##### 



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, 2006
 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. EmployerIncorporation or Organization)
    
    Identification No.)2500 MILLBROOK DRIVEBUFFALO GROVE, ILLINOIS
    
    60089(Address of Principal Executive Offices)
    
    (Zip Code)
 (847) 279-6100
 (Registrants telephone number)
  Yes þ No o
  Large accelerated filer o Accelerated filer o Non-accelerated filer þ
  Yes o No þ




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##### 



PagePART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets-June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations-Three and six months ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statement of Shareholders Equity-Six months ended June 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows-Six months ended June 30, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19ITEM 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    19ITEM 1A. Risk Factors
    
    
    19ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20ITEM 3. Defaults Upon Senior Securities
    
    
    20ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    21ITEM 5. Other Information
    
    
    21ITEM 6. Exhibits
    
    
    22
 2




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
 JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    2005(UNAUDITED)
    
    
    (AUDITED)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    17,781
    
    
    $
    791Trade accounts receivable (less allowance for doubtful accounts of $3 and $13,
respectively)
    
    
    4,987
    
    
    
    3,222Inventories
    
    
    10,970
    
    
    
    10,279Prepaid expenses and other current assets
    
    
    1,780
    
    
    
    1,402TOTAL CURRENT ASSETS
    
    
    35,518
    
    
    
    15,694PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    31,515
    
    
    
    31,071OTHER LONG-TERM ASSETSIntangibles, net
    
    
    9,509
    
    
    
    10,210Other
    
    
    105
    
    
    
    120TOTAL OTHER LONG-TERM ASSETS
    
    
    9,614
    
    
    
    10,330TOTAL ASSETS
    
    $
    76,647
    
    
    $
    57,095LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESCurrent installments of debt
    
    $
    380
    
    
    $
    7,044Trade accounts payable
    
    
    2,732
    
    
    
    3,046Accrued compensation
    
    
    1,168
    
    
    
    1,519Customer accrued liabilities
    
    
    332
    
    
    
    135Accrued interest payable
    
    
    
    
    
    
    2,514Accrued expenses and other liabilities
    
    
    730
    
    
    
    1,202TOTAL CURRENT LIABILITIES
    
    
    5,342
    
    
    
    15,460LONG-TERM LIABILITIESLong-term debt, less current installments
    
    
    408
    
    
    
    602Product warranty
    
    
    1,159
    
    
    
    TOTAL LONG-TERM LIABILITIES
    
    
    1,567
    
    
    
    602TOTAL LIABILITIES
    
    
    6,909
    
    
    
    16,062SHAREHOLDERS EQUITYCommon stock, no par value  150,000,000 shares authorized; 75,285,018 and
27,618,745 shares issued and outstanding at June 30, 2006 and December
31, 2005, respectively
    
    
    124,907
    
    
    
    67,339Series A Preferred Stock, $1.00 par value, 257,172 shares authorized and issued,
241,122 shares outstanding at December 31, 2005
    
    
    
    
    
    
    27,232Series B Preferred Stock, $1.00 par value, 170,000 shares authorized, 141,000
shares issued, 82,437 outstanding at June 30, 2006 and 106,600 outstanding
at December 31, 2005
    
    
    8,589
    
    
    
    10,758Warrants to acquire common stock
    
    
    13,631
    
    
    
    13,696Accumulated deficit
    
    
    (77,389
    )
    
    
    (77,992
    )TOTAL SHAREHOLDERS EQUITY
    
    
    69,738
    
    
    
    41,033TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    76,647
    
    
    $
    57,095
  3




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##### 



AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
 THREE MONTHS ENDED
    
    
    SIX MONTHS ENDEDJUNE 30,
    
    
    JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    12,475
    
    
    $
    12,578
    
    
    $
    42,205
    
    
    $
    22,759Cost of sales
    
    
    7,520
    
    
    
    7,726
    
    
    
    25,517
    
    
    
    14,564GROSS PROFIT
    
    
    4,955
    
    
    
    4,852
    
    
    
    16,688
    
    
    
    8,195Selling, general and administrative expenses
    
    
    4,669
    
    
    
    3,699
    
    
    
    9,153
    
    
    
    7,067Amortization and write-down of intangibles
    
    
    350
    
    
    
    425
    
    
    
    701
    
    
    
    804Research and development expenses
    
    
    2,121
    
    
    
    1,423
    
    
    
    4,166
    
    
    
    2,765TOTAL OPERATING EXPENSES
    
    
    7,140
    
    
    
    5,547
    
    
    
    14,020
    
    
    
    10,636OPERATING INCOME (LOSS)
    
    
    (2,185
    )
    
