##### 



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 September 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




---



##### 



PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsCondensed Consolidated Balance Sheets-September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations-Three and nine months ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statement of Shareholders Equity-Nine months ended September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows-Nine months ended September 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
    
    
    20ITEM 1A. Risk Factors
    
    
    20ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20ITEM 3. Defaults Upon Senior Securities
    
    
    21ITEM 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, EXCEPT SHARE DATA
 SEPTEMBER 30,
    
    
    DECEMBER 31,2006
    
    
    2005(UNAUDITED)
    
    
    (AUDITED)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    19,523
    
    
    $
    791Trade accounts receivable (less allowance for doubtful accounts of $1 and $13,
respectively)
    
    
    6,939
    
    
    
    3,222Inventories
    
    
    10,421
    
    
    
    10,279Prepaid expenses and other current assets
    
    
    1,206
    
    
    
    1,402TOTAL CURRENT ASSETS
    
    
    38,089
    
    
    
    15,694PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    33,244
    
    
    
    31,071OTHER LONG-TERM ASSETSIntangibles, net
    
    
    9,164
    
    
    
    10,210Other
    
    
    98
    
    
    
    120TOTAL OTHER LONG-TERM ASSETS
    
    
    9,262
    
    
    
    10,330TOTAL ASSETS
    
    $
    80,595
    
    
    $
    57,095LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESCurrent installments of debt
    
    $
    387
    
    
    $
    7,044Trade accounts payable
    
    
    2,039
    
    
    
    3,046Accrued compensation
    
    
    1,674
    
    
    
    1,519Customer accrued liabilities
    
    
    538
    
    
    
    135Accrued interest payable
    
    
    
    
    
    
    2,514Accrued expenses and other liabilities
    
    
    1,126
    
    
    
    1,202TOTAL CURRENT LIABILITIES
    
    
    5,764
    
    
    
    15,460LONG-TERM LIABILITIESLong-term debt, less current installments
    
    
    309
    
    
    
    602Product warranty
    
    
    1,131
    
    
    
    TOTAL LONG-TERM LIABILITIES
    
    
    1,440
    
    
    
    602TOTAL LIABILITIES
    
    
    7,204
    
    
    
    16,062SHAREHOLDERS EQUITYCommon stock, no par value  150,000,000 shares authorized; 81,000,130 and
27,618,745 shares issued and outstanding at September 30, 2006 and
December 31, 2005, respectively
    
    
    136,863
    
    
    
    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, 74,195 outstanding at September 30, 2006 and 106,600 outstanding
at December 31, 2005
    
    
    7,854
    
    
    
    10,758Warrants to acquire common stock
    
    
    7,312
    
    
    
    13,696Accumulated deficit
    
    
    (78,638
    )
    
    
    (77,992
    )TOTAL SHAREHOLDERS EQUITY
    
    
    73,391
    
    
    
    41,033TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    80,595
    
    
    $
    57,095
  3




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##### 



AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
 THREE MONTHS ENDED
    
    
    NINE MONTHS ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    14,490
    
    
    $
    10,985
    
    
    $
    56,695
    
    
    $
    33,744Cost of sales
    
    
    8,539
    
    
    
    7,317
    
    
    
    34,056
    
    
    
    21,881GROSS PROFIT
    
    
    5,951
    
    
    
    3,668
    
    
    
    22,639
    
    
    
    11,863Selling, general and administrative expenses
    
    
    4,226
    
    
    
    3,894
    
    
    
    13,379
    
    
    
    10,961Amortization and write-down of intangibles
    
    
    345
    
    
    
    353
    
    
    
    1,046
    
    
    
    1,157Research and development expenses
    
    
    2,649
    
    
    
    1,438
    
    
    
    6,815
    
    
    
    4,203TOTAL OPERATING EXPENSES
    
    
    7,220
    
    
    
    5,685
    
    
    
    21,240
    
    
    
    16,321OPERATING INCOME (LOSS)
    
    
    (1,269
    )
    
    
    (2,017
    )
    
    
    1,399
    
    
    
    (4,458
    )Interest income/(expense)  net
    
    
    230
    
    
    
    (595
    )
    
    
    (855
    )
    
    
    (1,705
    )Debt Retirement Gain/(Expense)
    
    
    
    
    
