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 March 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROMTO
 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
þ

  
  Non-accelerated filer
o
(Do not check if a smaller reporting company)

  
  Smaller reporting company
o
  Yes o No þ




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##### 



PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsCondensed Consolidated Balance Sheets-March 31, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations-Three months ended March 31, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Shareholders Equity-Three months ended March 31, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Cash Flows-Three months ended March 31, 2008 and 2007
    
    
    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
    
    
    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, EXCEPT SHARE DATA
 MARCH 31,
    
    
    DECEMBER 31,2008
    
    
    2007(UNAUDITED)
    
    
    (AUDITED)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    3,427
    
    
    $
    7,948Restricted cash for Revolving Credit Agreement
    
    
    3,300
    
    
    
    1,250Trade accounts receivable (less allowance for doubtful
accounts of $3 and $5,
respectively)
    
    
    3,071
    
    
    
    4,112Inventories
    
    
    33,795
    
    
    
    31,095Prepaid expenses and other current assets
    
    
    1,294
    
    
    
    1,317TOTAL CURRENT ASSETS
    
    
    44,887
    
    
    
    45,722PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    31,752
    
    
    
    32,262OTHER LONG-TERM ASSETSIntangibles, net
    
    
    7,032
    
    
    
    7,721Other
    
    
    155
    
    
    
    1,261TOTAL OTHER LONG-TERM ASSETS
    
    
    7,187
    
    
    
    8,982TOTAL ASSETS
    
    $
    83,826
    
    
    $
    86,966LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESRevolving Line of credit
    
    $
    11,264
    
    
    $
    4,521Mortgage Payable
    
    
    105
    
    
    
    208Trade accounts payable
    
    
    8,344
    
    
    
    14,070Accrued compensation
    
    
    1,152
    
    
    
    895Accrued expenses and other liabilities
    
    
    1,342
    
    
    
    1,306TOTAL CURRENT LIABILITIES
    
    
    22,207
    
    
    
    21,000LONG-TERM LIABILITIESProduct warranty liability
    
    
    1,299
    
    
    
    1,308TOTAL LONG-TERM LIABILITIES
    
    
    1,299
    
    
    
    1,308TOTAL LIABILITIES
    
    
    23,506
    
    
    
    22,308SHAREHOLDERS EQUITYCommon stock, no par value  150,000,000 shares authorized;
89,131,592 and 88,900,588 shares issued and outstanding
at March 31, 2008
and December 31, 2007, respectively
    
    
    167,099
    
    
    
    165,829Warrants to acquire common stock
    
    
    2,731
    
    
    
    2,795Accumulated deficit
    
    
    (109,510
    )
    
    
    (103,966
    )TOTAL SHAREHOLDERS EQUITY
    
    
    60,320
    
    
    
    64,658TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    83,826
    
    
    $
    86,966
  3




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##### 



AKORN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 IN THOUSANDS, EXCEPT PER SHARE DATA
 (UNAUDITED)
 THREE MONTHS ENDEDMARCH 31,2008
    
    
    2007Revenues
    
    $
    14,459
    
    
    $
    11,735Cost of sales
    
    
    10,712
    
    
    
    9,246GROSS PROFIT
    
    
    3,747
    
    
    
    2,489Selling, general and administrative expenses
    
    
    6,257
    
    
    
    5,242Amortization of intangibles
    
    
    339
    
    
    
    338Research and development expenses
    
    
    2,376
    
    
    
    2,011TOTAL OPERATING EXPENSES
    
    
    8,972
    
    
    
    7,591OPERATING LOSS
    
    
    (5,225
    )
    
    
    (5,102
    )Interest (expense)/income, net
    
    
    (115
    )
    
    
    259Other expense
    
    
    (201
    )
    
    
    LOSS BEFORE INCOME TAXES
    
    
    (5,541
    )
    
    
    (4,843
    )Income tax provision
    
    
    3
    
    
    
    NET LOSS
    
    $
    (5,544
    )
    
    $
    (4,843
    )NET LOSS PER SHARE:BASIC
    
    $
    (0.06
    )
    
