Company Quick10K Filing
Pernix Therapeutics Holdings
Price0.91 EPS-5
Shares14 P/E-0
MCap13 P/FCF-1
Net Debt340 EBIT-76
TEV353 TEV/EBIT-5
TTM 2018-09-30, in MM, except price, ratios
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-08
10-Q 2017-09-30 Filed 2017-11-07
10-Q 2017-06-30 Filed 2017-07-27
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-28
10-Q 2016-09-30 Filed 2016-11-10
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-03-10
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-01
10-K 2014-12-31 Filed 2015-03-02
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-08-11
10-Q 2014-03-31 Filed 2014-05-12
10-K 2013-12-31 Filed 2014-03-17
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-09
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-18
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-29
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-30
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-14
10-K 2009-12-31 Filed 2010-02-24
8-K 2019-06-11
8-K 2019-05-15
8-K 2019-05-08
8-K 2019-05-01
8-K 2019-04-30
8-K 2019-04-15
8-K 2019-04-01
8-K 2019-02-22
8-K 2019-02-12
8-K 2018-11-15
8-K 2018-11-08
8-K 2018-10-26
8-K 2018-10-17
8-K 2018-08-27
8-K 2018-08-09
8-K 2018-08-01
8-K 2018-07-27
8-K 2018-06-22
8-K 2018-05-22
8-K 2018-05-10
8-K 2018-04-23
8-K 2018-03-27
8-K 2018-03-08
8-K 2018-02-28
8-K 2018-02-28
8-K 2018-02-16
8-K 2018-02-06
8-K 2018-01-04
8-K 2017-03-29

PTX 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements.
Note 1. Company Overview
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Note 3. Business Combinations/Divestitures
Note 4. Variable Interest Entity
Note 5. Earnings per Share
Note 6. Fair Value Measurement
Note 7. Inventory
Note 8. Goodwill and Intangible Assets
Note 9. Accrued Allowances
Note 10. Debt and Lines of Credit
Note 11. Stockholders' Equity
Note 12. Income Taxes
Note 13. Commitments and Contingencies
Note 14. Restructuring
Note 15. Supplemental Cash Flow Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
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
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6.Exhibits
EX-3.1 exh3-1.htm
EX-10.1 exh10-1.htm
EX-10.2 exh10-2.htm
EX-10.6 exh10-6.htm
EX-10.7 exh10-7.htm
EX-10.8 exh10-8.htm
EX-31.1 exh31-1.htm
EX-31.2 exh31-2.htm
EX-32.1 exh32-1.htm

Pernix Therapeutics Holdings Earnings 2018-09-30

Balance SheetIncome StatementCash Flow
0.70.50.30.1-0.1-0.32013201520172019
Assets, Equity
2519149402013201520172019
Rev, G Profit, Net Income
0.30.20.1-0.1-0.2-0.32013201520172019
Ops, Inv, Fin

10-Q 1 body10q.htm 10-Q Q3 2018 10-Q DOC


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

 

þ

Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2018

o

Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from: _______ to _____________

001-14494
Commission File Number

PERNIX THERAPEUTICS HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)

Maryland

 

33-0724736

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

10 North Park Place, Suite 201, Morristown, NJ

 

07960

  (Address of principal executive offices) 

 

  (Zip Code)

(800) 793-2145
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s) and (2) has been subject to such filing requirements for the past 90 days. Yes    þ     No    o.

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    þ    No    o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer    o

Accelerated filer    o

Non-accelerated filer    þ

Smaller reporting company    þ

Emerging growth company    o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  o    NO  þ

On November 6, 2018, there were 14,505,848 shares outstanding of the Registrant's common stock, par value $0.01 per share.



PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q
For the Three and Nine Months Ended September 30, 2018

INDEX

PART I. 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1. 

Financial Statements (unaudited)

 

 

 

 

Condensed Consolidated Balance Sheets

 

 

3

 

 

Condensed Consolidated Statements of Operations

 

 

4

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Gain

 

 

5

 

 

Condensed Consolidated Statements of Stockholders' Equity (Deficit)

 

 

6

 

 

Condensed Consolidated Statements of Cash Flows

 

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

 

8

 

Item 2. 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 

37

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

53

 

Item 4.

Controls and Procedures

 

 

53

 

 

 

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

 

54

 

Item 1A. 

Risk Factors

 

 

54

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

92

 

Item 3.

Defaults upon Senior Securities

 

 

92

 

Item 4.

Mine Safety Disclosures

 

 

92

 

Item 5.

Other Information

 

 

92

 

Item 6.  

Exhibits

 

 

92

 

 

Signatures

 

 

94

 

 

 

2


PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements.

PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)
(Unaudited)

  

      September 30,     December 31,
      2018     2017
Current assets:            
     Cash and cash equivalents   $ 24,511    $ 32,820 
     Accounts receivable, net     66,443      45,317 
     Inventory, net     17,788      5,396 
     Prepaid expenses and other current assets     11,935      8,628 
     Income tax receivable     45      123 
          Total current assets     120,722      92,284 
             
Property and equipment, net     1,000      752 
Goodwill     17,572      12,100 
Intangible assets, net     133,649      96,606 
Other     1,827      2,263 
               Total assets   $ 274,770    $ 204,005 
Liabilities and Stockholders' Deficit            
Current liabilities:            
     Accounts payable   $ 11,302    $ 7,911 
     Accrued personnel expenses     5,181      5,748 
     Accrued allowances     71,698      56,309 
     Other accrued expenses     10,148      6,909 
     Interest payable     6,381      10,612 
     Treximet Secured Notes - current, net         3,664 
     Other liabilities - current     6,901      2,648 
          Total current liabilities     111,611      93,801 
             
Term loan     41,250     
Convertible notes - long-term, net     67,823      65,194 
Exchangeable notes - long-term, net     10,030      7,975 
Delayed draw term loan - long-term, net     37,805      27,248 
Derivative liability     54      93 
Contingent consideration     1,501      1,358 
Treximet Secured Notes - long-term, net     151,364      163,887 
Credit facility     14,185      14,185 
Deferred revenue     10,840     
Arbitration award         2,000 
Other liabilities - long-term     589      2,521 
          Total liabilities     447,052      378,262 
Commitments and contingencies (note 13)            
Stockholders' deficit:            
     Preferred stock, $0.01 par value; 8,500,000 and 10,000,000 shares authorized             
          at September 30, 2018 and December 31, 2017; no shares issued and
          outstanding at September 30, 2018 and December 31, 2017
       
     Series C convertible preferred stock, $0.01 par value, authorized 1,500,000 shares;             
          81,000 shares issued and outstanding at September 30, 2018        
     Common stock, $0.01 par value, 140,000,000 shares authorized, 13,957,733            
          and 11,841,173 shares issued and outstanding at September 30, 2018 and            
          December 31, 2017, respectively     140      119 
     Additional paid-in capital     274,458      261,158 
     Accumulated other comprehensive loss     85     
     Accumulated deficit     (479,476)     (435,534)
Total Pernix stockholders' deficit     (204,792)     (174,257)
Noncontrolling interests      32,510     
          Total stockholders' deficit     (172,282)     (174,257)
               Total liabilities and stockholders' deficit   $ 274,770    $ 204,005 

See accompanying notes to condensed consolidated financial statements.

3


PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

(In thousands, except per share data)
(Unaudited)

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
                         
Net revenues   $ 37,156    $ 40,469    $ 86,383    $ 104,527 
                         
Costs and operating expenses:                        
     Cost of product sales     11,823      10,580      26,353      31,113 
     Selling, general and administrative expense     31,872      20,226      67,412      59,519 
     Research and development expense     1,524      99      1,534      709 
     Depreciation and amortization expense     2,391      18,214      13,686      54,976 
     Change in fair value of contingent consideration         884      143      344 
     Loss from disposal and impairments of assets     75      25      75      25 
     Gain from legal settlement         (10,476)         (10,476)
     Restructuring costs     (2)     (97)     1,212      34 
          Total costs and operating expenses     47,683      39,455      110,415      136,244 
                         
Income (loss) from operations     (10,527)     1,014      (24,032)     (31,717)
                         
Other income (expense):                        
     Interest expense, net     (10,073)     (9,323)     (29,063)     (27,491)
     Gain on sale of assets             446     
     Change in fair value of derivative liability     18      46      39      (38)
     Gain from exchange of debt     137      14,650      137      14,650 
     Foreign currency transaction (loss) gain     (843)         (864)    
          Total other income (expense), net     (10,761)     5,373      (29,305)     (12,879)
                         
Income (loss) before income tax expense     (21,288)     6,387      (53,337)     (44,596)
Income tax expense     61      27      109      122 
Net income (loss)     (21,349)     6,360      (53,446)     (44,718)
Adjust: Net loss attributable to noncontrolling interests      9,504          9,504     
Net income (loss) attributable to common stockholders   $ (11,845)   $ 6,360    $ (43,942)   $ (44,718)
                         
Net income (loss) per common share attributable to common stockholders:                        
     Basic   $ (0.89)   $ 0.57    $ (3.55)   $ (4.31)
     Diluted   $ (0.89)   $ 0.42    $ (3.55)   $ (4.31)
                         
Weighted-average common shares outstanding:                        
     Basic     13,301      11,117      12,377      10,387 
     Diluted     13,301      16,520      12,377      10,387 

  See accompanying notes to condensed consolidated financial statements.

4


PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands
(Unaudited)

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
                         
Net income (loss)   $ (21,349)   6,360    $ (53,446)   (44,718)
                         
Other comprehensive income (loss):                        
     Foreign currency translation adjustments     849          849     
     Unrealized gain during period, net of tax of $0 and $0, respectively                 33 
Comprehensive income (loss)     (20,500)     6,369      (52,597)     (44,685)
     Less: Comprehensive income attributable to noncontrolling interests     (764)         (764)    
Comprehensive income (loss) attributable to common stockholders   $ (21,264)   $ 6,369    $ (53,361)   $ (44,685)

  See accompanying notes to condensed consolidated financial statements.

5


PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Deficit)

(In thousands)
(Unaudited)

      Series C
Convertible
Preferred Stock
  Common Stock     Additional Paid-In     Treasury     Accumulated     Accumulated
Other
Comprehensive
    Total Pernix
Stockholders'
    Noncontrolling     Total
Stockholders'
      Shares     Amount   Shares     Amount     Capital     Stock     Deficit     Loss     Deficit     interests     Deficit
Balance at December 31, 2016         10,016    100    244,309      (358,393)   (79)   (114,063)     (114,063)
Conversion of restricted stock units           44          (113)                   (112)         (112)
Issuance of Convertible Debt           1,100      11      12,499                  12,510          12,510 
Compensation expense on share-based awards                   2,491                  2,491          2,491 
Net proceeds from sale of shares           681          1,972                  1,979          1,979 
Other comprehensive loss                               79      79          79 
Net loss                           (77,141)         (77,141)         (77,141)
Balance at December 31, 2017           11,841      119      261,158        (435,534)         (174,257)         (174,257)
Capital Contribution - Nalpropion                                       41,250      41,250 
Treximet Secured Notes Conversion     81        1,855      18      11,558                  11,577          11,577 
Conversion of restricted stock units           71          (37)                 (36)         (36)
Compensation expense on share-based awards                   1,328                  1,328          1,328 
Net proceeds from sale of shares           191          451                  453          453 
Other comprehensive loss                               85      85      764      849 
Net loss                           (43,942)         (43,942)     (9,504)     (53,446)
Balance at September 30, 2018     81      13,958    140    274,458      (479,476)   85    (204,792)   32,510    (172,282)

  See accompanying notes to condensed consolidated financial statements.

6


PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)

      Nine Months Ended
      September 30,
      2018     2017
Cash flows from operating activities:            
     Net loss   $ (53,446)   $ (44,718)
     Adjustments to reconcile net loss to net cash used in operating activities:            
          Depreciation     316      277 
          Amortization of intangibles     13,457      54,788 
          Amortization of deferred financing costs     2,839      2,376 
          Accretion expense     3,806      3,837 
          PIK interest      1,409     
          Amortization of acquisition related inventory step-up     2,239     
          Stock compensation expense     1,328      1,935 
          Unrealized foreign currency loss      737     
          Fair market value change in contingent consideration     143      344 
          Fair market value change in derivative liability     (39)     38 
          Gain from legal settlement         (10,476)
          Gain from exchange of debt     (137)     (14,650)
          Impairment of fixed assets      75      25 
          Gain on sale of assets     (446)    
          (Increase) decrease in operating assets, net of effects of acquisitions:            
               Accounts receivable     6,487      2,361 
               Income tax receivable     78      985 
               Inventory     3,556      (355)
               Prepaid expenses and other assets     (3,605)     6,605 
          Increase (decrease) in operating liabilities, net of effects of acquisitions:            
               Accounts payable and accrued expenses     (293)     (2,979)
               Accrued allowances     2,441      (2,707)
               Interest payable     (3,980)     (5,026)
               Other liabilities     (2,360)     (1,878)
                    Net cash used in operating activities     (25,395)     (9,218)
             
Cash flows from investing activities:            
     Acquisition of Orexigen, net of cash acquired     (69,225)    
     Proceeds from sale of non-core assets     446     
     Purchase of software and equipment     (139)     (5)
                    Net cash used in investing activities     (68,918)     (5)
             
Cash flows from financing activities:            
     Nalpropion - Capital Contribution      41,250     
     Proceeds from 2018 Term Loan     41,250     
     Net proceeds from Delayed Draw Term Loan     9,167      30,000 
     Payments on Treximet Secured Notes     (5,373)     (17,511)
     Payments of financing costs     (221)     (13,586)
     Net payments on credit facilities         185 
     Payments on mortgages and capital leases     (38)     (55)
     Proceeds from issuance of common stock, net of tax and costs     453      1,123 
     Shares withheld for the payment of taxes     (37)     (67)
     Stock issuance costs     (549)    
                    Net cash provided by financing activities     85,902      89 
Effect of exchange rate changes on cash and cash equivalents     102     
Net decrease in cash and cash equivalents     (8,309)     (9,134)
Cash and cash equivalents, beginning of period     32,820      36,375 
Cash and cash equivalents, end of period   $ 24,511    $ 27,241 

See accompanying notes to condensed consolidated financial statements.

7


PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 is currently focused on the therapeutic areas of pain and neurology and has an interest in expanding into additional specialty segments. The Company promotes its branded products to health care professionals 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 Zohydro® ER with BeadTek® (Zohydro ER), 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, Treximet® a medication indicated for the acute treatment of migraine attacks with and without aura, and Silenor® a non-controlled substance and approved medication for the treatment of insomnia characterized by difficulty with sleep maintenance.

Subsequent Events

Departure of Angus Smith, Senior Vice President, Chief Business Officer and Principal Financial Officer

On October 26, 2018, Angus Smith notified the Company of his decision to resign as the Company's Senior Vice President, Chief Business Officer and Principal Financial Officer, effective as of November 23, 2018 (the "Effective Date"), to pursue other opportunities. Mr. Smith will continue in his current role through the Effective Date to assist with the transition of his responsibilities and other related matters.

The Company has designated Glenn Whaley, the Company's Vice President of Finance, Principal Accounting Officer and Corporate Controller, as principal financial officer of the Company to succeed Mr. Smith, effective as of the Effective Date. As of the Effective Date, Mr. Whaley's title will be Vice President of Finance, Principal Financial and Accounting Officer.

Nasdaq Deficiency Notices

On October 17, 2018, the Company received notice (the Minimum Market Value of Publicly Held Shares Notice) from the Nasdaq Stock Market LLC (Nasdaq) that the Company is not currently in compliance with the $15 million minimum market value of publicly held shares requirement of Nasdaq Listing Rule 5450(b)(3)(C). The Minimum Market Value of Publicly Held Shares Notice indicated that, consistent with Nasdaq Listing Rule 5810(c)(3)(D), the Company has until April 15, 2019 to regain compliance with the minimum market value of publicly held shares requirement by having the closing market value of publicly held shares, calculated by multiplying the closing bid price of the Company's common stock (Common Stock) by the Company's total shares outstanding (less any shares held by officers, directors or beneficial owners of 10% or more of the total shares outstanding ), meet or exceed $15 million for at least ten consecutive business days.

On October 19, 2018, the Company received notice (the Minimum Bid Price Notice) from Nasdaq that the Company is not currently in compliance with the $1.00 minimum closing bid price requirement of Nasdaq Listing Rule 5450(a)(1). The Minimum Bid Price Notice indicated that, consistent with Nasdaq Listing Rule 5810(c)(3)(A), the Company has until April 17, 2019 to regain compliance with the minimum bid price requirement by having the closing bid price of the Common Stock meet or exceed $1.00 per share for at least ten consecutive business days. If the Company does not regain compliance with the minimum bid price requirement by April 17, 2019, the Company may be eligible to transfer the listing of the Common Stock from the Nasdaq Global Market to the Nasdaq Capital Market if, at the time of such transfer, the Company meets the initial listing requirement for market value of publicly held shares ($1 million) and all other initial listing standards for the Nasdaq Capital Market (except for the minimum bid price requirement) and provides Nasdaq with written notice of its intention to cure the minimum bid price requirement deficiency. In response, Nasdaq may provide the

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Company with an additional 180 day period to satisfy the minimum bid price requirement. However, if it appears to the Nasdaq staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice to the Company that the Common Stock will be subject to delisting pursuant to Nasdaq's delisting procedures.

