Voluntary Reorganization Under Chapter 11

6 Months Ended

Jun. 30, 2020

Voluntary Reorganization Under Chapter 11

Chapter 11 Cases

On the Petition Date, the Company Parties filed the Chapter 11 Cases in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re Akorn, Inc., et al. Each Company Party continues to operate its business as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. On June 3, 2020, the United States Trustee for the District of Delaware appointed an official committee of unsecured creditors.

On the Petition Date, the Company Parties filed a series of “first-day” motions with the Bankruptcy Court to facilitate the Company Parties’ transition into Chapter 11, including by allowing the Company Parties to make payments upon, or otherwise honor, certain obligations that arose prior to the Petition Date, including obligations related to employee wages, salaries and benefits, taxes, and certain vendors and other providers of goods and services essential to the Company Parties’ businesses. On May 22, 2020, the Bankruptcy Court approved the relief sought in these motions on an interim basis. On June 15, 2020, the Bankruptcy Court entered the final order approving the relief sought.

Restructuring Support Agreement

In contemplation of the Chapter 11 Cases, on the Petition Date, the Company Parties entered into a Restructuring Support Agreement (together with all exhibits and schedules thereto, the “Restructuring Support Agreement”) with certain lenders (the “Consenting Term Lenders”) holding more than 75% in principal amount of the outstanding term loans under the Term Loan Agreement.

The Restructuring Support Agreement provides that the Consenting Term Lenders will support certain transactions (the “Transactions”) in pursuit of the Sale (as defined below) and confirmation of a Chapter 11 Plan contemplated by the plan term sheet attached to and incorporated into the Restructuring Support Agreement (the “Plan”) on the terms set forth in the Restructuring Support Agreement.

The Restructuring Support Agreement contemplates, among other things:

•that the Sale will be conducted pursuant to the bidding procedures attached to and incorporated into the Restructuring Support Agreement (as amended, modified, waived or supplemented, the “Bidding Procedures”), which Bidding Procedures were approved by the Bankruptcy Court on June 15, 2020;

•that the Sale will be conducted as follows:

◦in the event that the Buyer (as defined below) is the Successful Bidder (as defined in the Bidding Procedures), on the terms set forth in the Stalking Horse APA (as defined below), pursuant to which the full amount of indebtedness under the Term Loan Agreement shall be credit bid, or

◦in the event that a Qualified Bidder (as defined in the Bidding Procedures) other than the Stalking Horse Bidder is the Successful Bidder, on the terms of the purchase agreement for the Successful Bidder as approved by the Bankruptcy Court; and

•commitments by the Consenting Term Lenders to provide the debtor-in-possession financing pursuant to the terms and conditions set forth in the DIP Credit Agreement (described below).

In accordance with the Restructuring Support Agreement, the Consenting Term Lenders agreed, among other things, to: (i) vote in favor of the Plan, including supporting all of the debtor and third-party releases, injunctions, discharge and exculpation provisions provided in the Plan; (ii) use commercially reasonable effort to support the Transactions and take all reasonable actions necessary to implement and consummate the Transactions in accordance with the terms, conditions, and applicable deadlines set forth in the Restructuring Support Agreement, the Plan and the Bidding Procedures, as applicable; (iii) direct the Term Loan Agent (or any designated subagent) to credit bid up to the full amount of indebtedness under the Term Loan Agreement and otherwise facilitate the Transactions contemplated by the Restructuring Support Agreement and the Stalking Horse APA; and (iv) negotiate in good faith the applicable Definitive Documents (as defined in the Restructuring Support Agreement) and use their commercially reasonable efforts to agree to the form and substance of such Definitive Documents consistent with the terms of the Restructuring Support Agreement.