    $
    (0.06
    )DILUTED
    
    $
    (0.06
    )
    
    $
    (0.06
    )SHARES USED IN COMPUTING NET LOSS PER SHARE:BASIC
    
    
    89,053
    
    
    
    86,252DILUTED
    
    
    89,053
    
    
    
    86,252
  4




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##### 



AKORN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 UNAUDITED
 (In Thousands)
 Warrants to
    
    
    Retainedacquire
    
    
    EarningsThree Months Ended March 31, 2008
    
    Common Stock
    
    
    Common
    
    
    (AccumulatedShares
    
    
    Amount
    
    
    Stock
    
    
    Deficit)
    
    
    TotalBALANCES AT DECEMBER 31, 2007
    
    
    88,901
    
    
    $
    165,829
    
    
    $
    2,795
    
    
    $
    (103,966
    )
    
    $
    64,658Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,544
    )
    
    
    (5,544
    )Exercise of warrants into common stock
    
    
    50
    
    
    
    101
    
    
    
    (64
    )
    
    
    
    
    
    
    37Exercise of stock options
    
    
    163
    
    
    
    422
    
    
    
    
    
    
    
    
    
    
    
    422Employee stock purchase plan issuances
    
    
    8
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    58Amortization of deferred compensation
related to restricted stock awards
    
    
    10
    
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    225Stock-based compensation expense
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    464BALANCES AT MARCH 31, 2008
    
    
    89,132
    
    
    $
    167,099
    
    
    $
    2,731
    
    
    $
    (109,510
    )
    
    $
    60,320
 Warrants to
    
    
    Retainedacquire
    
    
    EarningsThree Months Ended March 31, 2007
    
    Common Stock
    
    
    Common
    
    
    (AccumulatedShares
    
    
    Amount
    
    
    Stock
    
    
    Deficit)
    
    
    TotalBALANCES AT DECEMBER 31, 2006
    
    
    85,991
    
    
    $
    150,250
    
    
    $
    4,862
    
    
    $
    (84,798
    )
    
    $
    70,314Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,843
    )
    
    
    (4,843
    )Exercise of warrants into common stock
    
    
    510
    
    
    
    1,033
    
    
    
    (651
    )
    
    
    
    
    
    
    382Exercise of stock options
    
    
    84
    
    
    
    276
    
    
    
    
    
    
    
    
    
    
    
    276Employee stock purchase plan issuances
    
    
    12
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    76Amortization of deferred compensation
related to restricted stock awards
    
    
    
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    221Stock-based compensation expense
    
    
    
    
    
    
    890
    
    
    
    
    
    
    
    
    
    
    
    890BALANCES AT MARCH 31, 2007
    
    
    86,597
    
    
    $
    152,746
    
    
    $
    4,211
    
    
    $
    (89,641
    )
    
    $
    67,316
  5




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##### 



AKORN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 IN THOUSANDS (UNAUDITED)
 THREE MONTHSENDED MARCH 312008
    
    
    2007OPERATING ACTIVITIESNet loss
    
    $
    (5,544
    )
    
    $
    (4,843
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,118
    
    
    
    1,095Non-cash stock compensation expense
    
    
    689
    
    
    
    1,111Changes in operating assets and liabilities:Trade accounts receivable
    
    
    1,041
    
    
    
    2,650Inventories
    
    
    (2,700
    )
    
    
    (2,466
    )Prepaid expenses and other current assets
    
    
    233
    
    
    
    212Other long-term assets
    
    
    1,246
    
    
    
    Trade accounts payable
    
    
    (5,726
    )
    
    
    (619
    )Accrued expenses and other liabilities
    
    
    284
    
    
    
    (982
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (9,359
    )
    
    
    (3,842
    )INVESTING ACTIVITIESPurchases of property, plant and equipment
    
    
    (269
    )
    
    
    (500
    )Purchase of intangible assets
    
    
    
    
    
    
    (50
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (269
    )
    
    
    (550
    )FINANCING ACTIVITIESRepayment of long-term debt
    
    
    (103
    )
    
    
    (96
    )Restricted cash for revolving credit agreement
    
    
    (2,050
    )
    
