document); (iv) resolutions of its board of directors (or similar governing body) approving and authorizing the increase in the Revolving Commitment Amount; and (v) signature and incumbency certificates of its officers executing any of the Loan Documents (it being understood that the Administrative Agent and each Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary (or similar officer) as being in full force and effect without modification; and
(d) such other agreements and opinions of counsel as the Administrative Agent may reasonably request.
6.5.6 The Lenders (new or existing) shall accept an assignment from the existing Lenders, and the existing Lenders shall make an assignment to the new or existing Lender accepting a new or increased Commitment, of a direct or participation interest in each then outstanding Loan and Letter of Credit such that, after giving effect thereto, all Revolving Outstandings hereunder are held ratably by the Lenders in proportion to their respective Commitments. Assignments pursuant to the preceding sentence shall be made in exchange for the principal amount assigned plus accrued and unpaid interest and facility and letter of credit fees. The Companies shall make any payments under Section 8.4 resulting from such assignments.
6.5.7 This Section shall supersede any provisions in Section 7.5 or 15.1 to the contrary.”
     2. Representations and Warranties. To induce the Administrative Agent and the Lenders to execute this Amendment, each Company jointly and severally represents and warrants to the Administrative Agent and the Lenders as follows:
     (a) Each Company is in good standing under the laws of its jurisdiction of formation and in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect.
     (b) Each Company is duly authorized to execute and deliver this Amendment and is duly authorized to perform its obligations hereunder.
     (c) The execution, delivery and performance by the Companies of this Amendment do not and will not (i) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (ii) conflict with (A) any provision of law, (B) the charter, by-laws or other organizational documents of any Company or (C) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon

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any Company or any of its properties or (iii) require, or result in, the creation or imposition of any Lien on any asset of any Company.
     (d) This Amendment is the legal, valid and binding obligation of each Company, enforceable against such Company in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting enforceability of creditors’ rights generally and to general principals of equity.
     (e) The representations and warranties in the Loan Documents (including but not limited to Section 9 of the Credit Agreement) are true and correct in all material respects with the same effect as though made on and as of the date of this Amendment (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties were true and correct as of such earlier date).
     (f) Except as specifically waived in this Amendment, no Event of Default or Unmatured Event of Default has occurred and is continuing.
     3. Conditions to Effectiveness. The effectiveness of this Amendment is expressly conditioned upon delivering to the Administrative Agent this Amendment executed by each Company, the Administrative Agent and the Required Lenders. The date on which such event has occurred is the “Effective Date”.
     4. Affirmation. Except as specifically provided in this Amendment, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver or forbearance of any Unmatured Event of Default or Event of Default or any right, power or remedy of the Administrative Agent or any Lender under the Credit Agreement or any of the other Loan Documents, or constitute a consent, waiver or modification with respect to any provision of the Credit Agreement or any of the other Loan Documents, and the Company hereby fully ratifies and affirms each Loan Document to which it is a party. Reference in any of this Amendment, the Credit Agreement or any other Loan Document to the Credit Agreement shall be a reference to the Credit Agreement as modified hereby and as further amended, modified, restated, supplemented or extended from time to time. This Amendment shall constitute a Loan Document for purposes of the Credit Agreement and the other Loan Documents.
     5. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute one instrument. Delivery of an executed counterpart of this Amendment by facsimile shall be effective as delivery of an original counterpart.
     6. Headings. The headings and captions of this Amendment are for the purposes of reference only and shall not affect the construction of, or be taken into consideration in interpreting, this Amendment.
     7. Further Assurances. Each Company agrees to execute and deliver, or cause to be executed and delivered, in form and substance satisfactory to the Administrative Agent and the Lenders, such further documents, instruments, amendments and financing statements and to

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take such further action, as may be necessary from time to time to perfect and maintain the liens and security interests created by the Loan Documents.
     8. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO ILLINOIS CHOICE OF LAW DOCTRINE.
     9. Acknowledgment. Each Company hereby waives, discharges and forever releases the Administrative Agent and each of the Lenders, and each of said Person’s employees, officers, directors, attorneys, stockholders and successors and assigns, from and of any and all claims, causes of action, allegations or assertions that either Company has or may have had at any time through (and including) the date of this Amendment, against any or all of the foregoing, regardless of whether any such claims, causes of action, allegations or assertions are known to either Company or whether any such claims, causes of action, allegations or assertions arose as a result of the Administrative Agent’s or any Lender’s actions or omissions in connection with the Credit Agreement, including any amendments or modifications thereto, or otherwise.
[signature pages follow]

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     IN WITNESS WHEREOF, this Amendment has been duly executed and delivered as of the day and year first above written.
         
    AKORN, INC.
 
       
 
  By:   /s/ Jeffrey A. Whitnell
 
       
 
  Title:   Chief Financial Officer
 
       
 
       
    AKORN (NEW JERSEY), INC.
 
       
 
  By:   /s/ Jeffrey A. Whitnell
 
       
 
  Title:   Chief Financial Officer
 
       
 
       
    LASALLE BANK NATIONAL ASSOCIATION,
    as Administrative Agent and Lender
 
       
 
  By:   /s/ Patrick J. O’Toole
 
       
 
  Title:   First Vice President
 
       

 

exv31w1
 

EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Arthur S. Przybyl, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q of Akorn, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
 
  /s/ ARTHUR S. PRZYBYL
 
   
 
  Arthur S. Przybyl
 
  Chief Executive Officer
Date: August 8, 2007
   

 

exv31w2
 

EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Jeffrey A. Whitnell, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q of Akorn, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
 
  /s/ JEFFREY A. WHITNELL
 
   
 
  Jeffrey A. Whitnell
 
  Chief Financial Officer
 
   
Date: August 8, 2007
   

 

exv32w1
 

EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C 1350
In connection with the Quarterly Report of Akorn, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2007, as filed with the Securities and Exchange Commission and to which this Certification is an exhibit (the “Report”), the undersigned officer of the Company does hereby certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) and Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934 (17 CFR 240.13a-14(b)), that to my knowledge:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
Date: August 8, 2007
   
 
  /s/ ARTHUR S. PRZYBYL
 
   
 
  Arthur S. Przybyl
 
  Chief Executive Officer

 

exv32w2
 

EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. 1350
In connection with the Quarterly Report of Akorn, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2007, as filed with the Securities and Exchange Commission and to which this Certification is an exhibit (the “Report”), the undersigned officer of the Company does hereby certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) and Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934 (17 CFR 240.13a-14(b)), that to my knowledge:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
Date: August 8, 2007
   
 
  /s/ JEFFREY A. WHITNELL
 
   
 
  Jeffrey A. Whitnell
 
  Chief Financial Officer