    
    (695
    )
    
    
    2,668
    
    
    
    (2,441
    )Interest income/(expense)  net
    
    
    234
    
    
    
    (584
    )
    
    
    (1,085
    )
    
    
    (1,110
    )Debt Retirement Gain/(Expense)
    
    
    
    
    
    
    1,212
    
    
    
    (391
    )
    
    
    1,212Other Expense
    
    
    (12
    )
    
    
    
    
    
    
    (29
    )
    
    
    INCOME/(LOSS) BEFORE INCOME TAXES
    
    
    (1,963
    )
    
    
    (67
    )
    
    
    1,163
    
    
    
    (2,339
    )Income tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15NET INCOME/(LOSS)
    
    
    (1,963
    )
    
    
    (67
    )
    
    
    1,163
    
    
    
    (2,354
    )Preferred stock dividends and adjustments
    
    
    (234
    )
    
    
    (915
    )
    
    
    (560
    )
    
    
    (1,976
    )NET INCOME/(LOSS) AVAILABLE TO COMMON
STOCKHOLDERS
    
    $
    (2,197
    )
    
    $
    (982
    )
    
    $
    603
    
    
    $
    (4,330
    )NET INCOME/(LOSS) PER SHARE:BASIC
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    0.01
    
    
    $
    (0.17
    )DILUTED
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    0.01
    
    
    $
    (0.17
    )SHARES USED IN COMPUTING NET INCOME/(LOSS)
PER SHARE:BASIC
    
    
    74,853
    
    
    
    25,961
    
    
    
    68,321
    
    
    
    25,601DILUTED
    
    
    74,853
    
    
    
    25,961
    
    
    
    76,481
    
    
    
    25,601
  4




---



##### 



AKORN, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
UNAUDITED
(In Thousands)
 Warrants toSeries A
    
    
    Series B
    
    
    acquire
    
    
    Retained EarningsCommon Stock
    
    
    Preferred
    
    
    Preferred
    
    
    Common
    
    
    (AccumulatedSix Months Ended June 30, 2006
    
    Shares
    
    
    Amount
    
    
    Stock
    
    
    Stock
    
    
    Stock
    
    
    Deficit)
    
    
    TotalBALANCES AT DECEMBER 31, 2005
    
    
    27,619
    
    
    $
    67,339
    
    
    $
    27,232
    
    
    $
    10,758
    
    
    $
    13,696
    
    
    $
    (77,992
    )
    
    $
    41,033Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,163
    
    
    
    1,163Preferred 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
    )
    
    
    
    
    
    
    888Conversion of convertible notes into
common stock
    
    
    3,540
    
    
    
    7,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,298Net proceeds from issuance of common
stock and warrants
    
    
    4,312
    
    
    
    16,257
    
    
    
    
    
    
    
    
    
    
    
    1,821
    
    
    
    
    
    
    
    18,078Stock issuance under stock option
and
stock purchase plans
    
    
    622
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Amortization of deferred
compensation
related to restricted stock awards
    
    
    
    
    
    
    277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    277FAS123R share based payment expense
    
    
    
    
    
    
    701
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    701BALANCES AT JUNE 30, 2006
    
    
    75,285
    
    
    $
    124,907
    
    
    $
    
    
    
    $
    8,589
    
    
    $
    13,631
    
    
    $
    (77,389
    )
    
    $
    69,738
 Warrants toSeries A
    
    
    Series B
    
    
    acquire
    
    
    Retained EarningsCommon Stock
    
    
    Preferred
    
    
    Preferred
    
    
    Common
    
    
    (AccumulatedSix Months Ended June 30, 2005
    
    Shares
    
    
    Amount
    
    
    Stock
    
    
    Stock
    
    
    Stock
    
    
    Deficit)
    
    
    TotalBALANCES AT DECEMBER 31, 2004
    
    
    25,133
    
    
    $
    59,571
    
    
    $
    25,787
    
    
    $
    13,109
    
    
    $
    14,160
    
    
    $
    (65,301
    )
    
    $
    47,326Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,354
    )
    
    
    (2,354
    )Preferred stock dividends earned
    
    
    
    
    
    
    
    
    
    
    752
    
    
    
    405
    
    
    
    
    
    
    
    (1,157
    )
    
    
    Intrinsic value of beneficial
conversion
features in convertible preferred stock
    
    
    
    
    
    
    819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (819
    )
    
    
    Conversion of preferred stock into
common stock
    
    
    576
    
    
    
    1,443
    
    
    
    
    
    
    
    (1,443
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants into common stock
    
    
    50
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    37Intrinsic value of beneficial
conversion
features in convertible interest
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134Stock issuance under stock option and
stock purchase plans
    