    
    Proceeds from line of credit
    
    
    6,743
    
    
    
    Proceeds from warrants exercised
    
    
    37
    
    
    
    382Proceeds under stock option and stock purchase plans
    
    
    480
    
    
    
    352NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    5,107
    
    
    
    638DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (4,521
    )
    
    
    (3,754
    )Cash and cash equivalents at beginning of period
    
    
    7,948
    
    
    
    21,818CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    3,427
    
    
    $
    18,064Amount paid for interest
    
    $
    175
    
    
    $
    14Amount paid for income taxes
    
    $
    3
    
    
    $
    1
  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
    
    THREE MONTHSENDED
    
    ENDEDMARCH 31, 2008
    
    MARCH 31, 2007Expected volatility
    
    
    44
    %
    
    
    46
    %Expected life (in years)
    
    
    4.0
    
    
    
    3.6Risk-free interest rate
    
    
    2.8
    %
    
    
    4.6
    %Dividend yield
    
    
    
    
    
    
    Weighted-average grant date fair values
    
    $
    2.62
    
    
    $
    2.46Forfeiture rate
    
    
    10
    %
    
    
    10
    %
  8




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##### 



Weighted AverageNumber of
    
    Weighted
    
    RemainingShares
    
    Average
    
    Contractual Term
    
    Aggregate(in thousands)
    
    Exercise Price
    
    (Years)
    
    Intrinsic ValueOutstanding at January 1, 2008
    
    
    4,719
    
    
    $
    4.69Granted
    
    
    29
    
    
    
    7.04Exercised
    
    
    (163
    )
    
    
    2.58Forfeited
    
    
    (137
    )
    
    
    6.33Outstanding at March 31, 2008
    
    
    4,448
    
    
    
    4.73
    
    
    
    2.7
    
    
    $
    3,428Exercisable at March 31, 2008
    
    
    2,726
    
    
    
    3.99
    
    
    
    2.1
    
    
    $
    3,278
    Number of Shares
    
    Weighted Average(in thousands)
    
    Grant Date Fair ValueNonvested at December 31, 2007
    
    
    175
    
    
    $
    5.05Granted
    
    
    50
    
    
    
    7.34Vested
    
    
    (10
    )
    
    
    7.34Canceled
    
    
    
    
    
    
    Nonvested at March 31, 2008
    
    
    215
    
    
    $
    5.48
 NOTE D  REVENUE RECOGNITION
    NOTE E  ACCOUNTS RECEIVABLE ALLOWANCES
  9




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##### 



MARCH 31,
    
    
    DECEMBER 31,2008
    
    
    2007Gross accounts receivable
    
    
    16,533
    
    
    $
    17,317Less:Allowance for doubtful accounts
    
    
    (3
    )
    
    
    (5
    )Returns reserve
    
    
    (974
    )
    
    
    (1,153
    )Discount and allowances reserve
    
    
    (387
    )
    
    
    (357
    )Chargeback and rebates reserves
    
    
    (12,098
    )
    
    
    (11,690
    )Net trade accounts receivable
    
    
    3,071
    
    
    
    4,112
     NOTE F  INVENTORIES
  MARCH 31,
    
    
    DECEMBER 31,2008
    
    
    2007Finished goods
    
    $
    24,779
    
    
    $
    20,804Work in process
    
    
    1,405
    
    
    
    2,173Raw materials and supplies
    
    
    7,611
    
    
    
    8,118$
    33,795
    
    
    $
    31,095
  10




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##### 



NOTE G  PROPERTY, PLANT AND EQUIPMENT
  MARCH 31,
    
    
    DECEMBER 31,2008
    
    
    2007Land
    
    $
    396
    
    
    $
    396Buildings and leasehold improvements
    
    
    18,236
    
    
    
    18,236Furniture and equipment
    
    
    39,048
    
    
    
    39,030Automobiles
    
    
    55
    
    
    
    55Sub-total
    
    
    57,735
    
    
    
    57,717Accumulated depreciation
    
    
    (32,424
    )
    
    
    (31,645
    )25,311
    
    
    
