| 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements | Note 2. Summary of Significant Accounting
Policies and Recent Accounting Pronouncements Basis of Presentation The accompanying consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), applied on a consistent
basis. Principles of Consolidation The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been
eliminated. Management's Estimates and Assumptions The preparation of consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates. The Company reviews all significant
estimates affecting the consolidated financial statements on a recurring basis and records the effect of any necessary adjustments
prior to their issuance. Significant estimates of the Company include: revenue recognition, sales allowances such as returns on
product sales, government program rebates, customer coupon redemptions, wholesaler/pharmacy discounts, product service fees, rebates
and chargebacks, sales commissions; useful lives of amortizable intangible assets; provisions for income taxes; uncertain tax positions,
and realizability of deferred tax assets; expected future cash flows used in evaluating intangible assets for impairment; stock-based
compensation; and the allocation of the purchase price for acquired assets and businesses, including the fair value of contingent
consideration. On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately reflect changes
in the Company's business and new information as it becomes available. If historical experience and other factors used by management
to make these estimates do not reasonably reflect future activity, the Company's consolidated financial statements could be materially
impacted. Business Acquisitions Acquired businesses are accounted for using
the acquisition method of accounting. The acquisition method of accounting for acquired businesses requires, among other things,
that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, with limited
exceptions, and that the fair value of acquired in-process research and development ("IPR&D"), be recorded on the
balance sheet. Also, transaction costs are expensed as incurred. Any excess of the acquisition consideration over the assigned
values of the net assets acquired is recorded as goodwill. Contingent consideration is included within the acquisition cost and
is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair
value at each reporting date until the contingency is resolved and changes in fair value are recognized in earnings. If the acquired
net assets do not constitute a business under the acquisition method of accounting, the transaction is accounted for as an asset
acquisition and no goodwill is recognized. In an asset acquisition, the amount allocated to acquired IPR&D with no alternative
future is charged to expense at the acquisition date. Fair Value of Financial Instruments The estimated fair values of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short
maturity periods. The fair value of acquisition-related contingent consideration is based on estimated discounted future cash flows
and assessment of the probability of occurrence of potential future events. The fair value of long-term debt is based on quoted
market prices, if available, or estimated discounted future cash flows. Cash and Cash Equivalents Cash and cash equivalents include certain
money-market funds with maturities of three months or less when purchased. The restricted cash amount at December 31,
2015 consists of amounts escrowed for the purchase of Zohydro ER with BeadTek. In accordance with the asset purchase agreement,
the Company has deposited $10.0 million in an escrow fund to be held for a period of 12 months from the closing date as a security
to pay, or be applied against, any losses incurred by the Company that are subject to the general representations, warranties and
indemnification obligations of Zogenix. The Company is considered to be the legal and tax owner of the fund until the expiration
of the escrow period of 12 months. Accordingly, the amount of $10.0 million in the escrow fund is recognized as restricted cash
and consideration payable to Zogenix. Restricted cash and the restricted cash payable are presented separately under current assets
and current liabilities, respectively, in the consolidated balance sheets. See Note 4, Business Combinations and Other
Acquisitions Concentrations of Credit Risk and Economic
Dependency The financial instruments that potentially
subject the Company to concentrations of credit risk are cash, cash equivalents, and accounts receivable. The Company invests its excess cash in high
quality, money market instruments. The Company maintains its cash and cash equivalents with a major financial institution. At times,
such amounts may exceed federally insured limits. The Company has not experienced any significant losses on its cash or cash equivalents. The Company's accounts receivable primarily
represent amounts due from drug wholesalers, retail drug stores, mass merchandisers and grocery store pharmacies in the United
States. The Company performs periodic credit evaluations of customers and does not require collateral. An allowance for doubtful
accounts is maintained for potential credit losses based on the aging of accounts receivable, historical bad debts experience,
and changes in customer payment patterns. Accounts receivables balances are written off against the allowance when it is probable
that the receivable will not be collected. The Company primarily sold to three major customers in 2015, 2014 and 2013. See
Note 18, Concentrations The Company relies on certain materials used
in its development and manufacturing processes, some of which are procured from a single source. Most of the Company's manufacturing
arrangements are not subject to long-term agreements and generally may be terminated by either party without penalty at any time.
