| 1. Company Overview | Note 1. Company Overview Pernix Therapeutics Holdings, Inc. and subsidiaries
(collectively, Pernix, the Company, we, our and us) is a specialty pharmaceutical company focused on the acquisition, development
and commercialization of prescription drugs, primarily for the United States (U.S.) market. The Company targets underserved therapeutic
areas, such as the central nervous system (CNS) and Pain, including neurology, psychiatry as well as Pain specialties, and has
an interest in expanding into additional specialty segments. The Company promotes its branded products to physicians through its
Pernix sales force, and markets its generic portfolio through its wholly owned subsidiaries, Macoven Pharmaceuticals, LLC (Macoven)
and Cypress Pharmaceuticals, Inc. (Cypress). The Company's branded products include Treximet®,
a medication indicated for the acute treatment of migraine attacks with and without aura, Silenor®, a non-controlled substance
and approved medication for the treatment of insomnia characterized by difficulty with sleep maintenance and Zohydro ER® with
BeadTek, an extended-release opioid agonist indicated for the management of pain severe enough to require daily, around-the-clock,
long-term opioid treatment and for which alternative treatment options are inadequate. The accompanying unaudited condensed consolidated
financial statements included herein have been prepared by the Company in accordance with generally accepted accounting principles
in the United States (GAAP) and under the rules and regulations of the United States Securities and Exchange Commission (SEC) for
interim reporting. In management's opinion, the interim financial data presented includes all adjustments (consisting solely of
normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. Certain
information required by GAAP has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results
for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any future
period or for the year ending December 31, 2017. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for
the year ended December 31, 2016, included in Pernix's 2016 Annual Report on Form 10-K filed with the SEC. The preparation of the unaudited condensed
consolidated financial statements requires management to make estimates and assumptions relating to reporting of the assets and
liabilities and the disclosure of contingent assets and liabilities to prepare these unaudited condensed consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period in conformity with GAAP. 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, amortization,
stock-based compensation, the determination of fair values of assets and liabilities in connection with business combinations,
and deferred income taxes. Actual results could differ from these estimates. Subsequent Events The Company has evaluated all events and transactions
since June 30, 2017 and did not have any recognized subsequent events but did have the following non-recognized subsequent events: Exchange Agreement On
July 20, 2017, the Company entered into an exchange agreement (the "Exchange Agreement") between Pernix and certain holders
(the "Holders") of Pernix's outstanding 4.25% Convertible Senior Notes due 2021 (the "4.25% Convertible Notes").
The Exchange Agreement governs the entry into several refinancing transactions (collectively, the "Transactions"). The
Transactions closed on July 21, 2017, and include:
A new five-year $40 million
asset-based revolving credit facility (the "New ABL Facility") by and among Pernix and certain subsidiaries of Pernix
as borrowers and guarantors (the "ABL Borrowers") and Pernix Ireland Pain Limited ("PIPL"), Pernix Ireland Limited,
Pernix Holdco 1, LLC, Pernix Holdco 2, LLC and Pernix Holdco 3, LLC as additional guarantors (the "ABL Guarantors"), Cantor
Fitzgerald Securities, as agent, and the Holders, as lenders. The New ABL Facility will replace Pernix's current asset-based revolving
credit agreement, dated as of August 21, 2015, by and among the ABL Borrowers, Wells Fargo Bank, National Association, as administrative
agent, and the lenders party thereto, as amended (the "Old ABL Facility"); A new five-year $45 million
delayed draw term loan facility (the "Term Facility") among PIPL, Cantor Fitzgerald Securities, as agent, and the Holders,
as lenders; A new indenture providing
for 4.25%/5.25% Exchangeable Senior Notes due 2022 (the "New Notes Indenture") under which PIPL is the issuer and Pernix
and its other subsidiaries are the guarantors (the "Guarantors"), with Wilmington Trust, National Association, as trustee
(the "Trustee"); The issuance to the Holders
of (a) $36,242,500 aggregate principal amount of PIPL's 4.25%/5.25% Exchangeable Senior Notes due 2022 (the "Exchangeable
Notes") pursuant to the New Notes Indenture and (b) 1,100,498 shares of Pernix's common stock (the "Exchange Shares"),
in exchange for the tender to PIPL of $51.8 million aggregate principal amount of 4.25% Convertible Notes held by the Holders
(the "Exchange"). The Exchangeable Notes will be exchangeable for Pernix's common stock; and A registration rights
agreement among Pernix, PIPL and the Holders that provides for the registration under the Securities Act of 1933, as amended,