The notices do not result in the immediate delisting of the Common Stock from the Nasdaq Global Market. If the Common Stock is delisted from the Nasdaq Global Market, the holders of the Convertible Notes (as defined in Note 10 below) and the Exchangeable Notes (as defined in Note 10 below) would have the right to require the Company (in the case of the Convertible Notes) or Pernix Ireland Pain Designated Activity Company (PIP DAC) (in the case of the Exchangeable Notes) to repurchase all of the Convertible Notes and Exchangeable Notes owned by such holders at a price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest thereon, within 35 business days following the Company or PIP DAC giving notice to such holders of the delisting. The Company's or PIP DAC's failure to pay such amounts when due would result in a default under the indentures governing the Convertible Notes or the Exchangeable Notes, as the case may be, which would ripen into an event of default immediately under the indenture governing the Convertible Notes, and within five days of becoming due under the indenture governing the Exchangeable Notes. Further, an event of default under either of these indentures would result in a cross-default under the Delayed Draw Term Loan (as defined in Note 10 below) as well as the ABL Facility (as defined in Note 10 below), which could result in indebtedness outstanding under those instruments to become immediately due and payable. In addition, any acceleration of the debt under the Convertible Notes, the Exchangeable Notes, the Delayed Draw Term Loan or the ABL Facility would trigger an event of default under the indenture governing the Treximet Secured Notes (as defined in Note 10 below), which could result in such indebtedness becoming immediately due and payable.

Going Concern

As of October 17, 2018, the Company was not in compliance with certain Nasdaq Global Market listing requirements. The Company's outstanding 4.25% Convertible Notes (as defined in Note 10 below) in the principal amount of $78.2 million that contain redemption features in the event the Company was not able to maintain its Nasdaq Global Market listing. In addition, the Company's outstanding Exchangeable Notes (as defined in Note 10 below) in the principal amount of $36.1 million contain redemption features in the event the Company is not able to maintain any Nasdaq listing. These factors raise substantial doubt about the ability of the Company to continue as a going concern within one year after the date that these financial statements are issued. The Company continues to seek other sources of capital and alternatives. However, if the Company is unable to raise sufficient capital or maintain its Nasdaq listing to prevent the redemption of its outstanding indebtness, the Company will not have sufficient liquidity to fund its business operations for at least the next year following the date that the financial statements are issued. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Conversion of 0% Series C Perpetual Convertible Preferred Stock

On October 3, 2018, holders of 13,100 shares of the Company' 0% Series C Perpetual Convertible Preferred Stock (Convertible Preferred Stock) elected to convert such Convertible Preferred Stock into 548,115 shares of the Common Stock (see note 11, Stockholders' Equity).

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

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 nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2018.

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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, 2017, included in Pernix's 2017 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.

Certain prior period amounts have been reclassified to conform to the current period presentation including reclassifying capitalized debt issuance costs of approximately $1.5 million from "Prepaid expenses and other current assets" to the Company's long-term debt instruments within "Total liabilities" except for those related to revolving credit facilities. This reclassification had no effect on previously reported results of operations, financial position or cash flows.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and variable interest entities (VIEs) for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company evaluates its ownership, contractual, and other interests in entities that are not wholly owned to determine if these entities are VIEs, and, if so, whether the Company is the primary beneficiary of the VIE. In determining whether the Company is the primary beneficiary of a VIE and therefore required to consolidate the VIE, a qualitative approach is applied that determines whether the Company has both (1) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. The Company will continuously assess whether it is the primary beneficiary of a VIE as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of such VIE. During the three and nine months ended September 30, 2018, the Company's consolidated VIE includes Nalpropion™ Pharmaceuticals Inc. (Nalpropion), and the Company remains the primary beneficiary of Nalpropion (see note 4, Variable Interest Entity). The equity of Nalpropion held by investors other than the Company are treated as a noncontrolling interest in the condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes nearly all existing revenue recognition guidance. Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606) and all the related amendments (new revenue standard) to all contracts using the modified retrospective method. No material differences were identified as compared to the Company's historical revenue recognition accounting and accordingly, the Company did not recognize a cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to the Company's net income on an ongoing basis.

The Company's new revenue recognition policy is as follows:

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally enters into contracts to sell approved branded and generic pharmaceutical drugs.

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  • Product Sales
  • Product sales revenue is recognized at the estimated consideration to be received when control has transferred to the customer, 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 the Company's consigned inventory location for shipment directly to a patient. Payment terms vary by customer and the products or services offered and is generally required in a term ranging from 30 to 90 days from date of shipment or satisfaction of the performance obligation.

  • Significant Judgments
  • Product sales contracts provide the customer with the right to return the product and also provide for a variety of discounts and allowances including, specialty distributor fees, wholesaler fees, prompt payment discounts, government rebates, government chargebacks, coupon programs and rebates under managed care plans which are accounted for as variable consideration. Returns are estimated through comparison of historical return data to their related sales on a production lot basis. Historical rates of return are determined for each product and are adjusted for known or expected changes in the marketplace specific to each product, when appropriate.

    Judgment is required to estimate the appropriate adjustments for variable consideration which is 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, the Company's expectations regarding future utilization rates for these programs and channel inventory data.

  • Contract Balances
  • The timing of customer invoicing generally does not differ from the timing of revenue recognition. The Company records provisions for returns, specialty distributor fees, wholesaler fees, government rebates, coupon programs and rebates under managed care plans are included within current liabilities in the Company's consolidated balance sheets. Provision for prompt payment discounts are generally shown as a reduction in accounts receivable.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, (ASU 2017-09). ASU 2017- 09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for the interim and annual periods beginning after December 15, 2017. The Company adopted the provisions of ASU 2017-09 as of January 1, 2018. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. Under the new standard, when substantially all of the fair value of assets acquired are concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required. The new standard may result in more transactions being accounted for as asset acquisitions rather than business combinations. The standard is effective for interim and annual periods beginning after December 15, 2017 and shall be applied prospectively. The Company adopted ASU 2017-01 as of January 1, 2018, and there was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.

In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which provides updated guidance on eight classification issues related to the statement of cash flows: debt prepayments and extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017. The Company adopted the provisions of ASU 2016-15 as of January 1, 2018. There was no material impact on the Company's results of operations resulting from the adoption of this guidance.

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The accounting standard primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, it includes a clarification related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. The Company adopted ASU 2016-01 as of January 1, 2018, and there was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.

Recently Issued Accounting Standards, Not Adopted as of September 30, 2018

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 which allowed SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of the U.S. Tax Cuts and Jobs Act (TCJA) on December 22, 2017. The Company continues to analyze the TCJA, see Note 12, Income taxes for more information.

In February 2016, the FASB issued ASU no. 2016-02, Leases, which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The leasing standard will be effective for calendar year-end public companies beginning after December 15, 2018, and interim periods within those fiscal years. In July 2018, the FASB issued additional authoritative guidance providing companies with an optional prospective transition method to apply the provisions of this guidance. The Company will adopt the standard in the first quarter of 2019 and elect this transition method to apply the standard prospectively. While the Company is currently evaluating the impact of adoption of this ASU, the adoption is expected to result in a material increase in the assets and liabilities recorded on the condensed consolidated balance sheets.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company's consolidated financial statements.

Significant Customers

The Company's customers consist of drug wholesalers, specialty pharmacies, 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 nine months ended September 30, 2018 and 2017, or 10% of total accounts receivable as of September 30, 2018 and December 31, 2017.

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
                         
McKesson Corporation     39%     35%     35%     34%
AmerisourceBergen Drug Corporation     26%     29%     26%     30%
Cardinal Health, Inc.     25%     23%     24%     24%
     Total     90%     87%     85%     88%

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Accounts Receivable, net:            
      September 30,     December 31,
      2018     2017
             
McKesson Corporation     37%     29%
Cardinal Health, Inc.     29%     31%
AmerisourceBergen Drug Corporation     27%     27%
     Total     93%     87%

Note 3. Business Combinations/Divestitures

Closing of Transactions Regarding Worldwide Rights to Contrave® (naltrexone HCl / bupropion HCl)

On April 17, 2018, PIP DAC entered into a commitment letter (the Commitment Letter) pursuant to which PIP DAC committed to provide Nalpropion with $7.5 million in debt and/or equity capital to fund Nalpropion's purchase of certain assets of Orexigen® Therapeutics, Inc. (Orexigen) on the terms and conditions contained in the Commitment Letter. Nalpropion is a special purpose vehicle jointly owned by PIP DAC and certain other co-investors. Nalpropion submitted a "stalking horse" bid to purchase certain assets of Orexigen, which filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. in the United States Bankruptcy Court for the District of Delaware. On June 22, 2018, the Company announced that no other bids for Orexigen's assets were received by the court-approved bid deadline and, on July 27, 2018, Nalpropion acquired substantially all of the assets of Orexigen, including worldwide rights to Contrave® (Contrave), a prescription-only weight loss medication (the Orexigen Acquisition). The purchase price for the Orexigen Acquisition was $73.5 million with $5 million held back to cover potential indemnification claims. The Company, through PIP DAC, received two purchase options that will enable it to acquire up to 49.9% and 100% of Nalpropion at specified time periods and purchase prices.

Nalpropion financed the Orexigen acquisition utilizing capital sourced from PIP DAC and certain other co-investors, including the full amount of borrowing available, from its 2018 Term Loan facility as defined and as discussed in Note 10. PIP DAC provided capital of $7.35 million, and an incremental $1.82 million for working capital requirements via its existing delayed draw term loan facility, which is structured as a 50% loan and 50% equity contribution to Nalpropion. The co-investors contributed $66.15 million and an incremental $16.35 million for working capital requirements, which was structured as a 50% loan and 50% equity contribution to Nalpropion. PIP DAC and certain affiliates of the co-investors are lenders to Nalpropion under its 2018 Term Loan (see Note 10, Debt and Lines of Credit).

As Nalpropion qualifies as a VIE based on its governance structure and contractual relationship with the Company, the Company will therefore consolidate Nalpropion in its condensed consolidated financial statements since the Company has the power to direct activities that most significantly impact Nalpropion's economic performance (see Note 4, Variable Interest Entity). The Orexigen Acquisition has been accounted for as a business combination using the acquisition method of accounting under the provisions of Accounting Standards Codification ("ASC") 805, Business Combinations by Nalpropion.

Fair Value of Consideration Transferred

The following table indicates the consideration transferred to effect the Orexigen Acquisition:

      Preliminary
      Purchase
      Price
      Allocation
Cash consideration   $ 68,500 
Holdback     5,000 
Total consideration transferred   $ 73,500 

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Assets Acquired and Liabilities Assumed

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The following recognized amounts are provisional and subject to change:

  • amounts for intangible assets, property and equipment, certain liabilities, and other working capital balances pending finalization of the valuation; and

  • amount of goodwill pending the completion of the valuation of the assets acquired and liabilities assumed.
      Amounts
      Recognized
      as of the
      Acquisition
      Date
Cash and cash equivalents   $ 730 
Accounts receivable     27,700 
Inventory (a)     18,219 
Prepaids and other current assets      344 
Property and equipment     426 
Intangible assets (b)     50,500 
Goodwill (c)     5,472 
Accounts payable     (1,097)
Accrued allowances     (13,574)
Accrued personnel expense     (841)
Other liabilities - current     (1,877)
Deferred revenue     (12,502)
    $ 73,500 

_________________________

(a)

Includes an estimated fair value step-up adjustment to inventory of $5.6 million.

(b)

The following table summarizes the preliminary amounts and useful lives assigned to identifiable intangible assets:

 

      Preliminary      
      Intangible     Estimated
      Asset     Useful
      Valuation     Life
Acquired developed technologies   $ 44,800      10 years
Tradenames     4,800      12 years
Other     900      5 years
    $ 50,500       

 

(c)

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents the following:

  • cost savings and operating synergies expected to result from utilizing the Company's shared services;
  • intangible assets that do not qualify for separate recognition (for instance, assembled workforce) and the residual amount paid not allocated to other net assets acquired.

Nalpropion will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. These changes could be significant. Nalpropion will finalize these amounts no later than one year from the acquisition date. To date, Nalpropion has incurred $3.9 million in transaction costs directly related to the Orexigen Acquisition, which includes expenditures for advisory, legal, valuation, accounting and other similar services. These costs have been expensed as acquisition-related costs and is included in selling, general and administrative expenses.

Pro Forma Information

The following table represents the consolidated financial information for the Company on a pro forma basis, assuming that the Orexigen Acquisition occurred as of January 1, 2017. The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the Orexigen Acquisition and are expected to have a continuing impact on the consolidated results. These items include, among others, adjustments to record the amortization of definite-lived intangible assets and interest expense. Additionally, the following table sets forth unaudited financial information and has been compiled from historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transactions occurred on the dates indicated or that may be achieved in the future.

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      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
Net revenues   $ 40,868    $ 59,372    $ 132,572    $ 165,931 
Net income (loss) attributable to Pernix     (22,371)     4,372      (59,890)     (55,574)
                         
Net income (loss) per share attributable to Pernix:                        
Basic   $ (1.68)   $ 0.39    $ (4.84)   $ (5.35)
Diluted   $ (1.68)   $ 0.30    $ (4.84)   $ (5.35)

Sale of Non-Core Assets

On May 29, 2018, the Company received proceeds of $446,000 from the sale of certain obsolete equipment and was recorded as a Gain on sale of assets line in the unaudited condensed consolidated statements of operations for the nine months ended September 30, 2018.

On November 6, 2017, the Company announced the sale of a non-core product, Cedax (ceftibuten capsules and ceftibuten for oral suspension), a third-generation cephalosporin antibiotic for the treatment of acute bacterial exacerbations of chronic bronchitis and middle ear infection, to SI Pharmaceuticals, LLC, for $2.0 million in gross cash proceeds. Cedax was discontinued by Pernix in 2016 and the Company did not generate any sales from this product in 2017.

Note 4. Variable Interest Entity

The Company evaluates its investment in Nalpropion in accordance with the variable interest model to determine whether it has a controlling financial interest in an investment. This evaluation is made as of the date on which the Company makes its initial investment, and subsequent evaluations are made if the structure of the investment changes. If the Company determines that Nalpropion is a VIE, then the Company evaluates whether Nalpropion is required to be consolidated. When the Company holds rights that give it the power to direct the activities of an entity that most significantly impact the entity's economic performance, combined with the obligation to absorb an entity's losses or the right to receive benefits, the Company consolidates a VIE. This determination may involve complex and subjective analyses.

As of September 30, 2018, the Company holds a variable interest in Nalpropion, for which the primary beneficiary of the VIE needs to be determined. The Company has concluded, based on its qualitative consideration of the relationship with Nalpropion and by virtue of the management agreement whereby the Company will assume responsibility for product distribution in the United States and managing Nalpropion, that the Company is the primary beneficiary of Nalpropion.

When the Company consolidates a VIE, it discloses the noncontrolling interest of investors other than the Company in its consolidated financial statements.

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The following items of Nalpropion are included in the Company's condensed consolidated statement of operations for the three and nine months ended September 30, 2018:

    Three Months Ended September 30, 2018
    Pernix     Nalpropion     Eliminations (1)     Total Company
Net revenues incl. related party $ 20,544    $ 17,923    $ (1,311)   $ 37,156 
                       
Costs and operating expenses:                      
     Cost of product sales   6,470      6,664      (1,311)     11,823 
     Selling, general and administrative expense   14,857      17,015      -       31,872 
     Research and development expense       1,522      -       1,524 
     Depreciation and amortization expense   1,434      957      -       2,391 
     Other operating expenses   73      -       -       73 
          Total costs and operating expenses   22,836      26,158      (1,311)     47,683 
                -       -  
Income (loss) from operations   (2,292)     (8,235)     -       (10,527)
                       
Other income (expense):                      
     Interest expense, net   (9,409)     (664)           (10,073)
     Other, net   (83)     (1,661)     1,056      (688)
          Total other income (expense), net   (9,492)     (2,325)     1,056      (10,761)
                       
Income (loss) before income tax expense $ (11,784)   $ (10,560)   $ 1,056    $ (21,288)
                       
(1) Included in Eliminations are transactions Pernix and Nalpropion enter into with one another. Such transactions include the sale of 
     Contrave inventory from Nalpropion to Pernix and elimination of equity in earnings of Nalpropion. 

 

    Nine Months Ended September 30, 2018
    Pernix     Nalpropion     Eliminations (1)     Total Company
Net revenues incl. related party $ 69,771    $ 17,923    $ (1,311)   $ 86,383 
                       
Costs and operating expenses:                      
     Cost of product sales   21,000      6,664      (1,311)     26,353 
     Selling, general and administrative expense   50,397      17,015      -       67,412 
     Research and development expense   12      1,522      -       1,534 
     Depreciation and amortization expense   12,729      957      -       13,686 
     Other operating expenses   1,430      -       -       1,430 
          Total costs and operating expenses   85,568      26,158      (1,311)     110,415 
                       
Income (loss) from operations   (15,797)     (8,235)     -       (24,032)
                       
Other income (expense):                      
     Interest expense, net   (28,399)     (664)     -       (29,063)
     Other, net   363      (1,661)     1,056      (242)
          Total other income (expense), net   (28,036)     (2,325)     1,056      (29,305)
                       
Income (loss) before income tax expense $ (43,833)   $ (10,560)   $ 1,056    $ (53,337)
                       
(1) Included in Eliminations are transactions Pernix and Nalpropion enter into with one another. Such transactions include the sale of 
     Contrave inventory from Nalpropion to Pernix and elimination of equity in earnings of Nalpropion. 