For the year ended December 31, 2015, approximately 25% of the inventory purchases, were from two primary suppliers - GSK and Aphena
Pharma Solutions, allocated 15% and 10%, respectively. For the year ended December 31, 2014, approximately 38% of the
inventory purchases, excluding the generic lice product, Spinosad, which is purchased exclusively from ParaPRO, were from three
primary suppliers, allocated 14%, 13% and 11% respectively, and approximately 14% of the inventory purchases were manufactured
by Woodfield Pharmaceuticals (the purchaser of PML). For the year ended December 31, 2013, approximately 42% of the
inventory purchases, excluding Natroba and its generic, Spinosad, which was purchased exclusively from ParaPRO, were from three
primary suppliers, allocated 21%, 13% and 8%, respectively, and approximately 16% of the inventory purchases were manufactured
by PML. The Company believes that it has good relationships with its current suppliers, and could secure the services of
alternative suppliers if necessary or required. Inventories Inventory is valued at the lower of cost or
market, with cost determined by using the specific identification method. Allowances for slow-moving, obsolete, and/or declines
in the value of inventory are determined based on management's assessments. Sample inventory is included in prepaid expenses and
other current assets on the consolidated balance sheets and are expensed to selling, general and administrative expenses on the
consolidated statements of operations and comprehensive loss The Company evaluates the carrying value of
inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared with quantities
on hand, the price the Company expects to obtain for products in their respective markets compared with historical cost and the
remaining shelf life of goods on hand. Property, Equipment and Depreciation Property and equipment are stated at cost,
less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets,
which ranges from three to seven years. Leasehold improvements are amortized over the shorter of the noncancelable term
of the operating lease or their economic useful lives. Maintenance and repairs are charged against earnings when incurred.
Additions and improvements that extend the economic useful life of the asset are capitalized. The cost and accumulated depreciation
of assets sold or retired are removed from the respective accounts, and any resulting gain or loss is reflected in current earnings. Goodwill The Company tests goodwill for impairment
annually in December and when events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill
represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed. The
Company has determined that it operates in a single segment and has a single reporting unit associated with the development and
commercialization of pharmaceutical products. The test for goodwill impairment is a two-step process. Step 1 is a comparison of
the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit
exceeds the reporting unit's fair value, we report Step 2 of the goodwill impairment test to determine the amount of impairment
loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. Under
such evaluation, if the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, the impairment
loss is recognized as an operating expense as the amount equal to the excess. There were no impairment charges recorded
to goodwill during the periods presented. Intangible Assets Intangible assets with finite useful lives
consist primarily of purchased developed technology and are amortized on a straight-line basis over their estimated useful lives,
which range from 3 to 13 years. The estimated useful lives associated with finite-lived intangible assets are consistent with the
estimated lives of the associated products and may be modified when circumstances warrant. Intangible assets with finite lives
are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. An
impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset
and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between
the carrying value and the fair value of the impaired asset. The fair value of IPR&D acquired through
a business combination is capitalized as an indefinite-lived intangible asset until the completion or abandonment of the related
research and development activities. IPR&D is not amortized but is tested for impairment annually or when events or circumstances
indicate that the fair value may be below the carrying value of the asset. If and when development is complete, which generally
occurs when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then
be amortized over their estimated useful lives. During the years ended December 31, 2015,
2014 and 2013, the Company recorded impairment charges of $24.4 million, $0, and $19.4 million. See Note 12, Goodwill
and Intangible Assets Impairment of Long-lived Assets The Company reviews long-lived assets, such
as property and equipment, subject to amortization, for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Fair value is determined through various valuation techniques including discounted
cash flow models, quoted market values and third-party independent appraisals, as considered necessary. If any long-lived assets
are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds
its fair value. In connection with the sale of PML, the Company recorded impairment charges of $6.7 million against the net assets
of PML in March 2014. See Note 5, Asset Dispositions Deferred Financing Costs Deferred financing costs are reported at cost,
less accumulated amortization, and are recorded in prepaid expenses and other current assets and other long-term assets. Amortization
expense is included in interest expense. Deferred financing costs amortized during years ended December 31, 2015, 2014 and 2013
were $2.7 million, $2.3 million and $1.3 million, respectively. Unamortized deferred financing costs were $12.8 million
and $14.3 million as of December 31, 2015 and 2014, respectively. Equity Method of Accounting The Company's investment in the joint venture
with SEEK was accounted for at cost and adjusted for the Company's share (46%) of the joint venture's undistributed earnings or
losses through May 14, 2012. See Note 11, Investment in Joint Venture, Revenue Recognition Product Sales Product sales revenue is recognized when title
has transferred to the customer and the customer has assumed the risks and rewards of ownership, which is typically on delivery
to the customer or, in the case of products that are subject to consignment agreements, when the customer removes product from
our consigned inventory location for shipment directly to a patient. Revenue from sales transactions where the
buyer has the right to return the product is recognized at the time of sale only if (i) the seller's price to the buyer is
substantially fixed or determinable at the date of sale, (ii) the buyer has paid the seller, or the buyer is obligated to
pay the seller and the obligation is not contingent on resale of the product, (iii) the buyer's obligation to the seller would
not be changed in the event of theft or physical destruction or damage of the product, (iv) the buyer acquiring the product
for resale has economic substance apart from that provided by the seller, (v) the seller does not have significant obligations
for future performance to directly bring about resale of the product by the buyer, and (vi) the amount of future returns can
be reasonably estimated. Revenues from sales of products are recorded
net of estimated allowances for returns, specialty distributor fees, wholesaler fees, prompt payment discounts, government rebates,
government chargebacks, coupon programs and rebates under managed care plans. Provisions for returns, specialty distributor fees,
wholesaler fees, government rebates, coupon programs and rebates under managed care plans are included within current liabilities
in our consolidated balance sheets. Provision for prompt payment discounts are generally shown as a reduction in accounts receivable.
Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, historical
utilization rates, new information regarding changes in these programs' regulations and guidelines that would impact the amount
of the actual rebates, our expectations regarding future utilization rates for these programs and channel inventory data. Co-promotion, Royalties and Other Product
Related Revenues We receive royalties from third parties based
on sales of our products under licensing and distribution arrangements. For those arrangements where royalties are reasonably estimable,
we recognize revenues based on estimates of royalties earned during the applicable period, and adjust for differences between the
estimated and actual royalties in the following quarter. Historically, these adjustments have not been significant. Our contract revenues consist of fees and
milestone payments. Non-refundable fees where we have no continuing performance obligations are recognized as revenues when there
is persuasive evidence of an arrangement and collection is reasonably assured. In situations where we have continuing performance
obligations, non-refundable fees are deferred and are recognized ratably over our projected performance period. Sales-based milestone
payments are typically payments made to us that are triggered when aggregate net sales of a product by a collaborator for a specified
period (for example, an annual period) reach an agreed upon threshold amount. We recognize sales-based milestone payments from
a collaborator when the event which triggers the obligation of payment has occurred, there is no further obligation on our part
in connection with the payment, and collection is reasonably assured. Cost of Product Sales Cost of product sales is comprised of (i)
costs to manufacture or acquire products sold to customers; (ii) royalty, co-promotion and other revenue sharing payments under
license and other agreements granting the Company rights to sell related products; (iii) direct and indirect distribution costs
incurred in the sale of products; and (iv) the value of any write-offs or donations of obsolete or damaged inventory that cannot
be sold. The Company acquired the rights to sell certain of its commercial products through license and assignment agreements with
the original developers or other parties with interests in these products. These agreements obligate the Company to make payments
under varying payment structures based on its net revenue from related products. In connection with the acquisitions of Cypress
and Somaxon, the Company adjusted the predecessor cost basis increasing inventory to fair value as required by ASC No. 820, Fair
Value Measurements and Disclosures Research and Development Research and development costs in connection
with the Company's internal programs for the development of products are expensed as incurred. Pernix either expenses research
and development costs as incurred or will advance third parties a research and development fee, which is amortized over the term
of the related agreement. Advertising Expenses The Company expenses the costs of advertising,
including promotional expenses, as incurred in SG&A. Advertising expenses for 2015, 2014 and 2013 were $9.7 million
$5.8 million, and $50,000, respectively. The increase is due to advertising programs for Treximet and Silenor that were
developed during 2015. Share-Based Compensation The Company recognizes all share-based payments
to employees, including grants of employee stock options and restricted share units ("RSUs"), at estimated fair value.
The Company amortizes the fair value of stock option or RSU grants on a straight-line basis over the requisite service period of
the individual stock option or RSU grant, which generally equals the vesting period. Stock option and RSU forfeitures are estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Segment Information The Company currently markets two major product
lines: a branded pharmaceuticals product line and a generic pharmaceuticals product line. These product lines qualify for reporting
as a single segment in accordance with GAAP because they are similar in the nature of the products and services, production processes,
types of customer, distribution methods and regulatory environment. The Company had a manufacturing subsidiary, PML, until April
21, 2014, when it was divested. See Note 5, Asset Dispositions Presentation of Financial Statements Acquisition-Related Contingent Consideration Acquisition-related contingent consideration,
which consists primarily of potential milestone payments and royalty obligations, is recorded in the consolidated balance sheets
at its acquisition date estimated fair value, in accordance with the acquisition method of accounting. The fair value of the acquisition-related
contingent consideration is remeasured each reporting period, with changes in fair value recorded in the consolidated statements
of income (loss). The fair value measurement is based on significant inputs not observable in the market and thus represents a
Level 3 measurement as defined in fair value measurement accounting. Income Taxes Temporary differences are differences between
the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred taxes represent the future
tax consequences on income taxes when the reported amount of the asset or liability is recovered or settled. Deferred taxes are
measured using the enacted tax rates expected to apply to taxable income in periods in which the deductible or taxable temporary
difference is expected to be recovered or settled. The effect on changes in tax rates and laws are recognized in income from continuing
operations in the period that includes the enactment date. The Company will recognize deferred tax assets for deductible temporary
differences, operating loss and tax credit carryforwards. The Company must also make judgments regarding