of the offer and sale of the Exchange Shares and the Underlying Shares (the "Registration Rights Agreement"). The parties to the Exchange Agreement made
certain customary representations and warranties. Under the Exchange Agreement, Pernix and each of its subsidiaries party thereto
agreed to indemnify each Holder (or certain funds and/or accounts for which a Holder or any of its affiliates acts as investment
advisor), its affiliates and the directors, officers, employees and agents of such Holder and each person who controls such Holder
for certain losses arising out of the Exchange Agreement or the "transactions," as defined therein. Pernix also agreed
to conduct a search for up to three new directors and to use its reasonable best efforts to facilitate the selection and appointment
of such directors to Pernix's board of directors within ninety days following the closing of the Transactions. New ABL Facility The ABL Borrowers entered into an asset-based
revolving credit agreement (the "ABL Credit Agreement") with Cantor Fitzgerald Securities, as agent (the "ABL Agent")
and the lenders party thereto to obtain the New ABL Facility. The ABL Borrowers' obligations under the New
ABL Facility are guaranteed by the ABL Borrowers and the ABL Guarantors and are secured by, among other things, the ABL Borrowers'
cash, inventory and accounts, in each case pursuant to a guaranty and security agreement between the ABL Borrowers, ABL Guarantors
and Cantor Fitzgerald Securities as agent. Availability of borrowings under the New ABL Facility from time to time will be subject
to a borrowing base calculation based upon a valuation of the ABL Borrowers' eligible inventories and eligible accounts receivable,
each multiplied by an applicable advance rate, subject to adjustments in accordance with the ABL Credit Agreement. Borrowings under
the New ABL Facility will bear interest at the rate of LIBOR plus 7.50%. In addition, the ABL Borrowers will be required to pay
a commitment fee on the undrawn commitments under the New ABL Facility from time to time at a rate per annum of 0.25% on the unused
commitments under the New ABL Facility, payable monthly. The ABL Credit Agreement contains representations and warranties, affirmative
and negative covenants, and events of default applicable to the Company, the other ABL Borrowers, the ABL Guarantors and their
respective subsidiaries that are customary for credit facilities of this type. The New ABL Facility will mature on July 21, 2022. The New ABL Facility will refinance the Old
ABL Facility in full and enhances the Company's financial flexibility, increases liquidity and extends the maturity date from July
31, 2017 to July 21, 2022. Term Facility PIPL entered into a term loan credit agreement
(the "Term Credit Agreement") with Cantor Fitzgerald Securities, as agent (the "Term Agent") and the lenders party
thereto to obtain the new Term Facility. $30 million under the Term Facility was drawn on the date of closing of the Transactions,
and the remaining $15 million will be available for subsequent draws for certain specified purposes, including to finance certain
acquisitions, subject to conditions set forth in the Term Credit Agreement. The Term Facility includes an incremental feature that
allows PIPL, with the consent of the requisite lenders under the Term Facility, to obtain up to an additional $20 million in term
loan commitments from new or existing lenders under the Term Facility that agree to provide such commitments. Interest on the loans
will accrue either in cash or a combination of cash and in kind interest, at PIPL's election. Cash interest will accrue at a rate
of 7.50% per annum, while the combination of cash and in-kind interest will accrue at a rate of 8.50% per annum, with up to 4.00%
per annum added to the principal amount of loans and the balance paid in cash. The Term Facility contains representations and warranties,
affirmative and negative covenants, and events of default applicable to PIPL and its subsidiaries (if any) that are customary for
credit facilities of this type. The Term Facility will mature on July 21, 2022. PIPL also entered into a mortgage debenture
with Cantor Fitzgerald Securities as agent, pursuant to which PIPL's obligations under the Term Facility will be secured by substantially
all of the assets of PIPL and its future-acquired subsidiaries. Upon the closing of the Transactions, the
Term Facility provided the Company with $30 million of liquidity immediately and, subject to conditions set forth in the Term Credit
Agreement, $15 million of additional liquidity for certain specified purposes in the future, as well as the potential for an additional
$20 million in commitments subject to lender consent. Exchangeable Notes PIPL, the Guarantors, and Wilmington Trust,
National Association, as Trustee, entered into the New Exchangeable Notes Indenture. The Exchangeable Notes issued under the New
Notes Indenture will be guaranteed by Pernix and each other subsidiary thereof. The Exchangeable Notes are senior, unsecured obligations
of PIPL. Interest on the Exchangeable Notes will be paid in cash or a combination of cash and in-kind interest at PIPL's election.