    
    250
    
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444Amortization of deferred compensation
related to restricted stock awards
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150BALANCES AT JUNE 30, 2005
    
    
    26,009
    
    
    $
    62,662
    
    
    $
    26,539
    
    
    $
    12,071
    
    
    $
    14,096
    
    
    $
    (69,631
    )
    
    $
    45,737
  5




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##### 



AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
 SIX MONTHSENDED JUNE 302006
    
    
    2005OPERATING ACTIVITIESNet income (loss)
    
    $
    1,163
    
    
    $
    (2,354
    )Adjustments to reconcile net income/(loss)
to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    1,645
    
    
    
    3,413Amortization of debt discounts
    
    
    1,059
    
    
    
    553Advances to Strides Arcolab Limited
    
    
    
    
    
    
    (1,500
    )Gain on Retirement of Debt
    
    
    
    
    
    
    (1,212
    )Non-cash stock compensation expense
    
    
    978
    
    
    
    150Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (1,765
    )
    
    
    849Inventories
    
    
    (691
    )
    
    
    (227
    )Prepaid expenses and other current assets
    
    
    (363
    )
    
    
    365Trade accounts payable
    
    
    (314
    )
    
    
    (2,382
    )Product warranty
    
    
    1,159
    
    
    
    Accrued customer liability
    
    
    197
    
    
    
    Accrued expenses and other liabilities
    
    
    (1,039
    )
    
    
    227NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    2,029
    
    
    
    (2,118
    )INVESTING ACTIVITIESPurchases of property, plant and equipment
    
    
    (1,388
    )
    
    
    (357
    )Purchase of intangible assets
    
    
    
    
    
    
    (75
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (1,388
    )
    
    
    (432
    )FINANCING ACTIVITIES (See Note 1 below)Repayment of long-term debt
    
    
    (2,917
    )
    
    
    (167
    )Repayment of NeoPharm Debt
    
    
    
    
    
    
    (2,500
    )Net borrowings under lines of credit
    
    
    
    
    
    
    663Proceeds from common stock and warrant offering
    
    
    18,078
    
    
    
    Proceeds from warrants exercised
    
    
    888
    
    
    
    37Proceeds under stock option and stock purchase plans
    
    
    300
    
    
    
    444NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    16,349
    
    
    
    (1,523
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    16,990
    
    
    
    (4,073
    )Cash and cash equivalents at beginning of period
    
    
    791
    
    
    
    4,110CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    17,781
    
    
    $
    37Amount paid for interest
    
    $
    561
    
    
    $
    365Amount paid for income taxes
    
    $
    2
    
    
    $
    72
  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




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##### 



NOTE A  BUSINESS AND BASIS OF PRESENTATION
 Business:
 Basis of Presentation
 NOTE B  USE OF ESTIMATES
  NOTE C  STOCK BASED COMPENSATION
    7




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##### 



THREE MONTHS
    
    SIX MONTHSENDED
    
    ENDEDJUNE 30, 2005
    
    JUNE 30, 2005Net income (loss) as reported
    
    $
    (67
    )
    
    $
    (2,354
    )Add: stock-based employee compensation expense included in reported net
income
    
    
    
    
    
    
    Deduct: total stock-based employee compensation expense determined under
fair-value-based method for all awards
    
    
    (373
    )
    
    
    (660
    )Pro forma net income (loss)
    
    
    (440
    )
    
    
    (3,014
    )Deduct: preferred stock dividends and adjustments
    
    
    (915
    )
    
    
    (1,976
    )Pro forma net loss available for common stockholders
    
    $
    (1,355
    )
    
    $
    (4,990
    )Basic and diluted loss per share of common stockShares used in Computing Net Loss Per Share
    
    
    25,961
    
    
    
    25,601As reported
    
    $
    (0.04
    )
    
    $
    (0.17
    )Pro forma
    
    $
    (0.05
    )
    
    $
    (0.19
    )
  THREE MONTHS
    
    THREE MONTHSENDED
    
    ENDEDJUNE 30, 2006
    
    JUNE 30, 2005(SFAS 123(R))
    
    (SFAS 123 Pro Forma)Expected Volatility
    
    
    45
    %
    
    
    64
    %Expected Life (in years)
    
    
    3.6
    
    
    
    5.0Risk-free interest rate
    
    
    5.0
    %
    
    
    3.9
    %Dividend yield
    
    
    
    
    
    
    Fair value per stock option
    
    $
    1.91
    
    
    $
    1.51
  Weighted AverageNumber of
    
    Weighted
    
    RemainingShares
    
    Average
    
    Contractual Term
    
    Aggregate(in thousands)
    