In accordance with the Restructuring Support Agreement, the Company Parties agreed, among other things, to: (i) use commercially reasonable efforts to (a) pursue the Transactions on the terms and in accordance with the milestones set forth in the Restructuring Support Agreement, and (b) cooperate with the Consenting Term Lenders to obtain necessary Court approval of the Definitive Documents to consummate the Transactions; (ii) not take any action, and not encourage any other person or entity to, take any action, directly or indirectly, that would reasonably be expected to, breach or be inconsistent with this Agreement, or take any other action, directly or indirectly, that would reasonably be expected to interfere with the acceptance or implementation of the Transactions, this Agreement, the Sale, or the Plan; (iii) use commercially reasonable efforts to obtain any and all required regulatory and/or third-party approvals for the Transactions; (iv) negotiate in good faith and use commercially reasonable efforts to execute and deliver the Definitive Documents and any other required agreements to effectuate and consummate the Transactions as contemplated by this Agreement; and (v) use commercially reasonable efforts to seek additional support for the Transactions from their other material stakeholders to the extent reasonably prudent.

The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to the filing, approval, confirmation and effectiveness of the Plan, entry of orders relating to the DIP Facility and the closing of the Sale.

Stalking Horse APA

The Company Parties entered into an asset purchase agreement (the “Stalking Horse APA”), dated as of May 20, 2020, with certain of the Company’s existing lenders (collectively, the “Buyer”), pursuant to which the Buyer has agreed to purchase, subject to the terms and conditions contained therein, substantially all of the assets of the Company Parties (the “Sale”). Each of the Company Parties is a debtor in the Chapter 11 Cases. The Stalking Horse APA, subject to an auction to solicit higher or otherwise better bids, was approved by the Bankruptcy Court on June 15, 2020. The Bankruptcy Court also approved the Buyer as the “stalking horse” bidder.

Under the terms of the Stalking Horse APA, the Buyer has agreed, absent any higher or otherwise better bid, to acquire substantially all of the assets of the Sellers for aggregate consideration comprising (i) the assumption of certain liabilities, (ii) the credit bid of 100% of the Lenders’ pre-petition claims under the Term Loan Agreement, which amount shall be satisfied by discharging all of the Lenders’ pre-petition claims pursuant to section 363(k) of the Bankruptcy Code, and (iii) an amount in cash equal to the amount set forth in the Wind-Down Budget included as an exhibit to the Stalking Horse APA.

Pursuant to the Stalking Horse APA, if the Company Parties receive any bids that are higher or otherwise better, the Company Parties will conduct an auction no later than eighty-two days after the Petition Date. As the stalking horse bidder, the Buyer’s offer to purchase substantially all of the assets of the Sellers, set forth in the Stalking Horse APA, serves as the minimum or floor bid on which the Company Parties, their creditors, suppliers, vendors, and other bidders may rely. Other interested bidders were permitted to participate in the auction if they submitted qualifying offers that were higher or otherwise better than the stalking horse bid.

Pursuant to the Bidding Procedures approved by the Bankruptcy Court, the bids for the Sale were due 5:00 p.m. (prevailing Eastern Time), on August 3, 2020. No qualified and actionable bids were received by the deadline. As a result, the auction was cancelled. The hearing to approve the Sale is scheduled to take place on August 20, 2020.

Debtor-In-Possession Financing

On May 22, 2020, the Company Parties entered into the DIP Credit Agreement with the DIP Lenders, and Wilmington Savings Fund Society, FSB, as the administrative agent, setting forth the terms and conditions of a $30.0 million debtor-in-possession financing facility (the “DIP Facility”). On May 22, 2020, the Bankruptcy Court granted the motion to approve the Interim DIP Order. Within seven days of such approval, $10.0 million became available to the Company Parties. On June 15,

2020, the Bankruptcy Court entered the Final DIP Order, pursuant to which the full $30.0 million became available to the Company Parties, subject to certain conditions.

For information on the DIP Facility, see Note 8 — Financing Arrangements.

Nasdaq Delisting

On May 21, 2020, the Company received a notification letter from the listing qualifications department staff of Nasdaq indicating that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined that the Company’s common stock would be delisted from Nasdaq. The Company did not appeal Nasdaq’s delisting determination. Accordingly, Nasdaq suspended trading of the Company’s common stock on June 1, 2020. On June 1, 2020, after Company’s common stock was suspended by Nasdaq, it began being quoted on the Pink Open Market operated by OTC Markets Group Inc. under the symbol “AKRXQ”. On June 9, 2020, Nasdaq filed a Form 25-NSE with the SEC to notify the Company that its common stock was going to be delisted, and delisting became effective 10 days after the Form 25 was filed.