Interest paid in cash (the "All Cash Method") will accrue at a rate of 4.25% per annum, while interest paid in a combination
of cash and in-kind will accrue at a rate of 5.25% per annum, with 2.25% per annum of interest (plus additional interest, if any)
capitalized to the principal amount of the Exchangeable Notes, and the balance paid in cash. The maturity date of the Exchangeable
Notes Indenture is July 15, 2022. The Exchangeable Notes initially are exchangeable
into shares of the Company's common stock at an exchange price per share of $5.50 (the "Exchange Price"). The Exchange
Price will be subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the
issuance of certain stock dividends on the Company's common stock, the issuance of certain rights or warrants, subdivisions, combinations,
distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain Company tender or exchange offers. Holders will exchange all or a portion of
their Exchangeable Notes at their option at any time prior to the close of business on the second scheduled trading day immediately
preceding the maturity date. Upon not less than 30 nor more than 45 trading
days' notice, if the daily Volume Weighted Average Price ("VWAP") (as defined in the Exchangeable Notes Indenture) of the
Company's common stock has been at least 120% of the Exchange Price then in effect for at least 20 trading days (whether or not
consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date
on which such notice of redemption is provided (the "Provisional Redemption", and such date of a Provisional Redemption,
the "Redemption Date"), the Company will have the right to redeem any or all of the Exchangeable Notes at a price equal
to 100% of the principal amount thereof (including any interest capitalized thereto) plus accrued interest that has not been paid
or capitalized to, but excluding, the date on which the Exchangeable Notes are to be redeemed. The redemption price will be paid
in cash. No "sinking fund" will be provided
for the Exchangeable Notes, which means that PIPL will not be required to periodically redeem or retire the Exchangeable Notes.
If PIPL or the Company undergoes a Fundamental Change (as defined below), subject to certain conditions, holders of the Exchangeable
Notes may require PIPL to repurchase for cash all or part of their Exchangeable Notes. The fundamental change repurchase price
will be equal to 100% of the principal amount (including any interest capitalized thereto) of the Exchangeable Notes to be repurchased,
plus accrued and unpaid interest to, but excluding, the date, chosen by PIPL, that is not less than 20 business days or more than
35 business days following the date on which notice of the Fundamental Change was provided by PIPL. Under the Exchangeable Notes Indenture, a
"Fundamental Change" will be deemed to have occurred if, among other events, any of the following occurs: (i) any "group"
or "person," within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (as amended, the "Exchange
Act"), other than a permitted holder under the Exchangeable Notes Indenture, becomes the direct or indirect "beneficial
owner," as defined in Rule 13d-3 under the Exchange Act, of the Company's common stock representing more than 50% of the Company's
voting power; (ii) the Company consummates any recapitalization, reclassification or change of the Company's common stock, subject
to certain exceptions as contained in the Exchangeable Notes Indenture; (iii) the Company effects any share exchange, consolidation
or merger pursuant to which the Company's common stock will be converted into cash, securities or other property or assets; (iv)
the Company effects any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all
of the Company's consolidated assets to a person or entity other than a permitted holder under the Exchangeable Notes Indenture;
(v) the Company's stockholders approve a plan or proposal for the Company's liquidation or dissolution or the liquidation or dissolution
of PIPL; and (vi) the Company's common stock ceases to be listed on The New York Stock Exchange, The NASDAQ Global Select Market
or The NASDAQ Global Market (or any of their respective successors). Holders of the Exchangeable Notes are entitled
to receive, in certain circumstances, additional shares of the Company's common stock upon exchanges of Exchangeable Notes in connection
with a Provisional Redemption or certain Fundamental Changes. Subject to certain limited exceptions, the
Exchangeable Notes contain covenants which prohibit or limit the ability of PIPL and the Guarantors to, among other things: (i)
pay cash dividends or making distributions on the Company's capital stock or redeem or repurchase the Company's capital stock;