    
    
    
    
    
    (391
    )
    
    
    1,212Other Expense
    
    
    (28
    )
    
    
    
    
    
    
    (57
    )
    
    
    INCOME/(LOSS) BEFORE INCOME TAXES
    
    
    (1,067
    )
    
    
    (2,612
    )
    
    
    96
    
    
    
    (4,951
    )Income tax provision
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    17NET INCOME/(LOSS)
    
    
    (1,067
    )
    
    
    (2,614
    )
    
    
    96
    
    
    
    (4,968
    )Preferred stock dividends and adjustments
    
    
    (182
    )
    
    
    (1,015
    )
    
    
    (742
    )
    
    
    (2,991
    )NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
    
    $
    (1,249
    )
    
    $
    (3,629
    )
    
    $
    (646
    )
    
    $
    (7,959
    )NET LOSS PER SHARE:BASIC
    
    $
    (0.02
    )
    
    $
    (0.14
    )
    
    $
    (0.01
    )
    
    $
    (0.31
    )DILUTED
    
    $
    (0.02
    )
    
    $
    (0.14
    )
    
    $
    (0.01
    )
    
    $
    (0.31
    )SHARES USED IN COMPUTING NET INCOME/(LOSS) PER SHARE:BASIC
    
    
    76,420
    
    
    
    26,203
    
    
    
    71,050
    
    
    
    25,804DILUTED
    
    
    76,420
    
    
    
    26,203
    
    
    
    71,050
    
    
    
    25,804
  4




---



##### 



AKORN, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
UNAUDITED
(In Thousands)
 Warrants to
    
    
    RetainedSeries A
    
    
    Series B
    
    
    acquire
    
    
    EarningsNine Months Ended September 30, 2006
    
    Common Stock
    
    
    Preferred
    
    
    Preferred
    
    
    Common
    
    
    (AccumulatedShares
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    96Preferred stock dividends earned
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    435
    
    
    
    
    
    
    
    (490
    )
    
    
    Intrinsic value of beneficial conversion
features in convertible preferred stock
    
    
    
    
    
    
    252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252
    )
    
    
    Conversion of preferred stock into
common stock
    
    
    38,123
    
    
    
    30,626
    
    
    
    (27,287
    )
    
    
    (3,339
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants into common stock
    
    
    5,682
    
    
    
    9,418
    
    
    
    
    
    
    
    
    
    
    
    (8,205
    )
    
    
    
    
    
    
    1,213Conversion of convertible notes into
common stock
    
    
    3,540
    
    
    
    7,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,298Net proceeds from issuance of common
stock and warrants
    
    
    5,312
    
    
    
    19,800
    
    
    
    
    
    
    
    
    
    
    
    1,821
    
    
    
    
    
    
    
    21,621Stock issuance under stock option and
stock purchase plans
    
    
    724
    
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606Amortization of deferred compensation
related to restricted stock awards
    
    
    
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    498FAS123R share based payment expense
    
    
    
    
    
    
    1,026
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,026BALANCES AT SEPTEMBER 30, 2006
    
    
    81,000
    
    
    $
    136,863
    
    
    $
    
    
    
    $
    7,854
    
    
    $
    7,312
    
    
    $
    (78,638
    )
    
    $
    73,391
 Warrants to
    
    
    RetainedSeries A
    
    
    Series B
    
    
    acquire
    
    
    EarningsNine Months Ended September 30, 2005
    
    Common Stock
    
    
    Preferred
    
    
    Preferred
    
    
    Common
    
    
    (AccumulatedShares
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,968
    )
    
    
    (4,968
    )Preferred stock dividends earned
    
    
    
    
    
    
    
    
    
    
    1,155
    
    
    
    597
    
    
    
    
    
    
    
    (1,752
    )
    
    
    Intrinsic value of beneficial conversion
features in convertible preferred stock
    
    
    
    
    
    
    1,239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,239
    )
    
    
    Conversion of preferred stock into
common stock
    
    
    682
    
    
    
    1,708
    
    
    
    
    
    
    
    (1,708
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants into common stock
    
    
    200
    
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    (255
    )
    
    
    
    
    
    
    150Intrinsic value of beneficial conversion
features in convertible interest
    
    
    
    
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204Stock issuance under stock option and
stock purchase plans
    