    26,072Construction in progress
    
    
    6,441
    
    
    
    6,190Property, plant, and equipment, net
    
    $
    31,752
    
    
    $
    32,262
  NOTE H  FINANCING ARRANGEMENTS
 Mortgage Payable
  Credit Facility
   11




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NOTE I  COMMON STOCK ISSUANCE
  NOTE J  EARNINGS PER COMMON SHARE
   NOTE K  INDUSTRY SEGMENT INFORMATION
   12




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THREE MONTHS ENDED MARCH 31,2008
    
    
    2007REVENUESOphthalmic
    
    $
    5,953
    
    
    $
    4,217Hospital Drugs & Injectables
    
    
    5,082
    
    
    
    5,443Biologics & Vaccines
    
    
    1,817
    
    
    
    Contract Services
    
    
    1,607
    
    
    
    2,075Total revenues
    
    $
    14,459
    
    
    $
    11,735GROSS PROFITOphthalmic
    
    $
    1,842
    
    
    $
    674Hospital Drugs & Injectables
    
    
    1,101
    
    
    
    1,518Biologics & Vaccines
    
    
    368
    
    
    
    Contract Services
    
    
    436
    
    
    
    297Total gross profit
    
    
    3,747
    
    
    
    2,489Operating expenses
    
    
    8,972
    
    
    
    7,591Operating loss
    
    
    (5,225
    )
    
    
    (5,102
    )Interest and other (expense)/income
    
    
    (316
    )
    
    
    259Loss before income taxes
    
    $
    (5,541
    )
    
    $
    (4,843
    )
  NOTE L  COMMITMENTS AND CONTINGENCIES
      13




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NOTE M  CUSTOMER AND SUPPLIER CONCENTRATION
     14




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##### 



NOTE N  RECENT ACCOUNTING PRONOUNCEMENTS
    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 U.S. Food and Drug
Administration (FDA), including current Good Manufacturing Practices regulations;
    
    Our ability to obtain regulatory approvals for products manufactured in 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 MARCH 31, 2008 COMPARED TO 2007
  THREE MONTHS ENDED MARCH 31,2008
    
    
    2007Ophthalmic segment
    
    $
    5,953
    
    
    $
    4,217Hospital Drugs & Injectables segment
    
    
    5,082
    
    
    
    5,443Biologics & Vaccines segment
    
    
    1,817
    
    
    
    Contract Services segment
    
    
    1,607
    
    
    
    2,075Total revenues
    
    $
    14,459
    
    
    $
    11,735
 16




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FINANCIAL CONDITION AND LIQUIDITY
 Overview
   17




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##### 



Facility Expansion
   CRITICAL ACCOUNTING POLICIES
  RECENT ACCOUNTING PRONOUNCEMENTS
   18




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  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
    
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  20




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##### 



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 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)
    
    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 on March 7, 2006.(4.2)
    
    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 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.)(4.3)
    
    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.(4.4)
    
    Securities Purchase Agreement dated November 14, 2007, between Akorn, Inc. and Serum Institute of India
Ltd., incorporated by reference to Exhibit 4.1 to Akorn, Inc.s report on Form 8-K filed on November 20,
2007.(10.1)
    
    Amendment to Credit Agreement dated March 10, 2008, by and among LaSalle Bank National Association, Akorn,
Inc. and Akorn (New Jersey), Inc., incorporated by reference to Exhibit 10.86 to Akorn, Inc.s report on
Form 10-K filed March 14, 2008.(10.2)*
    
    Amendment to Credit Agreement dated May 9, 2008, by and among LaSalle Bank National Association, Akorn, Inc.
and Akorn (New Jersey), Inc.(10.3)^
    
    2008 Management Bonus Objectives, incorporated by reference to Exhibit 10.1 to Akorn Inc.s report on Form
8-K filed April 24, 2008.(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. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002(32.2)*
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002
 22




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SIGNATURES
  AKORN, INC./s/ JEFFREY A. WHITNELLJeffrey A. WhitnellSr. Vice President, Chief Financial Officer
(Duly Authorized and Principal Financial Officer)  23