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The following assets and liabilities of Nalpropion are included in the Company's condensed consolidated balance sheet as of September 30, 2018.

    As of September 30, 2018
    Pernix     Nalpropion     Eliminations (1)     Total Company
Cash and cash equivalents (2) $ 18,202    $ 6,309    $ -     $ 24,511 
Accounts receivable, net (3)   58,907      7,536      -       66,443 
Inventory, net   4,174      13,614      -       17,788 
Related party receivable   5,841      38,305      (44,146)     -  
Other current assets   4,844      7,136      -       11,980 
Property and equipment, net   634      366      -       1,000 
Goodwill   12,100      5,472      -       17,572 
Intangible assets   84,047      49,602      -       133,649 
Investment in VIE   3,528      -       (3,528)     -  
Related party loan   4,584      -       (4,584)     -  
Other assets   1,827      -       -       1,827 
                -       -  
Total assets $ 198,688    $ 128,340    $ (52,258)   $ 274,770 
                       
Accounts payable and other accrued expenses $ 15,775    $ 10,856    $ -     $ 26,631 
Accrued allowances   54,543      17,155      -       71,698 
Interest payable   5,784      597      -       6,381 
Related party payable   38,305      5,841      (44,146)     -  
Other liabilities - current   5,806      1,095      -       6,901 
Long term debt excluding 2018 Term Loan   281,207      -       -       281,207 
2018 Term Loan   -       45,834      (4,584)     41,250 
Deferred revenue   -       10,840      -       10,840 
Other liabilities - long-term   2,144      -       -       2,144 
                       
Total liabilities   403,564    $ 92,218    $ (48,730)   $ 447,052 
                       
Total equity   (204,876)   $ 36,122    $ (36,038)   $ (204,792)
Noncontrolling interest   -       -       32,510      32,510 
                       
Total liabilities and equity $ 198,688    $ 128,340    $ (52,258)   $ 274,770 
                       
                       
(1) Included in Eliminations are transactions Pernix and Nalpropion enter into with one another. Such transactions may include the following:
     •   Operating transactions in accordance with a services agreement between Nalpropion and Pernix.
     •   Elimination of investments in Nalpropion.
     •   Elimination of investments in Nalpropion's earnings.
(2) Approximately $12.2 million of cash and cash equivalents related to Nalpropion is held by Pernix at September 30, 2018.
(3) Approximately $23.5 million of Pernix's accounts receivable, net includes accounts receivables related to sales of Contrave.

Note 5. Earnings per Share

Basic net income (loss) per common share is the amount of net income (loss) for the period divided by the weighted average shares of Common Stock outstanding during the reporting period. Diluted income (loss) per common share is the amount of income (loss) for the period plus interest expense on convertible debt divided by the sum of weighted average shares of Common Stock outstanding during the reporting period and weighted average shares that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares.

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The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands except per share data):

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
Numerator:                         
     Net income (loss)   $ (11,845)   $ 6,360    $ (43,942)   $ (44,718)
                         
Denominator - Basic:                        
     Weighted-average common shares     13,301      11,117      12,377      10,387 
                         
Numerator - Diluted:                        
     Net income (loss)   $ (11,845)   $ 6,360    $ (43,942)   $ (44,718)
     Adjustment for interest, net of income tax effect     -       599      -       -  
     Net income (loss), adjusted   $ (11,845)   $ 6,959    $ (43,942)   $ (44,718)
                         
Denominator - Diluted:                        
     Weighted-average common shares     13,301      11,117      12,377      10,387 
     Effect of dilutive securities:                        
          Stock options, Awards and Warrants     -       246      -       -  
          Exchangeable notes     -       5,157      -       -  
     Dilutive potential common shares     -       5,403      -       -  
Weighted-average common shares, diluted     13,301      16,520      12,377      10,387 
                         
Basic income (loss) per share   $ (0.89)   $ 0.57    $ (3.55)   $ (4.31)
Diluted income (loss) per share   $ (0.89)   $ 0.42    $ (3.55)   $ (4.31)

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):

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
Treximet Secured Notes     27,238      -       27,238      -  
Exchangeable Notes     6,572      -       6,572      1,738 
Converible Preferred Stock     3,389      -       3,389      -  
Stock options and restricted stock units     1,511      370      1,511      562 
4.25% Convertible Notes     682      780      682      1,014 
Warrants         -           33 
Total potential dilutive effect     39,396      1,150      39,396      3,347 

Note 6. Fair Value Measurement

The Company's financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

Level 1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2- Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

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Level 3- Inputs are unobservable and reflect the Company's assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.

Summary of Assets Recorded at Fair Value

The Company's cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations for similar assets.

The Company had no financial assets that are required to be measured at fair value as of September 30, 2018 and December 31, 2017.

There were no transfers of assets or liabilities between Level 1 and Level 2 during the three and nine months ended September 30, 2018 and 2017.

The carrying amounts reflected in the unaudited condensed consolidated balance sheets for certain short-term financial instruments including accounts receivable, accounts payable, accrued expenses, and other liabilities approximate fair value due to their short-term nature.

Summary of Liabilities Recorded at Carrying Value and Fair Value

The 4.25% Convertible Notes, Exchangeable Notes, 2018 Term Loan, Delayed Draw Term Loan and the Treximet Secured Notes (each, as defined below in Note 10) are recorded at carrying value. The derivative liability and contingent consideration are recorded at fair value. The fair and carrying value of our debt instruments are detailed as follows (in thousands):

      As of September 30, 2018     As of December 31, 2017
      Fair     Carrying     Fair     Carrying
      Value     Value     Value     Value
4.25% Convertible Notes   $ 33,714    $ 67,823    $ 36,208    $ 65,194 
Exchangeable Notes     13,631      10,030      21,375      7,975 
2018 Term loan     41,250      41,250      -       -  
Delayed draw term loan     36,940      37,805      30,300      27,248 
Derivative liability     54      54      93      93 
Contingent consideration     1,501      1,501      1,358      1,358 
Treximet Secured Notes     132,335      151,364      139,201      167,551 
     Total   $ 259,425    $ 309,827    $ 228,535    $ 269,419 

4.25% Convertible Notes, Exchangeable Notes, 2018 Term Loan and Delayed Draw Term Loan

The fair values of the 4.25% Convertible Notes and the Exchangeable Notes were estimated using the (i) terms of the Convertible Notes and Exchangeable Notes; (ii) rights, preferences, privileges, and restrictions of the underlying security; (iii) time until any restriction(s) are released; (iv) fundamental financial and other characteristics of the Company; (v) trading characteristics of the underlying security (exchange, volume, price, dividend yield and volatility); (vi) prevailing interest rates; and (vii) precedent sale transactions. The fair value was determined using a convertible note model that incorporated these inputs, as the convertible notes are not listed on any securities exchange or quoted on an inter-dealer automated quotation system.

The Delayed Draw Term Loan and the 2018 Term Loan are classified within Level 3 of the fair value measurements hierarchy. The fair value of these instruments has been estimated using a discounted cash flow analysis based on incremental borrowing rate for similar borrowing arrangements. The carrying amount of the Nalpropion's 2018 Term Loan approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to Nalpropion.

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Given the nature and the variable interest rates under the ABL Facility (as defined below), the fair value of borrowings under this facility approximated their carrying value as of September 30, 2018.

Derivative Liability

The derivative liability is classified within Level 3 of the fair value measurements hierarchy and the fair value is determined using a "with and without" conversion scenario. Under this methodology, valuations are performed on the 4.25% Convertible Notes inclusive of all terms as well as for a convertible note that has identical terms and features but excluding the conversion option. The difference between the two valuations is equal to the fair value of the conversion option. Significant increases or decreases in these inputs would result in a significant change in the fair value of the derivative liability.

Contingent Consideration

The contingent consideration is classified within Level 3 of the fair value measurements hierarchy and the fair value is based on two components - a regulatory milestone and commercial milestone.

For the regulatory milestone, the expected regulatory earn out payment was discounted taking into account (a) the Company's cost of debt, (b) the expected timing of the payment and (c) subordinate nature of the earn out obligation.

The fair value of the commercial milestone was determined using a Monte Carlo simulation. This simulation assumed a risk-neutral framework, whereby future net revenue was simulated over the earn out period using the Geometric Brownian Motion. For each simulation path, the earn out payments were calculated based on the achievement of the revenue milestone and then were discounted to the valuation date. Significant increases or decreases in these unobservable inputs and/or the probability of achievement of these milestones would result in a significant change in the fair value of the contingent consideration.

Treximet Secured Notes

The Company's Treximet Secured Notes is classified within Level 3 of the fair value measurements hierarchy and the fair value was estimated using a discounted cash flow model.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the periods (in thousands).

      As of and for the     As of and for the
      Nine Months Ended     Nine Months Ended
      September 30, 2018     September 30, 2017
Derivative liability:            
Balance at beginning of year   93    230 
     Impairment due to partial conversion     -       (90)
     Remeasurement adjustments - loss (gains) included in earnings     (39)     38 
Ending Balance    54    178 
             
Contingent consideration:            
Balance at beginning of year   1,358    2,403 
     Remeasurement adjustments - loss (gains) included in earnings     143      344 
Ending Balance    1,501    2,747 

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Note 7. Inventory

Inventories are stated at the lower of cost or market. Inventories consist of the following (in thousands):

      September 30,     December 31,
      2018     2017
Raw materials   $ 4,297    $ 727 
Work-in-process     2,957      238 
Finished goods     11,524      5,889 
Inventory, gross     18,778      6,854 
Reserve for obsolescence     (990)     (1,458)
     Inventory, net   $ 17,788    $ 5,396 

As of September 30, 2018, $13.6 million of inventory related to the Company's consolidation of Nalpropion as a VIE is included in the Company's unaudited condensed consolidated balance sheets.

Note 8. Goodwill and Intangible Assets

Goodwill consists of the following (in thousands):

      Amount
Balance at December 31, 2016   $ 30,600 
     Impairment     (18,500)
Balance at December 31, 2017     12,100 
     Additions     5,472 
     Impairment     -  
Balance at September 30, 2018   $ 17,572 

The Company performs an impairment test of goodwill annually in the fourth quarter of each fiscal year unless there are triggering events that would require such analysis during an interim period. There were no triggering events during the nine months ended September 30, 2018. For the year ended December 31, 2017, the carrying value of the reporting unit exceeded its fair value by $18.5 million and accordingly an impairment charge of $18.5 million was recorded in 2017. The decline in the estimated fair value of the reporting unit resulted from management's review of its then-current forecast. As a result of this review, management lowered its forecast for Zohydro ER. The lower projected operating results reflected changes in assumptions related to revenue, market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results of the business.

As of September 30, 2018, $5.5 million of goodwill related to the Company's consolidation of Nalpropion as a VIE is included in the Company's unaudited condensed consolidated balance sheets.

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Intangible assets consist of the following (dollars in thousands):

          As of September 30, 2018
      Weighted Average     Gross Carrying           Accumulated     Net Carrying
      Life Remaining     Amount     Impairment     Amortization     Amount
Unamortized intangible assets:                              
     In-process research and development     Indefinite   $ 11,000    $ -     $ -     $ 11,000 
Total unamortized intangible assets           11,000      -       -       11,000 
                               
Amortized intangible assets:                              
     Product licenses     4.8 years     2,846      -       (1,823)     1,023 
     Supplier contracts     2.6 years     583      -       (282)     301 
     Customer Lists     4.8 years     900      -       (32)     868 
     Tradename      11.8 years     4,800      -       (71)     4,729 
     Acquired developed technologies     12.7 years     409,486      -       (293,758)     115,728 
Total amortized intangible assets           418,615      -       (295,966)     122,649 
                               
Total intangible assets         $ 429,615    $ -     $ (295,966)   $ 133,649 

 

          As of December 31, 2017
      Weighted Average     Gross Carrying           Accumulated     Net Carrying
      Life Remaining     Amount     Impairment     Amortization     Amount
Unamortized intangible assets:                              
     In-process research and development     Indefinite   $ 11,000    $ -     $ -     $ 11,000 
Total unamortized intangible assets           11,000      -       -       11,000 
                               
Amortized intangible assets:                              
     Product licenses     5.4 years     2,846      -       (1,623)     1,223 
     Supplier contracts     3.3 years     583      -       (194)     389 
     Acquired developed technologies     13.7 years     364,686      -       (280,692)     83,994 
Total amortized intangible assets           368,115      -       (282,509)     85,606 
                               
Total intangible assets         $ 379,115    $ -     $ (282,509)   $ 96,606 

As of September 30, 2018, the weighted average remaining life for our definite-lived intangible assets in total was approximately 12.5 years.

In process research and development (IPR&D) will be amortized on a straight-line basis over its useful life once the receipt of regulatory approval is obtained.

Estimated amortization expense related to intangible assets with definite lives for each of the five succeeding years and thereafter is as follows (in thousands):

      Amount
2018 (October - December)   $ 2,642 
2019     10,567 
2020     10,480 
2021     10,385 
2022     10,346 
Thereafter     78,229 
Total   $ 122,649 

Amortization expense was $2.3 million and $13.5 million for the three months and nine months ended September 30, 2018, respectively, of which, $29,000 and $88,000 are included in cost of product sales in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively.

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Amortization expense was $18.2 million and $54.8 million for the three and nine months ended September 30, 2017, respectively, of which, $30,000 and $88,000 are included in cost of product sales in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2017, respectively

As of September 30, 2018, $49.6 million of intangible assets related to the Company's consolidation of Nalpropion as a VIE is included in the Company's unaudited condensed consolidated balance sheets.

Note 9. Accrued Allowances

Accrued allowances consist of the following (in thousands):

      September 30,     December 31,
      2018     2017
Accrued returns allowance   $ 25,370    $ 21,681 
Accrued price adjustments     22,823      10,766 
Accrued managed care rebates     17,230      17,221 
Accrued government program rebates     6,275      6,641 
     Total   $ 71,698    $ 56,309 

As of September 30, 2018, $17.2 million of accrued allowances related to the Company's consolidation of Nalpropion as a VIE is included in the Company's unaudited condensed consolidated balance sheets.

Note 10. Debt and Lines of Credit

Debt, net of discounts and deferred financing costs, consists of the following (in thousands):

      As of September 30, 2018     As of December 31, 2017
      Principal     Note
Discount
    Deferred
Financing
Costs
    Net of Discount
and Deferred
Financing Costs
    Principal     Note
Discount
    Deferred
Financing
Costs
    Net of Discount
and Deferred
Financing Costs
4.25% Convertible Notes   $ 78,225    $ (8,828)   $ (1,574)   $ 67,823    $ 78,225    $ (11,060)   $ (1,971)   $ 65,194 
Exchangeable Notes     36,145      (22,913)     (3,202)     10,030      35,743      (24,363)     (3,405)     7,975 
Delayed Draw Term Loan     40,074      -       (2,269)     37,805      30,000      -       (2,752)     27,248 
Treximet Secured Notes - Long Term     154,515      -       (3,151)     151,364      166,697      -       (2,810)     163,887 
Treximet Secured Notes - Short Term     -       -       -       -       5,373      -       (1,709)     3,664 
2018 Term Loan     41,250      -       -       41,250      -       -       -       -  
ABL Facility     14,185      -       -       14,185      14,185      -       -       14,185 
     Total outstanding debt   $ 364,394    $ (31,741)   $ (10,196)   $ 322,457    $ 330,223    $ (35,423)   $ (12,647)   $ 282,153 
                                                 
     Less: Current portion of long-term debt                       -                         3,664 
     Long-term debt outstanding, net                     $ 322,457                      $ 278,489 

Convertible Notes:

4.25% Convertible Notes

On April 22, 2015, the Company issued $130.0 million aggregate principal amount 4.25% Convertible Notes. The 4.25% Convertible Notes mature on April 1, 2021, unless earlier converted, redeemed or repurchased. Interest on the 4.25% Convertible Notes is payable on April 1 and October 1 of each year, beginning October 1, 2015.

The 4.25% Convertible Notes are governed by the terms of an indenture, between the Company and Wilmington Trust, National Association, each of which were entered into on April 22, 2015. The Company may not redeem the 4.25% Convertible Notes prior to April 6, 2019. However, the holders may convert their 4.25% Convertible Notes at any time prior to the close of business on the business day immediately preceding January 1, 2021 only under certain circumstances. The effective interest rate on the 4.25% Convertible Notes, including debt issuance costs and bifurcated conversion option derivative (discussed below), is 10.4%.

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The Company is required to separate the conversion option in the 4.25% Convertible Notes under Accounting Standards Codification (ASC) 815, Derivatives and Hedging. During April 2015, the Company recorded the bifurcated conversion option valued at $28.5 million as a derivative liability, which created a discount on the debt. The derivative liability is marked to market through the other income (expense) section on the unaudited condensed consolidated statements of operations for each reporting period, while the discount created on the 4.25% Convertible Notes is accreted as interest expense over the life of the debt. The derivative liability is valued at $54,000 and $93,000 as of September 30, 2018 and December 31, 2017, respectively.