    Exercise Price
    
    (Years)
    
    Intrinsic ValueOutstanding at January 1, 2006
    
    
    3,706
    
    
    $
    2.54Granted
    
    
    890
    
    
    
    4.85Exercised
    
    
    (656
    )
    
    
    2.32Forfeited
    
    
    (169
    )
    
    
    4.23Outstanding at June 30, 2006
    
    
    3,771
    
    
    $
    2.96
    
    
    
    3.06
    
    
    $
    4,648Exercisable at June 30, 2006
    
    
    2,617
    
    
    $
    2.45
    
    
    
    3.06
    
    
    $
    4,198
 8




---



##### 



Number of Shares
    
    Weighted Average(in thousands)
    
    Grant Date Fair ValueNonvested at December 31, 2005
    
    
    842
    
    
    $
    1.94Granted
    
    
    890
    
    
    $
    1.93Vested
    
    
    (506
    )
    
    $
    1.86Canceled
    
    
    (72
    )
    
    $
    1.64Nonvested at June 30, 2006
    
    
    1,154
    
    
    $
    1.99
   NOTE D  REVENUE RECOGNITION
    NOTE E  ACCOUNTS RECEIVABLE ALLOWANCES & CUSTOMER ACCRUED LIABILITIES
  9




---



##### 



JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    2005Gross Accounts Receivable
    
    $
    13,822
    
    
    $
    12,642Less:Allowance for Doubtful Accounts
    
    
    (3
    )
    
    
    (13
    )Returns Reserve
    
    
    (1,504
    )
    
    
    (1,529
    )Discount and Allowances Reserve
    
    
    (347
    )
    
    
    (244
    )Chargeback and Rebates Reserves
    
    
    (6,981
    )
    
    
    (7,634
    )Net Trade Accounts Receivable
    
    $
    4,987
    
    
    $
    3,222
  JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    2005Customer advance payments and net refunds liability
    
    $
    (332
    )
    
    $
    (135
    )Total Customer Accrued Liability
    
    $
    (332
    )
    
    $
    (135
    )
     NOTE F  INVENTORIES
  JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    2005Finished goods
    
    $
    3,521
    
    
    $
    4,914Work in process
    
    
    2,551
    
    
    
    1,702Raw materials and supplies
    
    
    4,898
    
    
    
    3,663$
    10,970
    
    
    $
    10,279
  10




---



##### 



NOTE G  PROPERTY, PLANT AND EQUIPMENT
  JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    2005Land
    
    $
    396
    
    
    $
    396Buildings and leasehold improvements
    
    
    9,433
    
    
    
    9,393Furniture and equipment
    
    
    28,364
    
    
    
    27,866Automobiles
    
    
    55
    
    
    
    55Sub-total
    
    
    38,248
    
    
    
    37,710Accumulated depreciation
    
    
    (27,823
    )
    
    
    (26,879
    )10,425
    
    
    
    10,831Construction in progress
    
    
    21,090
    
    
    
    20,240Property, Plant, & Equipment, net
    
    $
    31,515
    
    
    $
    31,071
  NOTE H  FINANCING ARRANGEMENTS
  JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    20052003 Subordinated Notes
    
    $
    
    
    
    $
    2,767Convertible subordinated debentures
    
    
    
    
    
    
    5,000Mortgages payable
    
    
    788
    
    
    
    938788
    
    
    
    8,705Less unamortized discount on debt
    
    
    
    
    
    
    (1,059
    )Less current installments of debt
    
    
    (380
    )
    
    
    (7,044
    )Long-term debt
    
    $
    408
    
    
    $
    602
   11




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NOTE I  COMMON STOCK ISSUANCE
   NOTE J  EARNINGS PER COMMON SHARE
  12




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##### 



THREE MONTHS ENDED
    
    
    SIX MONTHS ENDEDJUNE 30,
    
    
    JUNE 30,
    
    
    JUNE 30,
    
    
    JUNE 30,Fully Diluted Earnings Per Share Data
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss) available to common
stockholders  basic
    
    $
    (2,197
    )
    
    $
    (982
    )
    
    $
    603
    
    
    $
    (4,330
    )Preferred stock dividends adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted earnings  fully diluted basis
    
    $
    (2,197
    )
    
    $
    (982
    )
    
    $
    603
    
    
    $
    (4,330
    )Basic Shares
    
    
    74,853
    
    
    
    25,961
    
    
    
    68,321
    
    
    
    25,601Warrants
    
    
    
    
    
    
    
    
    
    
    6,610
    
    
    
    Options
    
    
    