(ii) create, assume or suffer to exist at any time any lien upon any of the Company's properties or assets; (iii) incur any debt
other than debt permitted under the terms of the Exchangeable Notes Indenture; (iv) enter into transactions with affiliates other
than on terms and conditions that, taken as a whole, would be obtained in an arm's-length transaction with non-affiliates; and
(v) make any sale of the Company's assets and the assets of the Company's subsidiaries except in accordance with the terms of the
Exchangeable Notes Indenture. The Exchangeable Notes Indenture provides
for customary events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization
involving PIPL) occurs and is continuing, the Trustee by notice to PIPL, or the holders of at least 25% in principal amount of
the then outstanding Exchangeable Notes by written notice to PIPL and the Trustee, may declare 100% of the accreted principal of
and accrued and unpaid interest, if any, on all of the Exchangeable Notes to be due and payable immediately. Upon the occurrence
of certain events of bankruptcy, insolvency or reorganization involving PIPL, 100% of the principal of and accrued and unpaid interest,
if any, on all of the Exchangeable Notes will become due and payable automatically, including a make-whole premium in an amount
equal to the present value of the interest that would accrue on such Exchangeable Notes (assuming the All Cash Method) from, and
including, such date of acceleration until the maturity date of the Exchangeable Notes, with such present value computed using
a discount rate equal to the sum of (i) the yield to maturity of United States Treasury securities with remaining maturity equal
to that of the Exchangeable Notes (as determined in a commercially reasonable manner by PIPL) on such date of acceleration and
(ii) 50 basis points. Notwithstanding the foregoing, for up to 270 days after the occurrence of an event of default, PIPL may elect
to have the sole remedy for an event of default relating to certain of PIPL's failures to comply with certain reporting covenants
in the Exchangeable Notes Indenture consist exclusively of the right to receive additional interest on the Exchangeable Notes. Holders of Exchangeable Notes will not be
entitled to receive shares of the Company's common stock upon exchange of any Exchangeable Notes to the extent such holder (or
group of which such holder is a part) would beneficially own more than 9.99% of the outstanding shares of the Company's common
stock. Subject to such limitation, at the initial Exchange Price, the Exchangeable Notes will be exchangeable into approximately
40% of the Company's outstanding common stock as of the date hereof (after giving effect to the issuance of the Exchange Shares
and the common stock underlying the Exchangeable Notes). The Exchange allowed the Company to reduce
the principal amount of its outstanding indebtedness through the exchange of the Holders' 4.25% Convertible Notes for a smaller
principal amount of the Exchangeable Notes. The principal amount of the Exchangeable Notes may be reduced if the holders thereof
exchange their Exchangeable Notes for shares of the Company's common stock. The Exchangeable Notes Indenture will provide capacity
to refinance up to an additional $25.0 million principal amount of the 4.25% Convertible Notes, which refinancing could also provide
an opportunity to further reduce the principal amount of the Company's outstanding indebtedness. GSK Agreement On July 20, 2017, Pernix and its wholly owned
subsidiary Pernix Ireland Limited (together, the "Pernix Parties") and Glaxo Group Limited, GlaxoSmithKline LLC, GlaxoSmithKline
Intellectual Property Holdings Limited, and GlaxoSmithKline Intellectual Property Management Limited (collectively, "GSK")
entered into an amendment ("Amendment No. 2") to the Interim Settlement Agreement between the Pernix Parties and GSK dated
July 27, 2015 (as amended, the "Interim Settlement Agreement"). Amendment No. 2 permits payment by the Pernix Parties
to GSK of a reduced amount in full satisfaction of the remaining approximately $21.2 million unpaid portion of the award (the "Award")
granted to GSK in the arbitration of certain matters previously disputed by the parties. Pursuant to Amendment No. 2, the
Pernix Parties are obligated to make two fixed payments to GSK: (i) a payment of $3.45 million due on or before August 4, 2017,
and (ii) a payment of $3.2 million due on or before December 31, 2017. In addition, the Pernix Parties agreed that if on or before
September 30, 2019, Pernix (x) redeems or repurchases 4.25% Convertible Notes for greater than 31.00 cents for every one dollar