Interest expense was $1.7 million and $5.1 million for the three and nine months ended September 30, 2018, respectively, and $1.9 million and $6.9 million for the three and nine months ended September 30, 2017, respectively, related to the 4.25% Convertible Notes. Interest expense includes amortization of deferred financing costs and accretion of debt discount.

Change in fair value of derivative liability was a benefit of $18,000 and $39,000 for the three and nine months ended September 30, 2018, respectively, and a benefit of $46,000 and an expense of $38,000 for the three and nine months ended September 30, 2017, respectively. Accrued interest on the 4.25% Convertible Notes was approximately $1.7 million and $0.8 million as of September 30, 2018 and December 31, 2017, respectively.

As a result of the Exchangeable Notes transaction during the third quarter of 2017, the Company recorded $14.7 million as gain from exchange of debt for the three months ended September 30, 2017.

Exchangeable Notes

On July 20, 2017, the Company entered into an exchange agreement (the 2017 Exchange Agreement) with certain holders of its 4.25% Convertible Notes (Holders) pursuant to which $51.8 million of aggregate principal amount of its 4.25% Convertible Notes held by the Holders were exchanged for (i) $36.2 million aggregate principal amount of 4.25%/5.25% Exchangeable Senior Notes due 2022 (the Exchangeable Notes), issued by PIP DAC pursuant to an Indenture, dated July 21, 2017 (the Exchangeable Notes Indenture), among PIPL, the guarantors party thereto (the Guarantors), and Wilmington Trust, National Association, as Trustee and (ii) 1,100,498 shares of Common Stock.

The Exchangeable Notes issued under the Exchangeable Notes Indenture are guaranteed by the Company and each other subsidiary thereof. The Exchangeable Notes are senior, unsecured obligations of PIP DAC. Interest on the Exchangeable Notes will be paid in cash or a combination of cash and in-kind interest at PIP DAC'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 (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 Common Stock at an exchange price per share of $5.50 (the Exchange Price).

The 2017 Exchange Agreement 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 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.

The outstanding borrowings of the Exchangeable Notes were paid down by $500,000 in November 2017 with a portion of the proceeds from the sale of certain non-core assets. Interest expense was $1.0 million and $3.0 million for the three and nine months ended September 30, 2018, respectively, and $0.6 million for the three and nine months ended September 30, 2017, related to the Exchangeable Notes and included amortization of deferred financing costs and accretion of debt discount. During the first quarter of 2018, PIP DAC elected the PIK option in lieu of making scheduled interest payments. The election increased the principal due on the Exchangeable Notes by $402,000 as of September 30, 2018. Accrued interest on the Exchangeable Notes was approximately $396,000 and $675,000 as of September 30, 2018 and December 31, 2017, respectively.

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Term Facility:

On July 21, 2017 PIP DAC entered into a term loan credit agreement (the Delayed Draw Term Loan, the Term Facility or DDTL) with Cantor Fitzgerald Securities, as agent and the lenders party thereto to obtain the DDTL. $30.0 million under the DDTL was drawn on July 21, 2017 in connection with the closing of several refinancing transactions and the remaining $15.0 million will be available for subsequent draws for certain specified purposes, including to finance certain acquisitions, subject to conditions set forth in the DDTL credit agreement. The DDTL includes an incremental feature that allows PIP DAC, with the consent of the requisite lenders under the Term Facility, to obtain up to an additional $20.0 million in term loan commitments. Interest on the loans will accrue either in cash or a combination of cash and in kind interest, at PIP DAC'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 DDTL will mature on July 21, 2022. During the first quarter of 2018, PIP DAC elected the PIK option in lieu of making scheduled interest payments. The election increased the principal due on the DDTL by $906,000 as of September 30, 2018.

On July 27, 2018, PIP DAC drew $9.2 million under the DDTL. The proceeds were used to fund the Company's investment in Nalpropion for Nalpropion's purchase of certain assets of Orexigen and for working capital requirements.

PIP DAC also entered into a mortgage debenture with Cantor Fitzgerald Securities as agent, pursuant to which PIP DAC's obligations under the DDTL will be secured by substantially all of the assets of PIP DAC and its future-acquired subsidiaries.

On August 1, 2018 the Company entered into an amendment of its Term Facility. These amendments were made to permit the exchange of the 12% Senior Secured Notes due 2020 (Treximet Secured Notes) for newly issued shares of Common Stock in the exchange transactions and equitization transaction (as defined below), and to amend certain terms of the Term Facility and the ABL Facility (collectively, the Credit Facilities), including (i) changes to permit the use of subsequent draws under the Term Facility for working capital or other general corporate purposes, and (ii) changes to the interest payment provisions under the Term Facility increasing the minimum percentage of interest that must be paid in cash to 6.00% per annum from 4.50% per annum.

Interest expense was approximately $1.0 million and $2.6 million for the three and nine months ended September 30, 2018 related to the DDTL and includes amortization of deferred financing costs. Accrued interest on the DDTL was approximately $624,000 and $484,000 as of September 30, 2018 and December 31, 2017, respectively.

Secured Notes:

Treximet Note Offering

On August 19, 2014, the Company issued $220.0 million aggregate principal amount of its Treximet Secured Notes pursuant to an Indenture (the August 2014 Indenture) dated as of August 19, 2014 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.

On April 13, 2015, the Company amended the August 2014 Indenture to allow the Company to, among other things, incur up to $42.2 million of additional debt. On December 29, 2017, the Company and the August 2014 Trustee entered into a third supplemental indenture to amend the August 2014 Indenture to clarify the definition of "Net Sales", as such term is defined in the August 2014 Indenture and resulted in the deferral of $3.2 million of principal payments until maturity of the notes.

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The Treximet Secured Notes mature on August 1, 2020 and bear interest at a rate of 12% per annum, payable in arrears on February 1 and August 1 of each year (each, a Payment Date), beginning on February 1, 2015. On each Payment Date, commencing August 1, 2015, the Company began paying installments of principal of the Treximet Secured Notes in an amount equal to 50% of net sales of Treximet for the two consecutive fiscal quarters immediately preceding such Payment Date (less the amount of interest paid on the Treximet Secured Notes on such Payment Date). At each month-end beginning with January 2015, the net sales of Treximet will be calculated, the monthly interest accrual amount will then be deducted from the net sales and this resulting amount will be recorded as the current portion of the Treximet Secured Notes. If the Treximet net sales less the interest due at the end of each six-month period does not result in any excess over the interest due, no principal payment must be paid at that time. The remaining balance outstanding on the Treximet Secured Notes will be due on the maturity date, which is August 1, 2020. As of September 30, 2018, the principal amount outstanding of the Treximet Secured Notes is $154.5 million and is classified as a non-current liability. As of December 31, 2017, the Company classified $5.4 million, of the Treximet Secured Notes as a current liability and $166.7 million as a non-current liability at December 31, 2017.

The Treximet Secured Notes are secured by a continuing first-priority security interest in substantially all of the assets of the Company and the Treximet Guarantors related to Treximet other than inventory and certain inventory related assets, including accounts arising from the sale of the inventory.

On August 1, 2018, the Company entered into an exchange agreement (2018 Exchange Agreement) with certain holders (Exchange Holders) of the Treximet Secured Notes for newly issued shares of Common Stock and shares of a newly created class of convertible preferred stock of the Company designated as Convertible Preferred Stock (Exchange Transactions).

The Exchange Transactions closed on August 1, 2018 and were as follows:

  • exchange of approximately $2.7 million aggregate principal amount of the Treximet Secured Notes for 1,204,586 shares of Common Stock which includes $0.2 million of accrued and unpaid interest on the Treximet Secured Notes;
  • exchange of $8.0 million principal amount of the Treximet Secured Notes plus $0.1 million of accrued and unpaid interest for 81,000 shares of Convertible Preferred Stock.

The 2018 Exchange Agreement affords certain Exchange Holders the right to exchange up to an additional $65.1 million aggregate principal amount of the Treximet Secured Notes plus accrued and unpaid interest, into additional Convertible Preferred Stock until February 1, 2020. The Company evaluated the transaction under ASC 470-50, Debtors Accounting for a Modification or Exchange of Debt Instruments and determined the inclusion of the conversion right was not substantive and therefore does not constitute a debt extinguishment.

On August 1, 2018, the Company entered into separate Equitization Exchange Agreements by and among Pernix and certain Equitization Holders of Treximet Secured Notes. Pursuant to the Equitization Exchange Agreements, the Company issued 650,190 shares of its Common Stock in exchange for approximately $1.5 million aggregate principal amount of Treximet Secured Notes held by such Equitization Holders plus $0.1 million of accrued and unpaid interest thereon (Equitization Transaction). This transaction closed on August 1, 2018.

As a result of the Exchange Transactions and Equitization Transaction, the Company recorded a net gain on early extinguishment of debt of $0.1 million.

Interest expense related to the Treximet Secured Notes was $5.2 million and $16.1 million for the three and nine months ended September 30, 2018, respectively, and was $5.6 million and $17.2 million for the three and nine months ended September 30, 2017, respectively. Interest expense includes amortization of deferred financing costs. Accrued interest on the Treximet Secured Notes was approximately $3.1 million and $8.6 million as of September 30, 2018 and December 31, 2017, respectively.

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2018 Term Loan

On July 27, 2018, Nalpropion entered into a credit agreement (2018 Credit Agreement) with Wilmington Savings Fund Society, FSB, as administrative and collateral agent, and certain lenders including PIP DAC and certain affiliates of Highbridge Capital Management, LLC (Highbridge) and Whitebox Advisors LLC (Whitebox, and collectively, the Lenders) from time to time party thereto providing for $45.8 million principal amount of a three-year term loan (the 2018 Term Loan). Loans under the 2018 Term Loan bear interest at 8.0% per year and mature on July 27, 2021. PIP DAC provided $4.6 million of the total commitment under the credit facility established under the 2018 Credit Agreement (2018 Credit Facility). Nalpropion borrowed the full $45.8 million available under the 2018 Term Loan to partially fund the Orexigen Acquisition and for working capital requirements. As PIP DAC is one of the lenders under the 2018 Credit Facility and provided $4.6 million of the total commitment under the 2018 Credit Facility, the $4.6 million is eliminated in consolidation as the transaction is between affiliates. As of September 30, 2018, $41.3 million of borrowings under the 2018 Term Loan related to the Company's consolidation of Nalpropion as a VIE is included in the Company's unaudited condensed consolidated balance sheets.

The borrowings under the 2018 Credit Agreement are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in the intangible assets of Nalpropion. Nalpropion is permitted to make voluntary prepayments at any time without payment of a premium or penalty. Nalpropion is required to make mandatory prepayments of outstanding indebtedness under the 2018 Credit Agreement (without payment of a premium) with (a) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (b) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions), and (c) 75% of the excess cash flow generated during a semi-annual period (commencing with the period subsequent to June 30, 2019), depending on certain factors as defined in the 2018 Credit Agreement.

The 2018 Credit Agreement contains certain negative covenants (subject to exceptions, materiality thresholds and other allowances) including, without limitation, negative covenants that limit Nalpropion's ability to incur additional debt, guarantee other obligations, grant liens on assets, make loans, acquisitions or other investments, dispose of certain assets, make optional payments in connection with or modify certain debt instruments, pay dividends or make other payments on capital stock, engage in mergers or consolidations, enter into arrangements that restrict Nalpropion's ability to pay dividends or grant liens, engage in transactions with affiliates, or change its fiscal year.

In addition, the 2018 Credit Agreement also contains customary events of default (with customary grace periods and materiality thresholds). Upon the occurrence of certain events of default, the obligations under the 2018 Credit Agreement may be accelerated and any remaining commitments thereunder may be terminated.

Interest expense related to the 2018 Term Loan was $0.7 million for the three months ended September 30, 2018 of which $0.1 million is due to the Company and is eliminated in consolidation. As of September 30, 2018, $0.6 million of accrued interest on the 2018 Term Loan related to the Company's consolidation of Nalpropion as a VIE is included in the Company's unaudited condensed consolidated balance sheets.

Credit Facility:

Cantor Fitzgerald

On July 21, 2017, Pernix and certain subsidiaries of Pernix as borrowers and guarantors (the ABL Borrowers) and PIP DAC, Pernix Ireland Limited, Pernix Holdco 1, LLC, Pernix Holdco 2, LLC and Pernix Holdco 3, LLC as additional guarantors (the ABL Guarantors), 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 a five-year $40 million asset-based revolving credit facility (the ABL Facility). On April 23, 2018, the Company entered into an amendment, effective as of April 12, 2018, to modify the borrowing base formula which determines the Company's capacity to draw on the ABL Facility, which could increase such capacity. The amendment also removed concentration limits for accounts receivable due from individual customers or other account debtors that may be included in the borrowing base.

The ABL Borrowers' obligations under the ABL Credit Agreement are guaranteed by the ABL Borrowers and the ABL Guarantors are secured by, among other things, the ABL Borrowers' cash, inventory and accounts receivable, in each case pursuant to a guaranty and security agreement between the ABL Borrowers, ABL Guarantors and Cantor Fitzgerald Securities as agent. Borrowings under the ABL Credit Agreement bear interest at the rate of LIBOR plus 7.50%, payable monthly, in addition to a commitment fee on any undrawn commitments at a rate per annum of 0.25%, 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 ABL Credit Agreement will mature on July 21, 2022.

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On August 1, 2018 the Company entered into an amendment of the ABL Facility. The amendment provides for certain changes to the borrowing base calculation under the ABL Facility that are intended to improve the Company's borrowing capacity under the ABL Facility and that will also permit the Company, among other things, to include Contrave inventory owned by the Company in the calculation of the borrowing base, and a reduction in the commitments under the ABL Facility from $40.0 million to $32.5 million.

Interest expense was $0.5 million and $1.5 million for the three and nine months ended September 30, 2018, respectively, and was $0.4 million for the three and nine months ended September 30, 2017, related to the ABL Credit Agreement and includes amortization of deferred financing costs. As of September 30, 2018, unamortized debt issuance costs of $0.6 million and $1.6 million are recorded on the unaudited consolidated balance sheets in Prepaid expenses and other currents assets and Other assets, respectively, and are being amortized to interest expense over the life of the agreement. As of December 31, 2017, $0.6 million and $2.1 million of unamortized debt issuance costs are recorded on the unaudited consolidated balance sheets in Prepaid expenses and other currents assets and Other assets, respectively.

Wells Fargo

On August 21, 2015, the Company entered into a credit agreement with Wells Fargo, as Administrative Agent and the lenders party thereto for a $50.0 million, three-year senior secured revolving credit facility (the Wells Fargo Credit Facility).

The ABL Facility entered into on July 21, 2017 replaced the Wells Fargo Credit Facility and the Company used the proceeds from the ABL Facility to repay the outstanding obligation of the Wells Fargo Credit Facility.

Interest expense including amortization of deferred financing costs related to the Wells Fargo Credit Facility amounted to $142,000 and $748,000, for the three and nine months ending September 30, 2017, respectively.

The following table represents the future maturity schedule of the outstanding debt and line of credit at September 30, 2018 (in thousands):

      Amount
2018 (October - December)   $ -  
2019     -  
2020     154,515 
2021     119,475 
2022     90,404 
Thereafter     -  
     Total maturities     364,394 
Less:      
     Note discount     (31,741)
     Deferred financing costs     (10,196)
Total outstanding debt, net   $ 322,457 

Note 11. Stockholders' Equity 

Convertible Preferred Stock

On August 1, 2018, in connection with the 2018 Exchange Agreement, the Company reclassified and designated 1,500,000 shares of the authorized but unissued preferred stock of the Company to the Convertible Preferred Stock. In connection with the Exchange Transactions, $8.0 million principal amount of the Treximet Secured Notes plus $100,000 of accrued and unpaid interest was exchanged for 81,000 shares of Convertible Preferred Stock. The Convertible Preferred Stock was recorded at fair value in the amount of $7.2 million, net of issuance costs of $0.5 million and is recorded to additional paid-in capital.

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Holders of Convertible Preferred Stock have the right to convert their shares of Convertible Preferred Stock, in whole or in part, into shares of Common Stock at any time on or after August 1, 2018 (the Initial Issue Date). The Company has the right, at its option, to automatically convert all shares of Convertible Preferred Stock into shares of Common Stock, subject to the satisfaction of certain specified conditions. Upon any conversion of an Exchange Holder's Convertible Preferred Stock, the Company will deliver shares of Common Stock, calculated by multiplying the number of shares of Convertible Preferred Stock by 41.841 shares of Common Stock per share of Convertible Preferred Stock (the Conversion Rate). The Conversion Rate is initially equal to the number of shares of Common Stock convertible into Common Stock at a price $0.01 above the consolidated closing bid price on the date immediately preceding Initial Issue Date, or $2.39 per share.

Subsequent to the Initial Issue Date, an Exchange Holder is not able to convert Convertible Preferred Stock into Common Stock to the extent that the Common Stock held by such Exchange Holder and its affiliates would exceed 4.985% of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock.