Going Concern

The Company’s financial condition and the Chapter 11 Cases raise substantial doubt about our ability to continue as a going concern within one year after the date of the issuance of these financial statements. The accompanying condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and contemplate the continuation of our operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. As a result of the Chapter 11 Cases, the realization of the debtors-in-possession's assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as debtors-in-possession pursuant to the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets, or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business for amounts other than those reflected in the accompanying consolidated financial statements. Further, a Chapter 11 plan of reorganization is likely to materially change from the amounts and classifications of assets and liabilities reported in our condensed consolidated balance sheets as of June 30, 2020. As the progress of these plans and transactions is subject to approval of the Bankruptcy Court and therefore not within our control, successful reorganization and emergence from bankruptcy is not considered probable. The Company’s condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

Liabilities Subject to Compromise

Liabilities subject to compromise refers to prepetition obligations which may be affected by the Chapter 11 Cases. These amounts represent the Company’s current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases. The Company has reviewed prepetition obligations giving consideration to the Chapter 11 motions approved by the Bankruptcy Court and other obligations based on whether they were secured or unsecured to determine the amounts to include within liabilities subject to compromise as shown in the table below. Differences between the liabilities the Company has estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust amounts as necessary. Such adjustments may be material.

The following table summarizes the components of liabilities subject to compromise included in the Company's condensed consolidated balance sheets as of June 30, 2020, (in thousands):


	June 30, 2020
Debt subject to compromise:
Trade accounts payable	$	(7,893)

Accrued royalties	(8,169)
Accrued compensation	(45)

Current portion of accrued legal fees and contingencies	(6,051)
Current portion of lease liability - Operating leases	(2,349)
Accrued expenses and other liabilities	(366)
Long-term lease liability - Operating leases	(20,483)
Long-term portion of accrued legal fees and contingencies	(31,160)
Liabilities subject to compromise	$	(76,516)

Costs of Reorganization

The Company has incurred and will continue to incur significant costs associated with the Chapter 11 Cases. The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Company’s results. Reorganization items represent costs directly associated with the Chapter 11 Cases since the Petition Date. Such costs include professional fees (incurred subsequent to the commencement of the Chapter 11 Cases) and DIP Credit Agreement financing fee. In accordance with ASC 852, any incremental expenses, gains and losses that are realized or incurred as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are recorded under Reorganization items.

The following table summarizes the components of Reorganization items included in the Company’s statement of operations (in thousands):


	Six Months Ended June 30, 2020
Professional fees	$	3,859
DIP Credit Agreement financing fees	1,950
Reorganization items	$	5,809

Cash payments for bankruptcy-related transactions were $0.8 million and $2.0 million, for operating activities and financing activities, respectively, for the six month period ended June 30, 2020. There were no bankruptcy-related cash receipt gains for the six month period ended June 30, 2020.

Debtors-in-Possession Condensed Combined Financial Statements

The condensed combined financial statements of the debtors-in-possession are set forth below. These condensed combined financial statements exclude the financial statements of certain non-debtors-in-possession entities.

Transactions and balances of receivables and payables between debtors-in-possession are eliminated in consolidation. However, the debtors-in-possession’s condensed combined balance sheets includes receivables from related non-debtors-in-possession and payables to related non-debtors-in-possession.

AKORN, INC.

(Debtor-in-possession)

CONDENSED COMBINED BALANCE SHEETS

(In Thousands, Except Share Data)


	June 30, 2020 (Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	78,631
Trade accounts receivable, net	130,921
Inventories, net	172,246
Income taxes receivable	50,204
Prepaid expenses and other current assets	30,676
TOTAL CURRENT ASSETS	462,678
PROPERTY, PLANT AND EQUIPMENT, NET	$	217,261
OTHER LONG-TERM ASSETS

Intangible assets, net	$	203,107
Right-of-use assets, net - Operating leases	21,003

Long-term investments	73,913
Other non-current assets	10,440
TOTAL OTHER LONG-TERM ASSETS	308,463
TOTAL ASSETS	$	988,402