of principal amount outstanding or (y) exchanges such notes for new notes or similar instruments that have a face value providing
such exchanging holders a recovery that is greater than 31.00 cents for every one dollar of 4.25% Convertible Notes exchanged by
such holders, Pernix shall, no later than five business days thereafter, distribute to GSK additional cash or notes, as applicable,
equal to such excess recovery, but in no event to exceed $2 million. GSK has agreed that for so long as the Pernix Parties
comply with the payment terms set forth in the Amendment No. 2, enforcement of the Award will be stayed and GSK shall not seek
to enforce or exercise any other remedies in respect of the Award, and that the outstanding balance of the Award shall be unconditionally
and irrevocably forgiven upon satisfaction of such terms. A portion of the proceeds from the Transactions will be used to
pay the amounts due to GSK under Amendment No. 2. Second Supplemental Indenture In connection with the Transactions, the Company
and certain of its wholly owned subsidiaries, Pernix Holdco 1, LLC, Pernix Holdco 2, LLC and Pernix Holdco 3, LLC (each, a "New
Guarantor", and collectively, the "New Guarantors") and U.S. Bank, National Association, as trustee, entered into a
second supplemental indenture (the "Second Supplemental Indenture") to that certain indenture dated as of August 19, 2014,
as amended by that certain first supplemental indenture, dated as of April 21, 2015 (as so supplemented, the August 2014 Indenture)
among the Company, certain of its subsidiaries (the "Treximet Guarantors") and U.S. Bank National Association (the August
2014 Trustee), as trustee and collateral agent. Pursuant to the Second Supplemental Indenture, the New Guarantors provided guarantees
of the obligations of the Company with respect to its 12.0% Senior Secured Notes due 2020 (the "Treximet Secured Notes")
issued under the August 2014 Indenture. Going Concern In the Company's Form 10-Q for the quarterly
period ended March 31, 2017, the Company disclosed that there was substantial doubt about the Company's ability to continue as
a going concern. However, management has evaluated the effects of the Transactions and GSK Amendment No. 2 on the Company's financial
condition and now believes that any potential going concern uncertainty that previously existed has been remediated. The Company
believes its existing cash balance, cash from operations and funding from the Transactions will be sufficient to fund its existing
level of operating expenses, current development activities, non-operating payments of debt, interest and general capital expenditure
requirements through at least the next twelve months. Principles of Consolidation The unaudited condensed consolidated financial
statements include the accounts of Pernix's wholly-owned subsidiaries Pernix Therapeutics, LLC, Macoven, Cypress, Cypress' subsidiary,
Hawthorn Pharmaceuticals, Inc., Pernix Ireland Limited and Pernix Ireland Pain Limited. Transactions between and among the Company
and its consolidated subsidiaries are eliminated. Fair Value of Financial Instruments A financial instrument is defined as cash
equivalent, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver
or receive cash or another financial instrument from another party. The Company's financial instruments consist primarily of cash
equivalents, notes receivable, a credit facility, and an arbitration award. The carrying values of these assets and liabilities
approximate their fair value due to their short-term nature. Significant Customers The Company's customers consist of drug wholesalers,
retail drug stores, mass merchandisers and grocery store pharmacies in the United States. The Company primarily sells its products
directly to large national drug wholesalers, which in turn resell the products to smaller or regional wholesalers, retail pharmacies,
chain drug stores, and other third parties. The following tables list the Company's customers that individually comprised
greater than 10% of total gross product sales for the three and six months ended June 30, 2017 and 2016, or 10% of total accounts
receivable as of June 30, 2017 and December 31, 2016.
Gross Product Sales:
Three Months Ended Six Months Ended
June 30, June 30,
2017 2016 2017 2016
McKesson Corporation 34% 35% 34% 36%
AmerisourceBergen Drug Corporation 33% 31% 31% 32%
Cardinal Health, Inc. 23% 26% 25% 26%
Total 90% 92% 90% 94%
Accounts Receivable, net:
June 30, December 31,
2017 2016
McKesson Corporation 31% 36%
Cardinal Health, Inc. 30% 28%
AmerisourceBergen Drug Corporation 29% 28%
Total 90% 92% |