    
    441
    
    
    
    734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734Amortization of deferred compensation
related to restricted stock awards
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273BALANCES AT SEPTEMBER 30, 2005
    
    
    26,456
    
    
    $
    64,134
    
    
    $
    26,942
    
    
    $
    11,998
    
    
    $
    13,905
    
    
    $
    (73,260
    )
    
    $
    43,719
  5




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##### 



AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
 NINE MONTHSENDED SEPTEMBER 302006
    
    
    2005OPERATING ACTIVITIESNet income (loss)
    
    $
    96
    
    
    $
    (4,968
    )Adjustments to reconcile net income/(loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    2,444
    
    
    
    4,927Amortization of deferred financing costs
    
    
    
    
    
    
    72Amortization of debt discounts
    
    
    1,059
    
    
    
    876Advances to Strides Arcolab Limited
    
    
    
    
    
    
    (1,500
    )Gain on Retirement of Debt
    
    
    
    
    
    
    (1,212
    )Non-cash stock compensation expense
    
    
    1,524
    
    
    
    273Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (3,717
    )
    
    
    4,761Inventories
    
    
    (142
    )
    
    
    (330
    )Prepaid expenses and other current assets
    
    
    218
    
    
    
    480Trade accounts payable
    
    
    (1,007
    )
    
    
    (3,279
    )Product warranty
    
    
    1,131
    
    
    
    Accrued customer liability
    
    
    403
    
    
    
    Accrued expenses and other liabilities
    
    
    (137
    )
    
    
    502NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    1,872
    
    
    
    602INVESTING ACTIVITIESPurchases of property, plant and equipment
    
    
    (3,571
    )
    
    
    (744
    )Purchase of intangible assets
    
    
    
    
    
    
    (75
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (3,571
    )
    
    
    (819
    )FINANCING ACTIVITIES (See Note 1 below)Repayment of long-term debt
    
    
    (3,009
    )
    
    
    (253
    )Repayment of NeoPharm Debt
    
    
    
    
    
    
    (2,500
    )Net borrowings under lines of credit
    
    
    
    
    
    
    Proceeds from common stock and warrant offering
    
    
    21,621
    
    
    
    Proceeds from warrants exercised
    
    
    1,213
    
    
    
    150Proceeds under stock option and stock purchase plans
    
    
    606
    
    
    
    734NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    20,431
    
    
    
    (1,869
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    18,732
    
    
    
    (2,086
    )Cash and cash equivalents at beginning of period
    
    
    791
    
    
    
    4,110CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    19,523
    
    
    $
    2,024Amount paid for interest
    
    $
    577
    
    
    $
    397Amount 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  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates:
 Chargebacks:
  7




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##### 



Sales Returns:
  NOTE C  STOCK BASED COMPENSATION
     THREE MONTHS
    
    NINE MONTHSENDED
    
    ENDEDSEPTEMBER 30, 2005
    
    SEPTEMBER 30, 2005Net income (loss) as reported
    
    $
    (2,614
    )
    
    $
    (4,968
    )Add: stock-based employee compensation expense included in reported net
income
    
    
    123
    
    
    
    273Deduct: total stock-based employee compensation expense determined under
fair-value-based method for all awards
    
    
    (270
    )
    
    
    (1,080
    )Pro forma net income (loss)
    
    
    (2,761
    )
    
    
    (5,775
    )Deduct: preferred stock dividends and adjustments
    
    
    (1,015
    )
    
    
    (2,991
    )Pro forma net loss available for common stockholders
    
    $
    (3,776
    )
    
    $
    (8,766
    )Basic and diluted loss per share of common stockShares used in Computing Net Loss Per Share
    
    
    26,203
    
    
    
    25,804As reported
    
    $
    (0.14
    )
    
    $
    (0.31
    )Pro forma
    
    $
    (0.14
    )
    
    $
    (0.34
    )
 8




---



##### 



THREE MONTHS
    
    THREE MONTHSENDED
    
    ENDEDSEPTEMBER 30, 2006
    
    SEPTEMBER 30, 2005(SFAS 123(R))
    
    (SFAS 123 Pro Forma)Expected Volatility
    
    
    52
    %
    
    
    59
    %Expected Life (in years)
    
    
    3.5
    
    
    