Moreover, at any time on or after the Initial Issue Date, the Company has the right to redeem the Convertible Preferred Stock, in whole or in part, at a redemption price equal to 100% of the liquidation preference of the shares to be redeemed, plus any accrued and unpaid dividends. Except as required by law or the Articles Supplementary, the Exchange Holders of Convertible Preferred Stock have no voting rights (other than with respect to certain matters regarding the Convertible Preferred Stock).

In accordance with the Articles Supplementary, the Company will not authorize, declare or pay regular or special dividends or other distributions (whether in the form of cash, shares, indebtedness or any other property or asset, but excluding any purchase, redemption or other acquisition of shares) on the shares of the Common Stock, unless simultaneously with the authorization, declaration or payment, it authorizes, declares or pays, as applicable, dividends or other distributions on the Convertible Preferred Stock.

On October 3, 2018, holders of 13,100 shares of the Company' 0% Series C Perpetual Convertible Preferred Stock elected to convert such Convertible Preferred Stock into 548,115 shares of the Company's Common Stock.

Controlled Equity Offering

On November 7, 2014, the Company entered into a controlled equity offering sales agreement (the Sales Agreement) with Cantor Fitzgerald & Co. (Cantor) pursuant to which the Company could issue and sell shares of its Common Stock having an aggregate offering price of up to one hundred million dollars, pursuant to an effective registration statement on Form S-3 (No. 333-200005), from time to time through Cantor, acting as agent. On November 22, 2017, the Company filed a registration statement on Form S-3 (No. 333-221717) to replace the previously-filed registration statement, which was subsequently declared effective by the SEC on December 18, 2017. The Company will pay Cantor a commission rate of 3.0% of the gross sales price per share of the Common Stock sold through Cantor as agent under the Sales Agreement.

During the nine months ended September 30, 2018, the Company sold 191,170 shares of Common Stock under the Sales Agreement at an average price of approximately $2.51 per share for gross proceeds of $480,000 and net proceeds of $453,000, after deducting commission and fees. During the nine months ended September 30, 2017, the Company sold 372,176 shares of Common Stock under the Sales Agreement at an average price of approximately $3.21 per share for gross proceeds of $1.2 million and net proceeds of $1.1 million, after deducting commission and fees. As of September 30, 2018, approximately $77.0 million of Common Stock remained available to be sold under this facility, subject to certain limitation to the extent the Company continues to have a public float of less than $75.0 million.

Noncontrolling Interest

Ownership interests in subsidiaries held by parties other than the Company are presented as non-controlling interest within stockholders' equity, separately from the equity held by the Company on the consolidated statements of stockholders' equity. Revenues, expenses, net income and other comprehensive income are reported in the condensed consolidated financial statements at the consolidated amounts, which includes amounts attributable to both the Company's interest and the non-controlling interests in Nalpropion. Net loss and other comprehensive loss is then attributed to the Company's interest and the non-controlling interests. Net loss to non-controlling interests is added to net loss in the consolidated statements of loss to determine net loss attributable to the Company's common shareholders (see unaudited condensed consolidated statements of stockholders' equity (deficit) for activity related to the noncontrolling interest).

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Warrants

As of September 30, 2018, the Company has approximately 4,380 outstanding Common Stock warrants assumed in connection with the acquisition of Somaxon Pharmaceuticals, Inc. (Somaxon) in March 2013, with exercise prices ranging from $83.73 to $258.51 and expiration dates ranging from August 2021 through December 2021.

Share-Based Compensation Plans

In November 2017, the Company's shareholders approved the 2017 Omnibus Incentive Plan (the 2017 Plan) for future equity awards granted by the Company. Subject to the adjustments described below, the maximum number of shares of  Common Stock that will be available for issuance under the 2017 Omnibus Incentive Plan will be equal to the sum of (i) one million (1,000,000) shares of Common Stock plus (ii) the number of shares of our Common Stock available for future awards under the 2015 Omnibus Incentive Plan and the 2009 Stock Incentive Plan as of November 15, 2017, plus (iii) the number of shares of Common Stock related to awards outstanding under such plans as of November 15, 2017 that terminate after such date by expiration or forfeiture, cancellation, or otherwise without the issuance of such shares of Common Stock. On May 22, 2018, the Company's stockholders approved an amendment to the 2017 Plan to increase the number of shares reserved under the 2017 Plan from 642,294 shares of Common Stock to 1,242,294 shares of Common Stock.

Stock-Based Compensation

Stock-based compensation expense is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period, which is the vesting period.

The Company uses the Black-Scholes option pricing model to determine the fair value of its stock options. The weighted average fair value of stock options granted during the periods and the assumptions used to estimate those values using the Black-Scholes option pricing mode were as follows:

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
Weighted average expected stock price volatility     86.4%     88.0%     86.4%     87.6%
Estimated dividend yield     -     -     -     -
Risk-free interest rate     2.9%     2.0%     2.8%     2.0%
Expected life of option (in years)     6.3     6.2     6.3     6.2
Weighted average grant date fair value per option   $ 0.69   $ 2.15   $ 1.61   $ 2.15

The Company measures the grant date fair value of restricted stock units (RSUs) using the Company's closing Common Stock price on the grant date.

The accounting policy with respect to stock options and RSUs is described in the audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Stock-based compensation expense was $0.4 million and $1.3 million for the three and nine months ended September 30, 2018, respectively and was $0.5 million and $1.9 million for the three and nine months ended September 30, 2017. Stock-based compensation expense for the periods presented is included within the selling, general and administrative expense in the unaudited condensed consolidated statements of operations.

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Stock Options

The following table shows the option activity, described above, during the nine months ended September 30, 2018 (shares and intrinsic value in thousands):

                  Weighted Average      
            Average     Remaining     Aggregate
            Exercise     Contractual Life     Intrinsic
      Shares     Price     (years)     Value
Options Outstanding at December 31, 2017     1,042    $ 13.80      8.8       
     Granted     556      2.17             
     Exercised     -       -              
     Cancelled     (228)     12.29             
     Expired     -       -              
Options outstanding at September 30, 2018     1,370    $ 9.34      8.7    $
Options vested and expected to vest as of September 30, 2018     895    $ 12.86      8.3    $
Options vested and exercisable as of September 30, 2018     339    $ 24.88      7.3    $

As of September 30, 2018, there was approximately $1.4 million of total unrecognized compensation cost related to non-vested stock options issued to employees and directors of the Company, which is expected to be recognized ratably over a weighted-average period of 2.0 years.

The total intrinsic value of options exercised during each of the three and nine months ended September 30, 2018 and 2017 was $0.

Options issued subsequent to January 2014 have a graded vesting schedule over either three or four years. The Company's stock option grants expire ten years from the date of grant.

Restricted Stock

The following table shows the Company's non-vested restricted stock activity during the nine months ended September 30, 2018 (shares in thousands):

            Weighted Average
            Grant Date Fair
      Shares     Value
Non-vested restricted stock outstanding at December 31, 2017     135    $ 3.17 
     Granted     62      2.46 
     Vested     (54)     3.25 
     Forfeited     (2)     2.60 
Non-vested restricted stock outstanding at September 30, 2018     141    $ 2.83 

The total fair value of RSUs vested in the nine months ended 2018 and 2017, were $177,000 and $220,000, respectively. As of September 30, 2018, there was $0.8 million total unrecognized compensation cost related to non-vested restricted stock issued to employees and directors of the Company which is expected to be recognized ratably over a weighted-average period of 1.97 years.

Note 12. Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act ("TCJA") was enacted reducing the corporate Federal tax rate from 35% to 21% effective for tax years beginning on or after January 1, 2018. ASC 740, Income Taxes, requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions and anticipated guidance from the U.S. Treasury and the Internal Revenue Service regarding the TCJA, the SEC staff issued Staff Accounting Bulletin 118, which allows companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment of the TCJA.

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Under the TCJA, the Corporate Alternative Minimum Tax ("AMT") was repealed. The Company's previously recorded AMT credits of approximately $0.2 million are now refundable subject to budgetary sequestration over a four-year period beginning in 2018, and the previously recorded valuation allowance for these AMT credits was reversed during the year ended December 31, 2017. The Company's Irish subsidiaries have accumulated deficits in earnings and profits and thus the Company will not be subject to the one-time transition tax.

The TCJA creates a new requirement that certain income (i.e., Global intangible low taxed income "GILTI") earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for the ASC 740 treatment of the GILTI tax. Therefore, the Company has not recorded any amounts related to potential GILTI tax in its consolidated financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI.

The Company reported an income tax expense of approximately $61,000 and $109,000 for the three and nine months ended September 30, 2018, respectively and an income tax expense of approximately $27,000 and $122,000 for the three and nine months ended September 30, 2017, respectively. The Company's effective tax rate was (0.2%) for the nine months ended September 30, 2018, compared to an estimated annual effective rate of (0.3%) for the nine months ended September 30, 2017.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. All deferred tax assets were subject to a full valuation allowance as of December 31, 2017.

The Company evaluates the realizability of its U.S. net deferred tax assets based on all available evidence, both positive and negative, on a quarterly basis. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that due to recent losses there is a continued need for a full valuation allowance against all of the Company's deferred tax assets as of September 30, 2018 and December 31, 2017.

As of September 30, 2018, the Company's gross deferred tax assets are comprised primarily of U.S. Federal net operating losses and accruals, and its gross deferred tax liabilities are comprised primarily of differences in the financial statement and tax bases of intangible assets.

The Company files income tax returns with both federal and state-level taxing authorities in the U.S., and with the taxing authorities of various foreign jurisdictions. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The IRS audit of the Company's 2014 and 2015 Federal tax returns concluded during the quarter ended September 30, 2018, and there were no material impacts to the Company's income tax provision as a result.  The Company's 2016 and 2017 tax returns are subject to potential examination.

Note 13. Commitments and Contingencies

Legal Proceedings

Pernix Ireland Pain Limited (n/k/a Pernix Ireland Pain Designated Activity Company) and Pernix Therapeutics, LLC v. Actavis Laboratories FL, Inc. (Actavis), District of Delaware Case No. 16-138; Pernix Ireland Pain Limited and Pernix Therapeutics, LLC v. Alvogen Malta Operations, Ltd. (Alvogen), District of Delaware Case No. 16-139.

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PIP DAC is the owner of: (a) U.S. Patent No. 9,265,760 (the '760 Patent), issued on February 23, 2016, (b) U.S. Patent No. 9,326,982 (the '982 Patent), issued on May 3, 2016, (c) U.S. Patent No. 9,333,201 (the '201 Patent), issued on May 10, 2016, and (d) U.S. Patent No. 9,339,499 (the '499 Patent), issued on May 17, 2016 (collectively, the Pernix Zohydro ER Patents).  The Pernix Zohydro ER Patents are listed in the United States Food and Drug Administration's (FDA) Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations (the Orange Book) as covering Zohydro ER.  Pernix Therapeutics, LLC (Pernix LLC) is the sole distributor of Zohydro ER in the United States. Pernix LLC and PIP DAC (collectively for the purpose of this paragraph, Pernix) brought suit against Actavis and Alvogen in the District of Delaware on March 4, 2016, seeking declaratory judgment of infringement of the '760 Patent. The Complaints relating to the '760 Patent were served on March 7, 2016. Pernix filed and served First and Second Amended Complaints on May 13, 2016 and May 31, 2016 against Alvogen and Actavis, respectively, adding allegations of infringement with respect to the '982, '201, and '499 Patents.  Actavis Motion to Dismiss was completed on July 11, 2016.  United States Patent Nos. 9,421,200 (the '200 Patent) and 9,433,619 (the '619 Patent) issued on August 23, 2016 and September 5, 2016, respectively.  Pernix filed and served Second and Third Amended Complaints, against Alvogen and Actavis respectively, on October 12, 2016, adding allegations of infringement with respect to the '200 and '619 Patents.  Actavis and Alvogen filed their respective Answers on November 30, 2016, denying Pernix's infringement allegations and raising Counterclaims of non-infringement and invalidity as to each of the asserted patents.  Pernix and Actavis entered into a settlement agreement on January 29, 2018.  Under the terms of the agreement, Pernix will grant Actavis a license to begin selling a generic version of Zohydro ER on March 1, 2029, or earlier under certain circumstances.  Other details of the settlement are confidential.  The launch of Actavis's generic product is contingent upon Actavis receiving final approval from the FDA of its ANDA for a generic version of Zohydro ER. For the Alvogen case, trial testimony was heard from June 11-13, 2018, post-trial briefing was completed on July 12, 2018, and the trial concluded with the parties' closing arguments on July 25, 2018. The district court's trial decision was rendered on August 24, 2018, finding the asserted claims of the Zohydro ER Patents to be infringed by Alvogen's proposed generic Zohydro ER product and not to be invalid for anticipation under 35 U.S.C. § 102. The district court also found the asserted claims to be invalid for obviousness under 35 U.S.C. § 103 and as lacking adequate written description under 35 U.S.C. § 112. Pernix filed a Notice of Appeal on September 7, 2018, appealing the district court's decision that the asserted claims are invalid for obviousness and lacking adequate written description to the United States Court of Appeals for the Federal Circuit. Pernix's opening appellate brief is due no later than November 13, 2018, Alvogen's answering brief is due no later December 24, 2018 and Pernix's reply brief is due no later than January 7, 2019. Oral argument on the appeal is expected in the second quarter of 2019, with a written decision to follow thereafter.

Medicine to Go Pharmacies, Inc. v. Macoven Pharmaceuticals, LLC and Pernix Therapeutics Holdings, Inc., District Court of New Jersey Case No. 2:16-cv-07717.

On October 23, 2016, Medicine to Go Pharmacies, Inc. (Plaintiff) filed an action against Pernix and its subsidiary, Macoven and unidentified individuals seeking redress for sending allegedly unlawful advertisements to facsimile machines in violation of the Telephone Consumer Protection Act, 47 U.S.C. 227. On December 2, 2016, the Company filed its answers in defense of the allegations. The December 2013 fax campaign that is the subject of this litigation was administered by a third party, Odyssey Services, Inc. (Odyssey), which was not initially named as a defendant in this litigation. On June 22, 2017, the Company filed a third-party complaint against Odyssey, seeking indemnity and contribution for any amounts that the Company may be liable to pay to the Plaintiff. Odyssey answered the third-party complaint and, in addition, filed a counterclaim for indemnification against the Company, alleging that the Company, not Odyssey, was responsible for the content of the facsimiles transmitted, and thus is liable to Odyssey for any costs or judgments associated with this action. Odyssey also filed a motion for summary judgment, seeking to dismiss the third-party claims against it; the Company has moved for summary judgment to hold Odyssey liable to indemnify the Company.

A settlement conference was conducted by the Court on July 12, 2018 during which counsel for Plaintiff and the Company agreed in principle that for purposes of settlement the defendants will create a settlement fund and the Company will contribute a total of $1.2 million to said fund, which amount shall be final and includes any and all costs of the settlement, including payment of claims submitted by class members, class notice, settlement administration, Plaintiff's

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attorneys' fees and costs, and any incentive award to Plaintiff. Further, the Company will not oppose Plaintiff's request that a Rule 23(b)(3) settlement class consisting of all persons and entities with fax numbers who received a copy of the December 2013 "Dear Pharmacist" fax be certified by the Court and the Company will agree that any unclaimed amounts of the settlement fund shall be distributed to one or more cy pres organizations to be selected by the Parties and subject to the approval of the Court. Odyssey subsequently agreed to participate in the settlement and to contribute to the proposed settlement fund. Plaintiff filed its unopposed motion for preliminary approval of the settlement on October 12, 2018, and the Court approved the motion on October 29, 2018.  As a result, notice of the settlement will be sent to all potential class members, who may submit a claim. Class members will have until January 5, 2019 to submit a claim, object to the settlement, or exclude themselves from the settlement. On February 21, 2019, the Court will conduct a final hearing to determine whether to grant final approval of the settlement, which will release all claims against Pernix and Odyssey. If the Court grants final approval, the settlement monies will be distributed thereafter.

Opioids Litigation

Beginning in 2014 and continuing to the present, a number of pharmaceutical companies have been named in numerous lawsuits brought by certain state and local governments related to the marketing of opioid pain medications. The claims are generally based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid pain medications and/or an alleged failure to take adequate steps to prevent abuse and diversion. The suits generally seek penalties and/or injunctive and monetary relief. These cases are in early stages of litigation. In May 2018, the Company was notified that the State of Arkansas has named approximately 65 companies and individuals, including the Company, in an ongoing lawsuit relative to the marketing and sale of opioid pain medications. In September of 2018, the Company filed a motion to dismiss the Arkansas lawsuit. That motion is currently pending.

During the second quarter of 2018, the Company was also served with two additional lawsuits in which it was included as a defendant, both of which were filed in Philadelphia County, PA (UFCW Local 23 Health Fund v. Endo Pharmaceuticals, Inc., et al. and Iron Workers Dist. Council of Philadelphia & Vicinity, Benefit Fund v. Abbott Laboratories, Inc., et al.). These cases have since been transferred to Delaware County, PA, although the decision to transfer the cases is currently on appeal. At this time, the Company is unaware of whether it will be named in any of the other opioid pain medication lawsuits. 

The Company intends to vigorously defend against the claims asserted against it in these litigations but is unable to predict probable outcomes at this time.