the realizability of deferred tax assets. The carrying value of the Company's net deferred tax assets is based on its view of whether
it is more likely than not that the Company will generate sufficient future taxable income in certain jurisdictions to realize
these deferred tax assets. A valuation allowance has been established for deferred tax assets which the Company does not believe
meet the "more likely than not" criteria. The Company's judgments regarding future taxable income may change due to changes
in market conditions, changes in tax laws, tax planning strategies or other factors. If the Company's assumptions and consequently
its estimates change in the future, the valuation allowances it has established may be increased or decreased, resulting in a respective
increase or decrease in income tax expense. The Company's effective tax rate is highly dependent upon the geographic distribution
of its worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, the availability of tax credits
and carryforwards, and the effectiveness of its tax planning strategies. The Company used a two-step approach to recognizing
and measuring uncertain tax positions accounted for in accordance with the guidance on judgments regarding the realizability of
deferred taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized
upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may
require periodic adjustments and which may not accurately anticipate actual outcomes. Income tax returns subject to review by taxing
authorities include 2012 through 2015. Contingencies Periodically, the Company may be involved
in claims and other legal matters. The Company records accruals for loss contingencies to the extent that management
concludes that it is probable that a liability has been occurred and the amount of the related loss can be reasonably estimated. Legal
fees and other expenses related to litigation are expensed as incurred and included in SG&A. See Note 22, Commitments
and Contingencies Earnings per Share Earnings per common share is presented under
two formats: basic earnings per common share and diluted earnings per common share. Basic earnings per common share is computed
by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding
during the period, plus the potentially dilutive impact of common stock equivalents (i.e. restricted stock, stock options,
warrants and convertible notes). Dilutive common share equivalents consist of the incremental common shares issuable upon exercise
of stock options and warrants, conversion of notes or vesting of restricted stock. The following table sets forth the computation
of basic and diluted net loss per share (in thousands, except per share data):
Year ended December 31,
2015 2014 2013
Numerator:
Net loss $ (148,315) $ (35,286) $ (25,635)
Denominator:
Weighted-average common shares, basic 53,321 37,871 36,444
Dilutive effective of stock options - - -
Weighted-average common shares, diluted 53,321 37,871 36,444
Net loss per share, basic and diluted $ (2.78) $ (0.93) $ (0.70) The following table sets forth the potential
common shares that could potentially dilute basic income per share in the future that were not included in the computation of diluted
income (loss) per share because to do so would have been anti-dilutive for the periods presented (in thousands):
Year ended December 31,
2015 2014 2013
4.25% Convertible Notes 7,887 - -
8.00% Convertible Notes - 18,056 -
Stock options and restricted stock 3,948 4,691 2,233
Warrants 469 1,500 469
Total potential dilutive effect 12,304 24,247 2,702 Investments in Marketable Securities and
Other Comprehensive Income On October 5, 2011, the Company acquired 2.6
million shares of TherapeuticsMD for a purchase price of $1.0 million, or $0.38 per share, representing approximately 3.2% of TherapeuticsMD's
outstanding common stock at that time. The Company held investments in marketable equity securities as available-for-sale
and the change in the market value gave rise to other comprehensive income. The components of other comprehensive loss are recorded
in consolidated statements of income (loss), net of the related income tax effect. On June 14, 2013, the Company sold all its shares
of TherapeuticsMD for approximately $4.6 million in cash proceeds, recognizing a gain on the investment of approximately $3.6 million. Recent Accounting Pronouncements In February 2016, the FASB issued Accounting
Standards Update ("ASU") 2016-02 Leases (Topic 842) The leasing standard will be effective for
calendar year-end public companies beginning after December 15, 2018. Public companies will be required to adopt the new leasing
standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will
be permitted for all companies and organizations upon issuance of the standard. For calendar year-end public companies, this means
an adoption date of January 1, 2019 and retrospective application to previously issued annual and interim financial statements
for 2018 and 2017. See Note 22, Commitments and Contingencies, In January 2016, the FASB issued Accounting
Standards Update ("ASU") 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities In November 2015, the FASB issued ASU 2015-17
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. In September 2015, the FASB issued ASU 2015-16
Simplifying the Accounting for Measurement-Period Adjustments In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs In July 2015, the FASB issued, ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory On August 27, 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern In May 2014, the FASB issued Accounting Standards
Update ("ASU") 2014-09, Revenue from Contracts with Customers. There were no other recent accounting pronouncements
that have not yet been adopted by the Company that are expected to have a material impact on the Company's consolidated financial
statements. |