    5.0Risk-free interest rate
    
    
    4.8
    %
    
    
    4.0
    %Dividend yield
    
    
    
    
    
    
    Fair value per stock option
    
    $
    1.60
    
    
    $
    1.63
  Weighted AverageNumber of
    
    Weighted
    
    RemainingShares
    
    Average
    
    Contractual Term
    
    Aggregate(in thousands)
    
    Exercise Price
    
    (Years)
    
    Intrinsic ValueOutstanding at January 1, 2006
    
    
    3,706
    
    
    $
    2.54Granted
    
    
    1,002
    
    
    $
    4.73Exercised
    
    
    (745
    )
    
    $
    2.38Forfeited
    
    
    (237
    )
    
    $
    4.01Outstanding at September 30, 2006
    
    
    3,726
    
    
    $
    2.97
    
    
    
    2.86
    
    
    $
    3,524Exercisable at September 30, 2006
    
    
    2,604
    
    
    $
    2.43
    
    
    
    2.33
    
    
    $
    3,367
   Number of Shares
    
    Weighted Average(in thousands)
    
    Grant Date Fair ValueNonvested at December 31, 2005
    
    
    842
    
    
    $
    1.94Granted
    
    
    1,002
    
    
    $
    1.89Vested
    
    
    (596
    )
    
    $
    1.79Canceled
    
    
    (126
    )
    
    $
    1.63Nonvested at September 30, 2006
    
    
    1,122
    
    
    $
    2.02
  9




---



##### 



Number of Shares
    
    Weighted Average(in thousands)
    
    Grant Date Fair ValueNonvested at December 31, 2005
    
    
    208
    
    
    $
    2.61Granted
    
    
    350
    
    
    $
    5.05Vested
    
    
    (206
    )
    
    $
    2.61Canceled
    
    
    (2
    )
    
    $
    2.61Nonvested at September 30, 2006
    
    
    350
    
    
    $
    5.05
 NOTE D  REVENUE RECOGNITION
    NOTE E  ACCOUNTS RECEIVABLE ALLOWANCES & CUSTOMER ACCRUED LIABILITIES
   10




---



##### 



SEPTEMBER 30,
    
    
    DECEMBER 31,2006
    
    
    2005Gross Accounts Receivable
    
    $
    17,956
    
    
    $
    12,642Less:Allowance for Doubtful Accounts
    
    
    (1
    )
    
    
    (13
    )Returns Reserve
    
    
    (2,172
    )
    
    
    (1,529
    )Discount and Allowances Reserve
    
    
    (361
    )
    
    
    (244
    )Chargeback and Rebates Reserves
    
    
    (8,483
    )
    
    
    (7,634
    )Net Trade Accounts Receivable
    
    $
    6,939
    
    
    $
    3,222
     NOTE F  INVENTORIES
  SEPTEMBER 30,
    
    
    DECEMBER 31,2006
    
    
    2005Finished goods
    
    $
    3,086
    
    
    $
    4,914Work in process
    
    
    2,042
    
    
    
    1,702Raw materials and supplies
    
    
    5,293
    
    
    
    3,663$
    10,421
    
    
    $
    10,279
  11




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NOTE G  PROPERTY, PLANT AND EQUIPMENT
  SEPTEMBER30,
    
    
    DECEMBER 31,2006
    
    
    2005Land
    
    $
    396
    
    
    $
    396Buildings and leasehold improvements
    
    
    9,478
    
    
    
    9,393Furniture and equipment
    
    
    29,008
    
    
    
    27,866Automobiles
    
    
    55
    
    
    
    55Sub-total
    
    
    38,937
    
    
    
    37,710Accumulated depreciation
    
    
    (28,277
    )
    
    
    (26,879
    )10,660
    
    
    
    10,831Construction in progress
    
    
    22,584
    
    
    
    20,240Property, Plant, & Equipment, net
    
    $
    33,244
    
    
    $
    31,071
  NOTE H  FINANCING ARRANGEMENTS
  SEPTEMBER 30,
    
    
    DECEMBER 31,2006
    
    
    20052003 Subordinated Notes
    
    $
    
    
    
    $
    2,767Convertible subordinated debentures
    
    
    
    
    
    
    5,000Mortgages payable
    
    
    696
    
    
    
    938696
    
    
    