Navigators Insurance Company v. Pernix Therapeutics Holdings, Inc. (U.S. District Court, Eastern District of PA)

On October 26, 2018, Navigators Insurance Company ("Navigators") initiated an insurance coverage declaratory judgment action against Pernix in the United States District Court for the Eastern District of Pennsylvania.  The action pertains to a dispute between the parties as to whether Navigators owes coverage under certain insurance policies for the defense and potential indemnity of Pernix in three lawsuits pending against Pernix: (1) UFCW, Local 23 and Employers Health Fund v. Endo Pharmaceuticals, Inc. et al., Case No. 180403485, filed in the Pennsylvania Court of Common Pleas, Philadelphia County ("UFCW Action"); (2) Iron Workers District Council of Philadelphia and Vicinity, Benefit Fund v. Abbott Laboratories, Inc. et al., Case No. 180502442, filed in the Pennsylvania Court of Common Pleas, Philadelphia County ("Iron Workers Action"); and (3) State of Arkansas, ex. rel. Scott Ellington et al. v. Purdue Pharma, L.P. et al., Case No. CV-2018-268, filed in the Circuit Court of Crittenden County, Arkansas ("Arkansas Action") (collectively, the "Underlying Actions"). 

The complaint alleges that Pernix requested that Navigators defend and indemnify it in the Underlying Actions under three policies Navigators issued to Pernix, all of which are effective from November 30, 2017 to November 30, 2018: a Products-Completed Operations Liability policy (the "Products Liability Policy"), a Commercial General Liability policy (the "CGL Policy"), and (3) a Commercial Umbrella Liability policy (the "Umbrella Policy") (collectively, the "Policies").  The complaint further alleges that, by letter dated October 23, 2018, Navigators: (1) disclaimed any duty to defend or indemnify Pernix in the UFCW Action and Iron Workers Action under the Policies; (2) disclaimed any duty to defend or indemnify Pernix in the Arkansas Lawsuit under the CGL and Umbrella Policies; (3) disclaimed any duty to defend or indemnify Pernix on Counts Three to Nine of the Arkansas Action under the Products Liability Policy; and (4) reserved the right to disclaim any duty to defend or indemnify Pernix on Counts One and Two of the Arkansas Action under the Products Liability Policy.  Navigators alleges that Pernix disputes the propriety of Navigator's disclaimers. 

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Navigators has asserted seven counts against Pernix.  Counts I through VI seek declarations that Navigators has no duty to defend or indemnify Pernix in the Underlying Actions under any of the Policies.  These counts contain allegations of the various provisions of the Policies on which Navigators relies.  Count VII is pled in the alternative and seeks a declaration that Navigators is entitled to allocation between covered and uncovered defense and indemnification costs to the extent that any counts of the Underlying Actions are covered by one or more of the Policies.

Pernix intends to vigorously contest these claims, and file a counterclaim that Navigators owes Pernix a duty to defend all of the Underlying Actions in full, and that any determination of the duty to indemnify at this point is premature.

Other Commitments and Contingencies

In July 2012 and January 2013, Somaxon settled two patent litigation claims with parties seeking to market generic equivalents of Silenor.  As of September 30, 2018, remaining payment obligations of the Company owed under these settlement agreements are $250,000. The balance is payable in the third quarter 2019 and is recorded in "other liabilities - current" on the Company's unaudited condensed consolidated balance sheets as of September 30, 2018.

During the first quarter of 2014, the Company settled all claims arising from certain actions by Cypress under the Texas Medicaid Fraud Prevention Act prior to its acquisition by the Company. As part of the settlement, the Company agreed to pay $12.0 million, payable in annual amounts of $2.0 million until the settlement is paid in full. As of September 30, 2018, the net present value of remaining payment obligations owed under this settlement agreement is $2.0 million and is recorded within other liabilities - current on the Company's unaudited condensed consolidated balance sheets as of September 30, 2018.

GlaxoSmithKline (GSK) Arbitration

Pursuant to Amendment No. 2, the Company agreed that if on or before September 30, 2019, the Company (x) redeems or repurchases its 4.25% Convertible Notes for greater than 31 cents for every one dollar of principal amount outstanding or (y) exchange such notes for new notes or similar instruments that have a face value providing such exchanging holders a recovery that is greater than 31 cents for every one dollar of 4.25% Convertible Notes exchanged by such holders, the Company 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 $2.0 million.  GSK has agreed that for so long as the Company complies 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.  As of September 30, 2018 and December 31, 2017, the Company has recorded $2.0 million as contingent consideration for the potential payment due by September 30, 2019 and is recorded in "other liabilities - current" and "Arbitration Award" on the Company's consolidated balance sheets, respectively. Also, the Company recorded $10.5 million as a gain from legal settlement for the year ended December 31, 2017 pursuant to Amendment No. 2 in the consolidated statements of operations and comprehensive loss.

Nalpropion Related Litigation

In April 2015, Orexigen and Takeda Pharmaceutical Company Limited (Takeda) received notification of a Paragraph IV certification for certain patents for Contrave which are listed in the Orange Book. The certification resulted from the filing by Actavis Laboratories FL, Inc. (Actavis) of an ANDA challenging such patents for Contrave. In June 2015, Orexigen and Takeda filed a lawsuit in the U.S. District Court for the District of Delaware against Actavis on the basis that Actavis' proposed generic products infringe certain patents for Contrave. Takeda held the NDA for Contrave and was a licensee of Orexigen's patents until August 2016, at which point the ownership of the NDA was transferred to Orexigen and Takeda's rights to the Orexigen patents were terminated. A bench trial took place in June 2017 and on October 13, 2017, the court issued an opinion finding that the claims of the three patents at issue (U.S. Patent Nos. 7,462,626, 7,375,111 and 8,916,195, which expire in 2024, 2025 and 2030, respectively) were valid and infringed. Actavis filed an appeal, which is pending in the U.S. Court of Appeals for the Federal Circuit (Federal Circuit Appeal), and filed its

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opening appeal brief on February 21, 2018. The Federal Circuit ordered that the appeal be stayed during Orexigen's pending bankruptcy proceedings. On July 27, 2018, Nalpropion acquired worldwide rights to Contrave, including the rights to the patents at issue. Nalpropion filed motions to substitute itself as a party in the appeal and to lift the stay. Those motions were granted on September 19, 2018, allowing the appeal to proceed. Nalpropion's answering was filed on September 28, 2018, and Acatvis's reply appeal brief is due on November 13, 2018. Oral argument is expected sometime in the first half of 2019. If Actavis is successful in the Federal Circuit Appeal, a generic version of Contrave could be launched prior to the expiration of one or more of the patents at issue, which would materially impact Nalpropion's and our financial condition and results of operations. Further, if Contrave infringes or is alleged to infringe intellectual property rights of third parties, we may be adversely affected.

Note 14. Restructuring

On January 4, 2018, the Company committed to and commenced a realignment plan to reduce operating costs and better align our workforce with the needs of our business in anticipation of the expiration of certain patents related to Treximet® (2018 Restructuring). The Company completed the realignment plan on January 5, 2018, resulting in a reduction of our workforce by 41 employees, the majority of which were associated with our sales force and commercial infrastructure. As of September 30, 2018, the Company has incurred $0.8 million in costs related to the 2018 Restructuring, consisting of $0.7 million related to employee termination benefits and $0.1 million related to contract termination costs.

On July 7, 2016, the Company announced a restructuring of its sales force and operations (2016 Restructuring). The 2016 Reorganization included a reduction of 54 sales positions, primarily from the Company's Neurology sales team and reduced its administrative staff by 6 employees. To date, the Company has incurred $2.8 million in costs related to the 2016 Restructuring, consisting of $1.4 million related to employee termination benefits and $1.4 million related to contract termination costs. All associated contract termination cost payments are expected to be made by 2020.

A summary of accrued restructuring costs, included as a component of accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets, is as follows (in thousands):

      December 31,
2017
    Charges     Cash     Non-cash     September 30,
2018
2018 Restructuring    $ -     $ 774    $ (774)   $ -     $ -  
                               
      December 31,
2017
    Charges     Cash     Non-cash     September 30,
2018
2016 Restructuring     $ 265    $ 438    $ (277)   $ -     $ 426 

Note 15. Supplemental Cash Flow Information

Supplemental cash flow information is as follows (in thousands):

      Nine Months Ended
      September 30,
      2018     2017
             
     Cash (received) paid for income taxes, net   $ 29    $ (873)
     Cash paid for interest     24,984      25,920 
Supplemental disclosures of Non-cash Investing and Financing activities:            
     Conversion of Treximet Secured Notes and interest to Common Stock    $ 4,433    $
     Conversion of Treximet Secured Notes and interest to Convertible Preferred Stock      8,100     
     Amount added to principal of Delayed Draw Term Loan and Exchangeable notes for Payment-in-kind (PIK) interest     1,308     
     Conversion of 4.25% Convertible Notes     -       (51,775)
     Issuance of 1,100,498 shares in exchange transaction     -       3,775 
     Issuance of Exchangeable Notes     -       36,243 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included in "Part I-Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2017. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties, including, but not limited to, those set forth under "Part I-Item1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2017, and "Part II-Item1A. Risk Factors" of our Quarterly Report on Form 10- Q for the three months ended March 31, 2018, our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2018 and this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2018.

The discussion below contains forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein, other than statements of current or historical fact, including statements regarding our current expectations of our future growth, results of operations, financial condition, cash flows, performance and business prospects, and opportunities and any other statements about management's future expectations, beliefs, goals, plans or prospects, constitute forward-looking statements. We have tried to identify forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "target," "will," "would" or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation: our ability to comply with the covenants under our indebtedness, including our outstanding note securities, and our Credit Facilities; the timing and results of our exploration of strategic alternatives to address our liquidity and capital structure; the rate and degree of market acceptance of, and our ability and our distribution and marketing partners' ability to obtain reimbursement for, any approved products; our ability to successfully execute our sales and marketing strategy, including to successfully recruit and retain sales and marketing personnel; our ability to obtain additional financing; our ability to maintain regulatory approvals for and the ability to continue to market our products and Contrave® (Contrave) in the United States; our ability to successfully manage Nalpropion; our ability to address any adverse impact on our net revenues caused by our ceasing to distribute the combination product isometheptene mucate, dichlorphenazone (IDA), and acetaminophen in compliance with United States Food and Drug Administration (FDA) requirements; the accuracy of our estimates regarding expenses, future revenues and capital requirements; our ability to manage our anticipated future growth; the ability of our products to compete with generic products as well as new products that may be developed by our competitors; our ability and our distribution and marketing partners' ability to comply with regulatory requirements regarding the sales, marketing and manufacturing of our products, the performance of our manufacturers, over which we have limited control; our ability to obtain and maintain intellectual property protection for our products; our ability to operate our business without infringing the intellectual property rights of others; loss of key scientific or management personnel; regulatory developments in the United States. and foreign countries; our ability to either acquire or develop and commercialize other product candidates in addition to our current products; our ability to regain compliance with the Nasdaq Global Market's continued listing rules; the outcome of any litigation to which we may be subject and other risks detailed above in "Part I-Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2017 and "Part II-Item1A. Risk Factors" of this Quarterly Report on Form 10-Q for the three months ended March 31, 2018, our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2018 and this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2018, as well as any amendments thereto reflected in subsequent filings with the SEC.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. In addition, any forward-looking statements in this Quarterly Report on Form 10-Q represent our views only as of the date of this Quarterly Report on Form 10-Q and should not be relied upon as representing our views as of any subsequent date. We anticipate that subsequent events and developments may cause our views to change.

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However, while we may elect to update these forward-looking statements publicly at some point in the future, we specifically disclaim any obligation to do so unless required by law, whether as a result of new information, future events or otherwise. Our forward-looking statements do not reflect the potential impact of any acquisitions, mergers, dispositions, business development transactions, joint ventures or investments we may enter into or make in the future. 

Overview

We are a specialty pharmaceutical company focused on improving patients' lives by identifying, developing and commercializing differentiated products that address unmet medical needs. Our strategy is to continue to create shareholder value by:

  • growing sales of the existing products in our portfolio in various ways, including identifying new growth opportunities; and
  • acquiring additional marketed specialty products or products close to regulatory approval to leverage our existing expertise and infrastructure.

We target underserved segments, such as central nervous system (CNS) indications, including pain and neurology. We promote our core branded products to physicians through our sales forces. We market our generic products through our wholly owned subsidiaries, Macoven and Cypress.

Our branded products include Zohydro ER with BeadTek (hydrocodone bitartrate) (Zohydro ER), an extended-release opioid agonist indicated for the management of pain, Silenor, a non-controlled substance and approved medication indicated for the treatment of insomnia characterized by difficulty with sleep maintenance and Treximet, a medication indicated for the acute treatment of migraine attacks, with or without aura, in adults.

Quarterly Update

Departure of Angus Smith, Senior Vice President, Chief Business Officer and Principal Financial Officer

On October 26, 2018, Angus Smith notified the Company of his decision to resign as the Company's Senior Vice President, Chief Business Officer and Principal Financial Officer, effective as of November 23, 2018 (the "Effective Date"), to pursue other opportunities. Mr. Smith will continue in his current role through the Effective Date to assist with the transition of his responsibilities and other related matters.

The Company has designated Glenn Whaley, the Company's Vice President of Finance, Principal Accounting Officer and Corporate Controller, as principal financial officer of the Company to succeed Mr. Smith, effective as of the Effective Date. As of the Effective Date, Mr. Whaley's title will be Vice President of Finance, Principal Financial and Accounting Officer.

2018 Exchange Transactions

On August 1, 2018, we entered into an exchange agreement (2018 Exchange Agreement) with certain holders (Exchange Holders) of our outstanding 12% Senior Secured Notes due 2020 (Treximet Secured Notes) for newly issued shares of our common stock (Common Stock) and shares of a newly created class of our convertible preferred stock designated as 0% Series C Perpetual Convertible Preferred Stock (Convertible Preferred Stock) (Exchange Transactions).

The Exchange Transactions included the following transactions:

  • exchange of approximately $2.7 million aggregate principal amount of the Treximet Secured Notes for 1,204,586 shares of Common Stock which includes $0.2 million of accrued and unpaid interest on the Treximet Secured Notes;
  • exchange of $8.0 million principal amount of the Treximet Secured Notes plus $0.1 million of accrued and unpaid interest for 81,000 shares of Convertible Preferred Stock.

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These transactions closed on August 1, 2018. In addition, the 2018 Exchange Agreement affords the Exchange Holders the right to exchange up to an additional $65.1 million aggregate principal amount of the Treximet Secured Notes plus accrued and unpaid interest, until February 1, 2020.

In addition, on October 3, 2018, holders of 13,100 shares of the Convertible Preferred Stock elected to convert such Convertible Preferred Stock into 548,115 shares of our Common Stock.

The Equitization Exchange Agreements

On August 1, 2018, we entered into separate Equitization Exchange Agreements (the Equitization Exchange Agreements) with certain holders (each, an Equitization Holder, and collectively the Equitization Holders) of our Treximet Secured Notes. Pursuant to the Equitization Exchange Agreements, we issued 650,190 shares of our Common Stock in exchange for approximately $1.5 million aggregate principal amount of Treximet Secured Notes held by such Equitization Holders plus $0.1 million of accrued and unpaid interest thereon (Equitization Transaction). This transaction closed on August 1, 2018.

Amended ABL Facility and Term Facility

On August 1, 2018 we entered into an amendment of our revolving asset-based credit facility agreement by and among us, the guarantors and lenders party thereto and Cantor Fitzgerald Securities, as agent (the ABL Facility), as well as an amendment to our existing delayed draw term loan facility by and among PIP DAC, the lenders party thereto and Cantor Fitzgerald Securities, as agent (the Term Facility and together with the ABL Facility, the Credit Facilities). These amendments were made to permit the exchange of the Treximet Secured Notes into Common Stock in the Exchange Transactions and Equitization Transaction, and to amend certain terms of the Credit Facilities, including (i) certain changes to the borrowing base calculation under the ABL Facility that are intended to improve our borrowing capacity under the ABL Facility and that will also permit us, among other things, to include Contrave inventory owned by us in the calculation of the borrowing base, (ii) changes to permit the use of subsequent draws under the Term Facility for working capital or other general corporate purposes, (iii) a reduction in the commitments under the ABL Facility from $40.0 million to $32.5 million, and (iv) changes to the interest payment provisions under the Term Facility increasing the minimum percentage of interest that must be paid in cash to 6.00% per annum from 4.50% per annum.

Closing of Transactions Regarding Worldwide Rights to Contrave (naltrexone HCl / bupropion HCl)

On April 17, 2018, we entered into a Commitment Letter pursuant to which we committed to provide Nalpropion Pharmaceuticals, Inc. (Nalpropion) with $7.5 million in debt and/or equity capital to fund Nalpropion's purchase of certain assets of Orexigen Therapeutics, Inc. (Orexigen). Nalpropion is a special purpose corporation jointly owned by us and certain other co-investors. Nalpropion submitted a "stalking horse" bid to purchase certain assets of Orexigen, which filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. in the United States Bankruptcy Court for the District of Delaware.

