Akorn Inc. has a market cap of $216.19 million; its shares were traded at around $2.39 with and P/S ratio of 2.85. AKRX is in the portfolios of Michael Price of MFP Investors LLC, Steven Cohen of SAC Capital Advisors.
Highlight of Business Operations:During the quarter ended March 31, 2010, we generated $1,965,000 in cash from operations, primarily due to net income of $3,520,000 with higher sales plus non-cash depreciation, amortization and stock compensation expense totaling $1,603,000, partially offset by the $1,798,000 decrease in the warrant value and a $2,413,000 increase in trade receivables in line with sales increases over the fourth quarter 2009 level. Investing activities generated a $455,000 decrease in cash flow mainly due to $1,185,000 used to purchase or upgrade property, plant and equipment, partially offset by $730,000 received as a partner distribution from the Joint Venture Company. Financing activities used $436,000 in cash during the quarter. The issuance of stock and warrants to Serum generated net proceeds of $2,469,000 which we used to pay off the $3,000,000 outstanding balance under our Credit Agreement.
During the quarter ended March 31, 2009, we used $1,532,000 in cash from operations, primarily due to a net loss of $10,691,000 and a $6,148,000 accounts receivable increase in line with higher sales, partially offset by a $3,993,000 increase in accounts payable and $4,750,000 in supply agreement termination liabilities associated with our Td vaccine supply agreement termination. In addition we had $1,454,000 in deferred financing cost write-offs along with non-cash depreciation, amortization, stock compensation and supply agreement termination expense totaling $3,551,000.
Pursuant to the Modification Agreement, on April 13, 2009, we granted EJ Funds a warrant (the “Modification Warrant”) to purchase 1,939,639 shares of our common stock at an exercise price of $1.11 per share, subject to certain adjustments. The Modification Warrant expires five years after its issuance and is exercisable upon payment of the exercise price in cash or by means of a cashless exercise yielding a net share figure. Under the Modification Agreement, we have the right to convert the Subordinated Note into term indebtedness under the Credit Agreement in exchange for additional warrants, on terms substantially identical to the Modification Warrant, to purchase 343,299 shares of our common stock for each $1,000,000 of converted debt. The exercise price of those warrants would also be $1.11 per share. The fair value of the Modification Warrant, using a Black-Scholes valuation model, was $1,358,000 when the Modification Warrant was issued on April 13, 2009 and increased to $2,425,000 as of December 31, 2009. As of March 31, 2010, the fair value decreased to $1,939,000. The quarterly decrease in value of $486,000 was included as income in our condensed consolidated statement of operations.
On August 17, 2009, we completed negotiations with EJ Funds for additional capacity on our Credit Facility, increasing the loan commitment from $5,650,000 to $10,000,000. The Credit Facility is secured by our assets and is not subject to debt covenants until April 1, 2010. In connection with this loan commitment increase, we issued EJ Funds 1,650,806 warrants to purchase our common stock at an exercise price of $1.16, the closing price of our stock on August 14, 2009. The estimated fair value of these warrants, using a Black-Scholes valuation model, was $1,238,000 on August 17, 2009, and this amount was capitalized as financing costs and is being amortized over the remaining term of the Credit Facility. The fair value of this warrant to purchase 1,650,806 shares of our common stock increased from $1,238,000 on August 17, 2009 to $2,096,000 as of December 31, 2009. As of March 31, 2010, the fair value decreased to $1,684,000. The quarterly decrease in value of $412,000 was included as income in our consolidated statement of operations. Future increases or decreases in the fair value of these warrants will be recorded in a similar manner.
In 2008, we capitalized $272,000 of loan origination fees and costs in association with the Credit Facility. In 2009, we incurred closing costs and additional legal fees related to the Credit Facility of $1,182,000. Upon the assignment of the Credit Facility to EJ Funds, we expensed the total deferred financing costs of $1,454,000. In 2009, we capitalized $1,518,000 for the fair value of the Modification Warrant and other costs in association with the assignment of the Credit Facility. We are amortizing this balance on a straight-line basis over the remaining term of the Credit Facility. The total expense recorded in the first quarter of 2010 for the amortization of this capitalized balance was $193,000.
On August 17, 2009, we refinanced our $5,000,000 Subordinated Note payable to the Kapoor Trust. The principal amount of $5,000,000 has been increased to $5,853,267 to include accrued interest through August 16, 2009 (interest accruing thereafter is payable monthly) and the annual interest rate of 15% remained unchanged. The term of the Subordinated Note has been extended by an additional five years and is now due and payable on August 17, 2014. As part of this refinancing agreement, we issued the Kapoor Trust an additional 2,099,935 warrants to purchase our common stock at an exercise price of $1.16, the closing price of the our stock on August 14, 2009. The fair value of these warrants on August 17, 2009, using a Black-Scholes valuation model, was $1,575,000 and this amount, along with $28,000 in legal fees, was capitalized as deferred financing costs and is being amortized over the term of the subordinated debt.
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