    8,705Less unamortized discount on debt
    
    
    
    
    
    
    (1,059
    )Less current installments of debt
    
    
    (387
    )
    
    
    (7,044
    )Long-term debt
    
    $
    309
    
    
    $
    602
    12




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NOTE I  COMMON STOCK ISSUANCE
   NOTE J  EARNINGS PER COMMON SHARE
   13




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##### 



NOTE K  INDUSTRY SEGMENT INFORMATION
  THREE MONTHS ENDED SEPTEMBER 30,
    
    
    NINE MONTHS ENDED SEPTEMBER 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESOphthalmic
    
    $
    6,139
    
    
    $
    5,779
    
    
    $
    15,649
    
    
    $
    17,102Hospital Drugs & Injectables
    
    
    6,028
    
    
    
    3,152
    
    
    
    35,029
    
    
    
    10,415Contract Services
    
    
    2,323
    
    
    
    2,054
    
    
    
    6,017
    
    
    
    6,227Total revenues
    
    $
    14,490
    
    
    $
    10,985
    
    
    $
    56,695
    
    
    $
    33,744GROSS PROFITOphthalmic
    
    $
    2,198
    
    
    $
    2,261
    
    
    $
    5,483
    
    
    $
    6,453Hospital Drugs & Injectables
    
    
    3,070
    
    
    
    1,255
    
    
    
    15,437
    
    
    
    4,630Contract Services
    
    
    683
    
    
    
    152
    
    
    
    1,719
    
    
    
    780Total gross profit
    
    
    5,951
    
    
    
    3,668
    
    
    
    22,639
    
    
    
    11,863Operating expenses
    
    
    7,220
    
    
    
    5,685
    
    
    
    21,240
    
    
    
    16,321Operating income (loss)
    
    
    (1,269
    )
    
    
    (2,017
    )
    
    
    1,399
    
    
    
    (4,458
    )Interest & Other income (expense)
    
    
    202
    
    
    
    (595
    )
    
    
    (912
    )
    
    
    (1,705
    )Debt Retirement gain/(expense)
    
    
    
    
    
    
    
    
    
    
    (391
    )
    
    
    1,212Income/(Loss) before income taxes
    
    $
    (1,067
    )
    
    $
    (2,612
    )
    
    $
    96
    
    
    $
    (4,951
    )
  NOTE L  COMMITMENTS AND CONTINGENCIES
 (i)
   14




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(ii)
 (iii)
  (iv)
 NOTE M  CUSTOMER AND SUPPLIER CONCENTRATION
     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 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 SEPTEMBER 30, 2006 COMPARED TO 2005
  THREE MONTHS ENDED SEPTEMBER 30,2006
    
    
    2005Ophthalmic segment
    
    $
    6,139
    
    
    $
    5,779Hospital Drugs & Injectables segment
    
    
    6,028
    
    
    
    3,152Contract Services segment
    
    
    2,323
    
    
    
    2,054Total revenues
    
    $
    14,490
    
    
    $
    10,985
  16




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NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO 2005
  NINE MONTHS ENDED SEPTEMBER 30,2006
    
    
    2005Ophthalmic segment
    
    $
    15,649
    
    
    $
    17,102Hospital Drugs & Injectables segment
    
    
    35,029
    
    
    
    10,415Contract Services segment
    
    
    6,017
    
    
    
    6,227Total revenues
    
    $
    56,695
    
    
    $
    33,744
     17




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FINANCIAL CONDITION AND LIQUIDITY
 Overview
  18




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##### 



Facility Expansion
   CRITICAL ACCOUNTING POLICIES
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   ITEM 4. CONTROLS AND PROCEDURES
  19




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PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    20




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##### 



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  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)
    
    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.(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.)(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)
    
    Waiver and Consent to Credit Agreement dated September 13, 2006, among LaSalle Bank National Association,
the financial institutions party thereto, Akorn, Inc. and Akorn (New Jersey), Inc. incorporated by reference
to Exhibit 10.1 to Akorn Inc.s report on Form 8-K filed September 14, 2006.(10.2)*
    
    Akorn, Inc. Director Compensation Agreement(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. Whitnell
   Sr. Vice President, Chief Financial Officer
   (Duly Authorized and Principal Financial Officer)Date: November 9, 2006
 24