On April 23, 2018, pursuant to a confidential non-binding term sheet agreement between us and the co-investors in Nalpropion, Nalpropion entered into a "stalking horse" asset purchase agreement (Asset Purchase Agreement) to acquire certain assets of Orexigen, including worldwide rights to Contrave, a prescription-only weight-loss medication, for $75 million in cash.

On June 22, 2018, we announced that no other bids for Orexigen's assets were received by the court-approved bid deadline and on July 27, 2018, Nalpropion acquired substantially all the assets and assumed certain liabilities of Orexigen for approximately $73.5 million in cash. Pursuant to an amendment to the Asset Purchase Agreement that was entered into concurrent with closing of the transaction, the purchase price was reduced to $73.5 million and $5.0 million of the purchase price was held back by Nalpropion to cover potential indemnification claims. On July 27, 2018, we funded PIP DAC's contribution of 10% of the capital required to fund the purchase price for Orexigen of $7.35 million and an incremental $1.82 million for working capital requirements, via its existing Term Facility. The Company owns 10% of the equity and has one of three seats on the Board of Directors of Nalpropion. We determined Nalpropion qualifies as a Variable Interest Entity (VIE) based on its governance structure and contractual relationship with us, therefore we will consolidate Nalpropion in our consolidated financial statements since the we have the power to direct activities that most significantly impacts Nalpropion's economic performance.

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Zohydro ER with BeadTek 20MG

On March 28, 2018 we resumed distribution of the 20 mg dosage strength of Zohydro ER. While our supplier now believes that it has resolved its manufacturing issue, we will experience a temporary stock-out of the 20 mg dosage during the fourth quarter of 2018. We do not believe that this temporary stock-out will have a material impact on the overall prescription volume for Zohydro ER in the fourth quarter.

Launch of Treximet Authorized Generic

On February 14, 2018, four patents covering Treximet expired, enabling up to three generic competitors to enter the market. As of September 30, 2018, three competitors have entered the market. Concurrent with the launch of generics by third parties, we launched an authorized generic version of Treximet and we will also continue to distribute the branded versions of Treximet. We have one additional patent that covers Treximet which will expire in 2026 that we expect to prevent additional generic competitors from entering the market until that time. We expect that generic competition for Treximet will have a material adverse effect on our net revenues for the nine month period ending September 30, 2018 and fiscal year ending December 31, 2018 as compared to the corresponding periods of the fiscal year ending December 31, 2017.

Patent Litigation Concerning Zohydro ER

We announced on January 29, 2018 that we had entered into a settlement agreement with Actavis Laboratories FL (Actavis) resolving patent litigation related to Zohydro ER. The litigation has been pending in the U.S. District Court for the District of Delaware and resulted from Actavis's submission of an ANDA to the FDA seeking approval to market a generic version of Zohydro ER. Under the terms of the agreement, we will grant Actavis a license to begin selling a generic version of Zohydro ER on March 1, 2029, or earlier under certain circumstances.  Other details of the settlement are confidential.  The launch of Actavis's generic product is contingent upon Actavis receiving final approval from the FDA of its ANDA for a generic version of Zohydro ER. The settlement agreement also resolves a pending appeal related to a patent litigation between Recro Gainesville LLC and Actavis, which also relates to Actavis's proposed generic version of Zohydro ER. As required by law, the parties have submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review.

A patent litigation that we previously commenced against Alvogen Malta Operations Ltd. related to Alvogen's proposed generic version of Zohydro ER. For the Alvogen case, trial testimony was heard from June 11-13, 2018, post-trial briefing was completed on July 12, 2018, and the trial concluded with the parties' closing arguments on July 25, 2018. The district court's trial decision was rendered on August 24, 2018, finding the asserted claims of the Zohydro ER patents to be infringed by Alvogen's proposed generic Zohydro ER product and not to be invalid for anticipation under 35 U.S.C. § 102. The district court also found the asserted claims to be invalid for obviousness under 35 U.S.C. § 103 and as lacking adequate written description under 35 U.S.C. § 112. We filed a Notice of Appeal on September 7, 2018, appealing the district court's decision to the United States Court of Appeals for the Federal Circuit. Our opening appellate brief is due no later than November 13, 2018, Alvogen's answering brief is due no later December 24, 2018, and our reply brief is due no later than January 7, 2019. Oral argument on the appeal is expected in second quarter 2019, with a written decision to follow thereafter. Absent a reversal of the Court's decision, pursuant to a previous settlement agreement dated September 29, 2016, between Alvogen and Recro Gainsville LLC, Alvogen can launch a generic version of Zohydro® ER with BeadTek®, subject to final approval of an ANDA from the FDA, as early as October 1, 2019.

Sales Force Restructure

On January 4, 2018, we committed to and commenced a realignment plan to reduce operating costs and better align our workforce with the needs of our business in anticipation of the expiration of certain patents related to Treximet®. We completed the realignment plan on January 5, 2018, resulting in a reduction of our workforce by 41 employees, the majority of which were associated with our sales force and commercial infrastructure. In connection with this commercial reorganization, we expect to realize annualized cost savings of $7.0-$8.0 million beginning in the first quarter of 2018. We recorded a one-time charge of $0.8 million during the nine months ended September 30, 2018 as a result of this realignment.

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Adoption of New Accounting Guidance

Revenue Recognition

On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers (ASC 606) and all the related amendments to all contracts using the modified retrospective method. Upon adoption of ASC 606, we did not initially recognize a cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We do not expect the adoption of the new revenue standard to have a material impact on our results of operations for the year ending December 31, 2018. See note 2, Basis of Presentation and Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements for more information.

Results of Operations

Comparison of Three Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017 and includes the results of Nalpropion (in thousands):

      Three Months Ended            
      September 30,     Increase /      
      2018     2017     (Decrease)     Percent
Net revenues   $ 37,156    40,469    (3,313)     -8%
                         
Costs and operating expenses:                        
     Cost of product sales     11,823      10,580      1,243      12%
     Selling, general and administrative expense     31,872      20,226      11,646      58%
     Research and development expense     1,524      99      1,425      *
     Depreciation and amortization expense     2,391      18,214      (15,823)     -87%
     Loss from disposal and impairments of assets     75      25      50      200%
     Change in fair value of contingent consideration         884      (884)     *
     Gain from legal settlement         (10,476)     10,476      *
     Restructuring costs     (2)     (97)     95      *
Other income (expense):                        
     Interest expense     (10,073)     (9,323)     750      8%
     Change in fair value of derivative liability     18      46      (28)     *
     Gain from exchange of debt     137      14,650      (14,513)     *
     Foreign currency transaction gain (loss)     (843)         (843)     *
Income tax expense (benefit)     61      27      34      *
Net income attributable to noncontrolling interests      9,504          9,504      *

*    Comparison to prior period is not meaningful.

Net Revenues

Net revenues consist of net product sales and revenue from co-promotion and other revenue sharing arrangements or agreements. We recognize product sales net of estimated allowances for product returns, price adjustments (customer rebates, managed care rebates, service fees, chargebacks, coupons and other discounts), government program rebates (Medicaid, Medicare and other government sponsored programs) and prompt pay discounts. The factors that determine our net product sales are the level of demand for our products, unit sales prices, the applicable federal and supplemental government program rebates, contracted rebates, services fees, and chargebacks and other discounts that we may offer such as consumer coupon programs. In addition to our own product portfolio, we have entered into co-promotion agreements and other revenue sharing arrangements with various parties in return for a percentage of sales we generate or on sales they generate.

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The following table sets forth a summary of our net revenues for the three months ended September 30, 2018 and 2017 (in thousands):

      Three Months Ended            
      September 30,     Increase /      
      2018     2017     (Decrease)     Percent
Contrave   $ 16,418    $ -     $ 16,418      *
Treximet     3,369      19,802      (16,433)     -83%
Treximet AG     2,253      -       2,253      *
Zohydro ER     6,655      6,305      350      6%
Silenor     5,596      6,881      (1,285)     -19%
Other     2,586      7,372      (4,786)     -65%
     Net product revenues     36,877      40,360      (3,483)     -9%
Co-promotion and other revenue     279      109      170      156%
Total net revenues   $ 37,156    $ 40,469    $ (3,313)     -8%

*    Comparison to prior period is not meaningful.

Net revenues decreased $3.3 million or 8% during the three months ended September 30, 2018 compared to the three months ended September 30, 2017.

The increase in Contrave net revenues of $16.4 million during the three months ended September 30, 2018 is attributable to Nalpropion's acquisition of Orexigen, which closed on July 27, 2018.

Treximet brand net revenues decreased by $16.4 million, or 83%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 due to the loss of exclusivity of Treximet in February 2018 resulting in generic competition. We expect that future Treximet brand revenues will continue to decrease year over year due to the loss of exclusivity. On February 15, 2018, we launched an authorized generic version of Treximet (Treximet AG).

Treximet AG net revenues were $2.3 million during the three months ended September 30, 2018 due to its launch on February 15, 2018. There were no sales of Treximet AG prior to its launch.

Zohydro ER net revenues increased by $0.4 million, or 6%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase was due to an increase in net price of $0.6 million (related to favorable gross to net accrual rates), partially offset by lower sales volume of $0.2 million.

Silenor net revenues decreased by $1.3 million, or 19%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease was due to a decrease in net price of $1.6 million (primarily related to a $1.0 million favorable settlement with one of our customers in the prior year), partially offset by higher sales volume of $0.3 million.

Net product revenues - other decreased by $4.8 million, or 65%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease was due primarily to discontinuation of products no longer sold of $3.7 million, including IDA.

Cost of Product Sales

Cost of product sales increased by $1.2 million, or 12%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. There was a $5.4 million increase in costs of product sales which was attributable to Nalpropion's acquisition of Contrave and increased Zohydro ER, and Treximet AG product costs of $0.8 million and $0.3 million, respectively, due to increased volume. This increase was partially offset by a $3.3 million decrease reflecting lower Treximet brand sales as a result of generic competition, combined with a $2.0 million decrease in our other product revenue (primarily related to discontinued products).

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Selling, General and Administrative Expense

Selling, general and administrative expense increased by $11.7 million, or 58%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017.  The increase is attributable primarily to Nalpropion's acquisition of Orexigen which resulted in selling, general and administrative expenses of $17.1 million. This increase was partially offset by lower sales force related expenses of $2.6 million due to the restructuring announced in January 2018, lower marketing and selling expenditures of $1.0 million related primarily to Treximet due to the loss of exclusivity, $0.6 million of lower deal costs as well as $1.2 million of lower spend across numerous areas.

Research and Development Expense

Research and development expense increased by $1.4 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 and is attributable primarily to Nalpropion's acquisition of Orexigen which incurred research and development costs of $1.5 million partially offset by discontinuation of certain Zohydro-related research projects.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased by $15.8 million, or 87%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease was related primarily to Treximet intangible assets becoming fully amortized upon the expiration of certain underlying patents and the loss of its exclusivity in February 2018, partially offset by increased depreciation and amortization expense of $1.0 million related to Nalpropion's acquisition of Orexigen.

Change in Fair Value of Contingent Consideration

For the acquisition of Zohydro ER, we initially recorded $14.2 million of contingent consideration. The fair value of the contingent consideration linked to FDA approval was $2.7 million and the fair value of the contingent consideration linked to achievement of the net sales target was $11.5 million. As of September 30, 2018, the current fair value of the contingent consideration was approximately $1.5 million. We recorded a benefit of $0 and $884,000 as change in fair value of contingent consideration in the three months ended September 30, 2018 and 2017, respectively.

Restructuring Costs

Restructuring costs were a benefit of $2,000 and $97,000 during the three months ended September 30, 2018 and 2017, respectively, due primarily to the 2016 initiatives to restructure our sales force and operations.

Interest Expense

Interest expense increased by $0.8 million, or 8%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase was related primarily to higher borrowings under the Delayed Draw Term Loan (DDTL), which was used to fund our investment in Nalpropion and an increase in borrowings under the 2018 Term Loan as a result of Nalpropion's acquisition of Orexigen. These increases were offset partially by reduced interest expense on our Treximet Secured Notes due to the lower principal balance.

Change in Fair Value of Derivative Liability

We are required to separate the conversion option in the 4.25% Convertible Senior Notes Due 2021 (4.25% Convertible Notes) under ASC 815, Derivatives and Hedging. We recorded the bifurcated conversion option valued at $28.5 million at issuance, as a derivative liability, which creates additional discount on the debt. The derivative liability is marked to market through the other income (expense) section on the unaudited condensed consolidated statements of operations for each reporting period. We recorded a benefit of $18,000 and $46,000 as change in fair value of derivative liability in other income (expense) in the three months ended September 30, 2018 and 2017, respectively.

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Gain from Exchange of Debt

During the three months ended September 30, 2018, certain holders of the Treximet Secured Notes exchanged a total of $4.4 million in principal and accrued interest for Common Stock under the 2018 Exchange Agreement and the Equitization Exchange Agreements, which resulted in an extinguishment of deferred financing fees of $0.3 million. In addition, certain holders of the Treximet Secured Notes exchanged $8.1 million in principal and accrued interest for $7.7 million of Convertible Preferred Stock and resulted in a gain on extinguishment of $0.4 million. The combined effect of these transactions resulted in a net $0.1 million gain from the exchange of the Treximet Secured Notes during the three months ended September 30, 2018.

We recorded a gain of $14.7 million during the three months ended September 30, 2017 related to the Exchange Agreement. In July 2017, certain holders of the 4.25% Convertible Notes exchanged $51.8 million in principal notes for $36.2 million of 4.25%/5.25% Exchangeable Senior Notes due 2022 (the Exchangeable Notes).

Net loss attributable to noncontrolling interests

In accordance with the accounting consolidation principles, we consolidated Nalpropion which neither we nor our subsidiaries owned 100%, into our consolidated financial statements. Net loss attributable to noncontrolling interests relates to the portion of the net loss of Nalpropion not attributable, directly or indirectly, to our ownership interests. We recognized $9.5 million during the three months ended September 30, 2018 as a result of the Nalpropion transaction.

Income Tax Expense

We reported an income tax expense of $61,000 and $27,000 for the three months ended September 30, 2018 and 2017, respectively.

Comparison of Nine Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017 and includes the results of Nalpropion (in thousands):

      Nine Months Ended            
      September 30,     Increase /      
      2018     2017     (Decrease)     Percent
Net revenues   $ 86,383    104,527    (18,144)     -17%
                         
Costs and operating expenses:                        
     Cost of product sales     26,353      31,113      (4,760)     -15%
     Selling, general and administrative expense     67,412      59,519      7,893      13%
     Research and development expense     1,534      709      825      116%
     Depreciation and amortization expense     13,686      54,976      (41,290)     -75%
     Change in fair value of contingent consideration     143      344      (201)     *
     Loss from disposal and impairments of assets     75      25      50      *
     Gain from legal settlement         (10,476)     10,476      *
     Restructuring costs     1,212      34      1,178      *
Other income (expense):                        
     Interest expense     (29,063)     (27,491)     1,572      6%
     Gain on sale of assets     446          (446)     *
     Change in fair value of derivative liability     39      (38)     77      *
     Gain from exchange of debt     137      14,650      (14,513)     *
     Foreign currency transaction gain     (864)         (864)     *
Income tax expense (benefit)     109      122      13      *
Net income attributable to noncontrolling interests      9,504          9,504      *

*    Comparison to prior period is not meaningful.

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The following table sets forth a summary of our net revenues for the nine months ended September 30, 2018 and 2017 (in thousands):

      Nine Months Ended            
      September 30,     Increase /      
      2018     2017     (Decrease)     Percent
Contrave   16,418    -     16,418      *
Treximet     17,221      50,412      (33,191)     -66%
Treximet AG     7,135      -       7,135      *
Zohydro ER     21,937      17,955      3,982      22%
Silenor     17,299      15,580      1,719      11%
Other     5,738      20,335      (14,597)     -72%
     Net product revenues     85,748      104,282      (18,534)     -18%
Co-promotion and other revenue     635      245      390      159%
Total net revenues   $ 86,383    $ 104,527    $ (18,144)     -17%

*    Comparison to prior period is not meaningful.

Net revenues decreased $18.1 million or 17% during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

The increase in Contrave net revenues of $16.4 million during the nine months ended September 30, 2018 was attributable to Nalpropion's acquisition of Orexigen which closed on July 27, 2018.

Treximet brand net revenues decreased by $33.2 million, or 66%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 due to the loss of exclusivity of Treximet in February 2018 resulting in generic competition. We expect that future Treximet brand revenues will continue to decrease year over year due to the loss of exclusivity. On February 15, 2018, we launched Treximet AG.

Treximet AG net revenues were $7.1 million during the nine months ended September 30, 2018 due to its launch on February 15, 2018. There were no sales of Treximet AG prior to its launch.

Zohydro ER net revenues increased by $4.0 million, or 22%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase was due to an increase in net price of $1.8 million (primarily related to favorable gross to net accrual rates) and sales volume of $2.2 million.

Silenor net revenues increased by $1.7 million, or 11%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase was primarily due to an increase in sales volume of $2.1 million partially offset by a decrease in net price of $0.4 million (primarily related a $1.0 million favorable settlement with one of our customers in the prior year).

Net product revenues - other decreased by $14.6 million, or 72%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was due primarily to discontinuation of products no longer sold of $10.7 million, including IDA, and increased competitive and pricing pressures on our generics portfolio.