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	30,956

Accrued royalties	1,968
Accrued compensation	16,998
Current portion of long-term debt (net of deferred financing costs)	855,246
Debtor-in-possession financing	30,000
Accrued administrative fees	23,612
Current portion of accrued legal fees and contingencies	4,364

Accrued expenses and other liabilities	21,566
TOTAL CURRENT LIABILITIES	$	984,710
LIABILITIES SUBJECT TO COMPROMISE	76,516
LONG-TERM LIABILITIES


Uncertain tax liabilities	2,741



TOTAL LONG-TERM LIABILITIES	$	2,741
TOTAL LIABILITIES	$	1,063,967





TOTAL SHAREHOLDERS’ (DEFICIT) EQUITY	$	(75,565)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	988,402

AKORN, INC.

(Debtor-in-possession)

CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE (LOSS)

(In Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended June 30,		Six Months Ended June 30,
	2020		2020
Revenues, net	$	119,713	$	322,793
Cost of sales (exclusive of amortization of intangibles, included within operating expenses below)	83,764		190,291
GROSS PROFIT	35,949		132,502

Selling, general and administrative expenses	55,990		120,254
Research and development expenses	9,500		19,344
Amortization of intangibles	6,152		12,294
Impairment of goodwill	—		267,923
Impairment of intangible assets	400		400
Litigation rulings, settlements and contingencies	—		(7,470)
TOTAL OPERATING EXPENSES	$	72,042	$	412,745

OPERATING (LOSS)	(36,093)		(280,243)
Amortization of deferred financing costs	—		(8,629)
Interest expense, net	(33,473)		(58,422)
Reorganization items, net	(5,809)		(5,809)
Other non-operating (expense), net	(323)		(668)

(LOSS) BEFORE INCOME TAXES	(75,698)		(353,771)
Income tax (benefit)	(25,735)		(49,180)

NET (LOSS)	$	(49,963)	$	(304,591)










COMPREHENSIVE (LOSS):
Net (loss)	$	(49,963)	$	(304,591)
Unrealized holding gain on available-for-sale securities, net of tax of $(1) for the three month period ended June 30, 2020, and $(1) for the six month period ended June 30, 2020.	4		3
COMPREHENSIVE (LOSS)	$	(49,959)	$	(304,588)

AKORN, INC.

(Debtor-in-possession)

CONDENSED COMBINED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Six Months Ended June 30,
	2020
OPERATING ACTIVITIES:
Net (loss)	$	(304,591)
Adjustments to reconcile combined net (loss) to net cash (used in) operating activities:
Depreciation and amortization	25,988
Amortization of debt financing costs	8,629
Debtor-in-possession financing costs	1,950
Impairment of intangible assets	400
Goodwill impairment	267,923

Non-cash stock compensation expense	7,778
Non-cash interest expense	3,289

Deferred income taxes, net	(225)

Other	37
Changes in operating assets and liabilities:
Other non-current assets	(7,317)
Trade accounts receivable	1,849
Inventories, net	(12,411)
Prepaid expenses and other current assets	(1,403)
Income taxes receivable	(48,993)
Trade accounts payable	4,875
Accrued legal fees and contingencies	(10,734)

Uncertain tax liabilities	108
Accrued expenses and other liabilities	4,635
NET CASH (USED IN) OPERATING ACTIVITIES	$	(58,213)
INVESTING ACTIVITIES:
Proceeds from disposal of assets	8

Purchases of property, plant and equipment	(9,996)
NET CASH (USED IN) INVESTING ACTIVITIES	$	(9,988)
FINANCING ACTIVITIES:

Proceeds from Debtor-in-possession financing	30,000
Inter-company funding	(19,726)
Debtor-in-possession financing costs	(1,950)
Stock compensation plan withholdings for employee taxes	(98)



NET CASH PROVIDED BY FINANCING ACTIVITIES	$	8,226
Effect of exchange rate changes on cash and cash equivalents	—
(DECREASE) IN CASH AND CASH EQUIVALENTS	$	(59,975)
Cash, cash equivalents, and restricted cash at beginning of period	138,606
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	78,631

AKORN INC 10-Q