    
    
    
    
    
    
    
    1,550
    
    
    
    Fully Diluted Shares
    
    
    74,853
    
    
    
    25,961
    
    
    
    76,481
    
    
    
    25,601
 NOTE K  INDUSTRY SEGMENT INFORMATION
  THREE MONTHS ENDED JUNE 30,
    
    
    SIX MONTHS ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESOphthalmic
    
    $
    5,703
    
    
    $
    6,227
    
    
    $
    9,510
    
    
    $
    11,323Hospital Drugs & Injectables
    
    
    5,104
    
    
    
    4,362
    
    
    
    29,001
    
    
    
    7,263Contract Services
    
    
    1,668
    
    
    
    1,989
    
    
    
    3,694
    
    
    
    4,173Total revenues
    
    $
    12,475
    
    
    $
    12,578
    
    
    $
    42,205
    
    
    $
    22,759GROSS PROFITOphthalmic
    
    $
    2,287
    
    
    $
    2,390
    
    
    $
    3,285
    
    
    $
    4,192Hospital Drugs & Injectables
    
    
    2,190
    
    
    
    2,151
    
    
    
    12,367
    
    
    
    3,375Contract Services
    
    
    478
    
    
    
    311
    
    
    
    1,036
    
    
    
    628Total gross profit
    
    
    4,955
    
    
    
    4,852
    
    
    
    16,688
    
    
    
    8,195Operating expenses
    
    
    7,140
    
    
    
    5,547
    
    
    
    14,020
    
    
    
    10,636Operating income (loss)
    
    
    (2,185
    )
    
    
    (695
    )
    
    
    2,668
    
    
    
    (2,441
    )Interest & Other income (expense)
    
    
    222
    
    
    
    (584
    )
    
    
    (1,114
    )
    
    
    (1,110
    )Debt Retirement gain/(expense)
    
    
    
    
    
    
    1,212
    
    
    
    (391
    )
    
    
    1,212Income/(Loss) before income taxes
    
    $
    (1,963
    )
    
    $
    (67
    )
    
    $
    1,163
    
    
    $
    (2,339
    )
  13




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NOTE L  COMMITMENTS AND CONTINGENCIES
       NOTE M  CUSTOMER AND SUPPLIER CONCENTRATION
    14




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15




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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
  
    
    Our ability to comply with all of the requirements of the FDA, including current Good
Manufacturing Practices regulations;
    
    Our ability to obtain regulatory approvals of, commence operations at and obtain business
for our new lyophilization facility;
    
    Our ability to avoid defaults under debt covenants;
    
    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, 2006 COMPARED TO 2005
  THREE MONTHS ENDED JUNE 30,2006
    
    
    2005Ophthalmic segment
    
    $
    5,703
    
    
    $
    6,227Hospital Drugs & Injectables segment
    
    
    5,104
    
    
    
    4,362Contract Services segment
    
    
    1,668
    
    
    
    1,989Total revenues
    
    $
    12,475
    
    
    $
    12,578
 16




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##### 



®
       SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO 2005
  SIX MONTHS ENDED JUNE 30,2006
    
    
    2005Ophthalmic segment
    
    $
    9,510
    
    
    $
    11,323Hospital Drugs & Injectables segment
    
    
    29,001
    
    
    
    7,263Contract Services segment
    
    
    3,694
    
    
    
    4,173Total revenues
    
    $
    42,205
    
    
    $
    22,759
   17




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FINANCIAL CONDITION AND LIQUIDITY
 Overview
    Facility Expansion
  18




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##### 



CRITICAL ACCOUNTING POLICIES
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   ITEM 4. CONTROLS AND PROCEDURES
   PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  19




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  20




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##### 



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Nominee
    
    Votes For
    
    Votes WithheldJohn N. Kapoor, Ph.D.
    
    
    66,615,009
    
    
    
    1,618,317Arthur S. Przybyl
    
    
    66,613,666
    
    
    
    1,619,660Jerry N. Ellis
    
    
    68,159,345
    
    
    
    73,981Ronald M. Johnson
    
    
    66,552,508
    
    
    
    1,680,818Jerry I. Treppel
    
    
    68,098,330
    
    
    
    134,996
  ITEM 5. OTHER INFORMATION
  21




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##### 



ITEM 6. EXHIBITS
  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)
    
    Amendment 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.(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 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.
 22




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Exhibit No.
    
    Description(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.)(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
 23




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##### 



SIGNATURES
  AKORN, INC./s/ JEFFREY A. WHITNELLJeffrey A. WhitnellSr. Vice President, Chief Financial Officer
     (Duly Authorized and Principal Financial Officer)  24