Cost of Product Sales

Cost of product sales decreased by $4.8 million, or 15%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease in cost of product sales was due primarily to a $7.1 million decrease as a result of lower Treximet brand sales as a result of generic competition combined with $6.0 million decrease in our other product revenue (primarily related to discontinued products), partially offset by (i) a $5.4 million increase in costs of product sales attributable to Nalpropion's acquisition of Contrave and (ii) increased Zohydro ER, Treximet AG and Silenor product costs of $1.8 million, $0.6 million and $0.5 million, respectively due to increased volume.

45


Selling, General and Administrative Expense

Selling, general and administrative expense increased by $8.0 million, or 13%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.  The increase is attributable primarily to Nalpropion's acquisition of Orexigen which resulted in selling, general and administrative expenses of $17.1 million. The increase was partially offset by lower sales force related expenses of $7.1 million due to the restructuring announced in January 2018, lower marketing and selling expenditures of $2.7 million related primarily to Treximet due to the loss of exclusivity, as well as $1.7 million of lower spend across numerous areas, partially offset by higher legal fees of $2.4 million related primarily to patent defense and legal settlements.

Research and Development Expense

Research and development expense increased by $0.8 million during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 and is attributable primarily to Nalpropion's acquisition of Orexigen which resulted in research and development costs of $1.5 million partially offset by discontinuation of certain Zohydro-related research projects.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased by $41.3 million, or 75%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease was related primarily to Treximet intangible assets becoming fully amortized upon the expiration of certain underlying patents and the loss of its exclusivity in February 2018, partially offset by increased depreciation and amortization expense of $1.0 million related to Nalpropion's acquisition of Orexigen.

Change in Fair Value of Contingent Consideration

For the acquisition of Zohydro ER, we initially recorded $14.2 million of contingent consideration. The fair value of the contingent consideration linked to FDA approval was $2.7 million and the fair value of the contingent consideration linked to achievement of the net sales target was $11.5 million. As of September 30, 2018, the current fair value of the contingent consideration was approximately $1.5 million. We recorded expense of $0.1 million and $0.3 million as change in fair value of contingent consideration in the nine months ended September 30, 2018 and 2017, respectively.

Restructuring Costs

Restructuring costs were $1.2 million and $34,000 during the nine months ended September 30, 2018 and 2017, respectively, due to the 2018 and 2016 initiatives to restructure our sales force and operations.

Interest Expense

Interest expense increased by $1.6 million, or 6%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase was related primarily to (i) increased borrowings under the DDTL which was used to fund our investment in Nalpropion (ii) higher average interest rates under our ABL Facility, and (iii) an increase in borrowings under the 2018 Term Loan as a result of Nalpropion's acquisition of Orexigen. These increases were offset partially by reduced interest expense on our Treximet Secured Notes due to the lower principal balance.

Change in Fair Value of Derivative Liability

We are required to separate the conversion option in the 4.25% Convertible Notes under ASC 815, Derivatives and Hedging. We recorded the bifurcated conversion option valued at $28.5 million at issuance, as a derivative liability, which creates additional discount on the debt. The derivative liability is marked to market through the other income (expense) section on the unaudited condensed consolidated statements of operations for each reporting period. We recorded a benefit of $39,000 and an expense of $38,000 as change in fair value of derivative liability in other income (expense) in the nine months ended September 30, 2018 and 2017, respectively.

46


Gain from Exchange of Debt

During the nine months ended September 30, 2018, certain holders of the Treximet Secured Notes exchanged a total of $4.4 million in principal and accrued interest for Common Stock under the 2018 Exchange Agreement and the Equitization Exchange Agreements, which resulted in an extinguishment of deferred financing fees of $0.3 million. In addition, certain holders of the Treximet Secured Notes exchanged $8.1 million in principal and accrued interest for $7.7 million of Convertible Preferred Stock and resulted in a gain on extinguishment of $0.4 million. The combined effect of these transactions resulted in a net $0.1 million gain from the exchange of the Treximet Secured Notes during the nine months ended September 30, 2018.

We recorded a gain of $14.7 million during the nine months ended September 30, 2017 related to the Exchange Agreement. In July 2017, certain holders of the 4.25% Convertible Notes exchanged $51.8 million in principal notes for $36.2 million in Exchangeable Notes.

Net loss attributable to noncontrolling interests

In accordance with the accounting consolidation principles, we consolidated Nalpropion which neither we nor our subsidiaries owned 100%, into our consolidated financial statements. Net loss attributable to noncontrolling interests relates to the portion of the net loss of Nalpropion not attributable, directly or indirectly, to our ownership interests. We recognized $9.5 million during the nine months ended September 30, 2018 as a result of the Nalpropion transaction.

Income Tax Expense

We reported an income tax expense of $109,000 and $122,000 for the nine months ended September 30, 2018 and 2017, respectively.

Non-GAAP Financial Measures

To supplement our financial results determined by GAAP, we have disclosed in the table below adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).

Adjusted EBITDA is a non-GAAP financial measure that excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP.  This non-GAAP financial measure excludes from net loss: interest expense; depreciation and amortization; income tax expense; inventory step-up amortization, selling, general and administrative adjustments; gain from sale of non-core assets; change in fair value of contingent consideration; loss from disposal and impairment of assets; gain from exchange of debt; change in fair value of derivative liability; restructuring costs; and foreign currency transactions.  In addition, from time to time in the future there may be other items that we may exclude for the purposes of our use of adjusted EBITDA; likewise, we may in the future cease to exclude items that we have historically excluded for the purpose of adjusted EBITDA.  We believe that adjusted EBITDA provides meaningful supplemental information regarding our operating results because it excludes or adjusts amounts that management and the board of directors do not consider part of core operating results or that are non-recurring when assessing the performance of the organization.  We believe that inclusion of adjusted EBITDA provides consistency and comparability with past reports of financial results and provides consistency in calculations by outside analysts reviewing our results.  Accordingly, we believe that adjusted EBITDA is useful to investors in allowing for greater transparency of supplemental information used by management.

We believe that these non-GAAP financial measures are helpful in understanding our past financial performance and potential future results, but there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential

47


differences in the exact method of calculation between companies. Adjustment items that are excluded from our non-GAAP financial measures can have a material impact on net earnings. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, net loss, cash flow from operations or other measures of performance prepared in accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as a supplement to GAAP financial measures and by reconciling the non-GAAP financial measure to its most comparable GAAP financial measure. Investors are encouraged to review the reconciliations of the non-GAAP financial measure to its most comparable GAAP financial measure that is included below in this Quarterly Report on Form 10-Q.

Reconciliation of GAAP reported net loss to adjusted EBITDA is as follows (in thousands):

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
      2018     2017     2018     2017
Net income (loss) attributable to common stockholders   $ (11,845)   $ 6,360    $ (43,942)   $ (44,718)
Add: Net loss attributable to noncontrolling interests     (9,504)         (9,504)    
Adjustments:                        
     Interest expense     10,073      9,323      29,063      27,491 
     Depreciation and amortization      2,422      18,243      13,773      55,064 
     Income tax expense     61      27      109      122 
EBITDA     (8,793)     33,953      (10,501)     37,959 
     Inventory step-up amortization(1)     2,239          2,239     
     Selling, general and administrative adjustments (2)     5,059      1,985      8,190      3,720 
     Gain from sale of non-core asset (3)             (446)    
     Change in fair value of contingent consideration (4)         884      143      344 
     Loss from disposal and impairment of assets (5)     75      25      75      25 
     Gain from exchange of debt (6)     (137)     (14,650)     (137)     (14,650)
     Change in fair value of derivative liability (7)     (18)     (46)     (39)     38 
     Restructuring costs (8)     (2)     (97)     1,212      34 
     Gain from legal settlement (9)         (10,476)         (10,476)
     Foreign currency transaction (gain) loss (10)     843          864     
Adjusted EBITDA   $ (734)   $ 11,578    $ 1,600    $ 16,994 

________________

(1)

Excludes inventory step-up amortization recorded as part of Nalpropion's acquisition of Orexigen.

(2)

Excludes deal costs of $4.6 million and $1.3 million; stock compensation expense of $0.4 million and $0.5 million; severance expense of $16,000 and $0.2 million; and litigation settlement expenses of $25,000 and $20,000 for the three months ended September 30, 2018 and 2017, respectively. Also excludes deal costs of $5.4 million and $1.5 million; stock compensation expense of $1.3 million and $1.9 million; severance expense of $0.1 million and $0.2 million; and arbitration and litigation settlement expenses of $1.3 million and $38,000 for the nine months ended September 30, 2018 and 2017, respectively.

(3)

Excludes the gain from the sale of certain obsolete equipment.

(4)

Excludes loss from change in fair value of contingent consideration related to the 2015 acquisition of Zohydro ER and is linked to the achievement of certain net sales targets. Any change in fair values between the reporting dates is recognized in the condensed consolidated statements of operations.

(5)

Excludes loss from impairment of other assets.

(6)

Excludes $0.1 million gain related to the Exchange Transaction and the Equitization Transaction in the three and nine months ended September 2018. For the three and nine months ended September 30, 2017, excludes a $14.7 million gain related to the July 2017 financing transactions in which certain holders of the 4.25% Convertible Notes exchanged $51.8 million in principal notes for $36.2 million in Exchangeable Notes.

(7)

Excludes changes in fair value of derivative liability consideration. We are required to separate the conversion option in the 4.25% Convertible Notes under ASC 815, Derivatives and Hedging. We recorded the bifurcated conversion option valued at $28.5 million at issuance, as a derivative liability, which created additional discount on the debt. The derivative liability is marked to market through the other income (expense) section on the condensed consolidated statements of operations for each reporting period.

(8)

Excludes the cost related to the initiative to restructure our sales force and operations for the three and nine months ended September 30, 2018 and 2017.

(9)

Excludes $10.5 million gain from Pernix and GSK amended settlement agreement resulting from Amendment NO. 2 to the Interim Settlement Agreement with GSK under which Pernix paid approximately $6.7 million to GSK (potentially up to $8.7 million), which is a reduction of up to approximately $14.5 million from the initial settlement agreement.

(10)

Excludes losses on foreign currency transactions primarily related to Nalpropion's operations.

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Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources (amounts in thousands):

      September 30,     December 31,
      2018     2017
Cash and cash equivalents   $ 24,511    $ 32,820 
Total current assets     120,723      92,284 
Current debt (1)     -       3,664 
Arbitration award (2)     2,000      2,000 
Non-current debt (1)     322,457      278,489 
Stockholders' deficit   $ (172,282)   $ (174,257)

(1)

The table below lists the total Borrowings, the note discount, and the deferred financing costs that when combined equal the components of current and non-current book value of the debt listed on our condensed consolidated balance sheets at September 30, 2018 and December 31, 2017, respectively. See Note 10, Debt and Lines of Credit to our condensed consolidated financial statements.

As of September 30, 2018

      Total     Note     Deferred Financing     Book
      Borrowings     Discount     Costs (a)     Value
4.25% Convertible Notes   $ 78,225    $ (8,828)   $ (1,574)   $ 67,823 
Exchangeable Notes     36,145      (22,913)     (3,202)     10,030 
2018 Term Loan     41,250      -       -       41,250 
Delayed Draw Term Loan     40,074      -       (2,269)     37,805 
Treximet Secured Notes - Long Term     154,515      -       (3,151)     151,364 
Treximet Secured Notes - Short Term     -       -       -       -  
ABL Facility     14,185      -       -       14,185 
     Balance at September 30, 2018   $ 364,394    $ (31,741)   $ (10,196)   $ 322,457 

As of December 31, 2017

      Total     Note     Deferred Financing     Book
      Borrowings     Discount     Costs (a)     Value
4.25% Convertible Notes   $ 78,225    $ (11,060)   $ (1,971)   $ 65,194 
Exchangeable Notes     35,743      (24,363)     (3,405)     7,975 
Delayed Draw Term Loan     30,000      -       (2,752)     27,248 
Treximet Secured Notes - Long Term     166,697      -       (2,810)     163,887 
Treximet Secured Notes - Short Term     5,373      -       (1,709)     3,664 
ABL Facility     14,185      -       -       14,185 
     Balance at December 31, 2017 (a)   $ 330,223    $ (35,423)   $ (12,647)   $ 282,153 

__________________________

(a)

We reclassified capitalized debt issuance costs of approximately $1.5 million from "Prepaid expenses and other current assets" to our long-term debt instruments within "Total liabilities" except for those related to revolving credit facilities to conform to the current period presentation. This reclassification had no effect on previously reported results of operations, financial position or cash flows.

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(2) GSK Arbitration

Relates to obligations associated with our arbitration proceeding with GSK. We had been engaged in an arbitration proceeding with GSK relating to an alleged breach by us of a covenant contained in the Asset Purchase and Sale Agreement, dated May 13, 2014, by and among GSK and its affiliates and us pertaining to a pre-existing customer agreement. The parties entered into an interim settlement agreement (the Interim Settlement Agreement) in July 2015 under which we paid approximately $10.3 million to GSK and escrowed an additional amount of approximately $6.2 million. On January 31, 2017, the arbitration tribunal issued opinions in favor of GSK, awarding it damages and fees in the amount of approximately $35.0 million, plus interest (estimated to be approximately $2.0 to $5.0 million). On March 17, 2017, we entered into Amendment No.1 to the Interim Settlement Agreement with GSK whereby we agreed to establish a payment schedule for satisfaction of the current balance of the award.

On July 20, 2017, we and GSK entered into Amendment No. 2 to the Interim Settlement Agreement.  Amendment No. 2 superseded Amendment No. 1 and permitted payment by us to GSK of a reduced amount in full satisfaction of the remaining approximately $21.2 million unpaid portion of the award granted to GSK in the arbitration of certain matters previously disputed by the parties.  Pursuant to Amendment No. 2, we were 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. Both of these payments were made as of December 31, 2017. Also pursuant to Amendment No. 2, we agreed that if on or before September 30, 2019, we (x) redeem or repurchase our 4.25% Convertible Notes for greater than 31 cents for every one dollar of principal amount outstanding or (y) exchange such notes for new notes or similar instruments that have a face value providing such exchanging holders a recovery that is greater than 31 cents for every one dollar of 4.25% Convertible Notes exchanged by such holders, we 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 $2.0 million. GSK has agreed that for so long as we 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. As of September 30, 2018, and December 31, 2017, we recorded $2.0 million as contingent consideration for the potential payment due by September 30, 2019 and is recorded in other liabilities - current and Arbitration award, respectively, on our condensed consolidated balance sheets Also, we recorded $10.5 million as gain from legal settlement for the year ended December 31, 2017 pursuant to Amendment No. 2 in the consolidated statements of operations and comprehensive loss.

During the nine months ended September 30, 2018 and 2017 we utilized cash from operations of $25.4 million and $9.2 million respectively.

As of September 30, 2018, we had cash and cash equivalents of $24.5 million and borrowing availability of $6.8 million under our ABL Facility.

We have an effective shelf registration statement on Form S-3 with the SEC, which covers the offering, issuance and sale of up to $150.0 million of our Common Stock, preferred stock, debt securities, warrants, subscription rights and units. The shelf registration statement includes a sales agreement prospectus covering the offering, issuance and sale of up to $10.0 million shares of our Common Stock that may be issued and sold under the Controlled Equity Offering Sales Agreement, dated November 7, 2014, between us and Cantor Fitzgerald & Co. as agent. We sold 191,170 and 680,926 shares of Common Stock under this controlled equity program during the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively, for net proceeds of $453,000 and $2.0 million during the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively.

As a result of the Exchange Transactions announced on August 1, 2018, the principal amount of our Treximet Secured Notes outstanding at September 30, 2018 was reduced by $12.2 million to $154.5 million, resulting in an annual interest savings of $1.5 million. The amendment to our Term Facility provides us with access to up to $5.8 million of the delayed draw feature for working capital purposes, further enhancing our liquidity. In addition, the ABL Facility amendment includes changes to the borrowing base calculation, which provides for, among other revisions, the inclusion of Contrave® inventory owned by us going forward. As such, we believe that this amendment will create additional borrowing capacity under the ABL Facility. 

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On July 27, 2018, we funded the contribution, which contribution was made by PIP DAC, our wholly owned subsidiary, of 10% of the capital, or $7.35 million, required to fund Nalpropion's acquisition of Orexigen and an incremental $1.8 million for working capital requirements, via our existing DDTL. On July 27, 2018, Nalpropion acquired substantially all the assets and assumed certain liabilities of Orexigen for approximately $73.5 million in cash.

Our future capital requirements will depend on many factors, including:

  • the level of product sales of our currently marketed products and any additional products that we may market in the future;
  • the extent to which we acquire or invest in products, businesses and technologies;
  • the level of inventory purchase commitments under supply, manufacturing, license and/or co-promotion agreements;
  • the scope, progress, results and costs of development activities for our current product candidates;
  • the costs, timing and outcome of regulatory review of our product candidates;
  • the number of, and development requirements for, additional product candidates that we pursue;
  • the costs of commercialization activities, including product marketing, sales and distribution;
  • the costs and timing of establishing manufacturing and supply arrangements for clinical and commercial supplies of our product candidates and products;
  • the extent to which we choose to establish collaboration, co-promotion, distribution or other similar