UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One) |
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þ |
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended: September 30, 2017
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.
Maryland |
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33-0724736 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
10 North Park Place, Suite 201, Morristown, NJ |
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07960 |
(Address of principal executive offices) |
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(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 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 o(Do not check if a smaller reporting company) |
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.
oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
o NO þOn November 1, 2017, there were 11,532,423 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, 2017
INDEX
PART I. |
FINANCIAL INFORMATION |
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Item 1. |
Financial Statements (unaudited) |
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3 |
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Condensed Consolidated Statements of Operations and Comprehensive Gain (Loss) |
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4 |
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Condensed Consolidated Statements of Stockholders' Equity (Deficit) |
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5 |
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6 |
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7 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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32 |
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Item 3. |
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49 |
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Item 4. |
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50 |
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PART II. |
OTHER INFORMATION |
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Item 1. |
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50 |
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Item 1A. |
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50 |
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Item 2. |
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58 |
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Item 3. |
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58 |
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Item 4. |
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58 |
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Item 5. |
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59 |
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Item 6. |
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59 |
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61 |
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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, | |||||
2017 | 2016 | |||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 27,241 | $ | 36,375 | ||
Accounts receivable, net | 48,368 | 50,729 | ||||
Inventory, net | 8,130 | 7,775 | ||||
Prepaid expenses and other current assets | 8,814 | 12,617 | ||||
Income tax receivable | 429 | 1,414 | ||||
Total current assets | 92,982 | 108,910 | ||||
Property and equipment, net | 831 | 1,103 | ||||
Goodwill | 30,600 | 30,600 | ||||
Intangible assets, net | 114,783 | 169,571 | ||||
Other | 2,408 | 257 | ||||
Total assets | $ | 241,604 | $ | 310,441 | ||
Liabilities and Stockholders' Deficit | ||||||
Current liabilities: | ||||||
Accounts payable and accrued expenses | $ | 22,699 | $ | 21,343 | ||
Accrued allowances | 58,254 | 60,961 | ||||
Interest payable | 5,871 | 10,897 | ||||
Treximet Secured Notes - current, net | - | 11,103 | ||||
Other liabilities - current | 6,789 | 5,224 | ||||
Total current liabilities | 93,613 | 109,528 | ||||
Convertible notes - long-term, net | 64,879 | 104,071 | ||||
Exchangeable notes - long-term, net | 8,266 | - | ||||
Delayed draw term loan - long-term, net | 27,584 | - | ||||
Derivative liability | 178 | 230 | ||||
Contingent consideration | 2,747 | 2,403 | ||||
Treximet Secured Notes - long-term, net | 168,833 | 172,250 | ||||
Credit facility - long-term, net | 14,185 | 14,000 | ||||
Arbitration award | 2,000 | 17,522 | ||||
Other liabilities - long-term | 2,567 | 4,500 | ||||
Total liabilities | 384,852 | 424,504 | ||||
Commitments and contingencies (notes 1, 3, 6, 7, 10 and 11) | ||||||
Stockholders' deficit: | ||||||
Preferred stock, $0.01 par value, authorized 10,000,000 shares; | ||||||
no shares issuedand outstanding | - | - | ||||
Common stock, $0.01 par value, 140,000,000 shares authorized, 11,532,423 and | ||||||
10,015,641 shares issued and outstanding at September 30, 2017 and | ||||||
December 31, 2016, respectively | 115 | 100 | ||||
Additional paid-in capital | 259,794 | 244,309 | ||||
Accumulated other comprehensive loss | (46) | (79) | ||||
Accumulated deficit | (403,111) | (358,393) | ||||
Total stockholders' deficit | (143,248) | (114,063) | ||||
Total liabilities and stockholders' deficit | $ | 241,604 | $ | 310,441 |
See accompanying notes to condensed consolidated financial statements.
3
PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Net revenues | $ | 40,469 | $ | 41,468 | $ | 104,527 | $ | 110,683 | ||||
Costs and operating expenses: | ||||||||||||
Cost of product sales | 10,580 | 10,840 | 31,113 | 34,272 | ||||||||
Selling, general and administrative expense | 20,226 | 22,173 | 59,519 | 73,615 | ||||||||
Research and development expense | 99 | 1,712 | 709 | 5,139 | ||||||||
Depreciation and amortization expense | 18,214 | 20,700 | 54,976 | 65,426 | ||||||||
Change in fair value of contingent consideration | 884 | 516 | 344 | (8,958) | ||||||||
Loss from disposal and impairments of assets | 25 | 652 | 25 | 2,423 | ||||||||
Gain from legal settlement | (10,476) | - | (10,476) | - | ||||||||
Restructuring costs | (97) | 2,277 | 34 | 2,277 | ||||||||
Total costs and operating expenses | 39,455 | 58,870 | 136,244 | 174,194 | ||||||||
Income (loss) from operations | 1,014 | (17,402) | (31,717) | (63,511) | ||||||||
Other income (expense): | ||||||||||||
Interest expense | (9,323) | (8,857) | (27,491) | (26,818) | ||||||||
Change in fair value of derivative liability | 46 | (209) | (38) | 6,744 | ||||||||
Gain from exchange of debt | 14,650 | - | 14,650 | - | ||||||||
Foreign currency transaction (loss) gain | - | 31 | - | 98 | ||||||||
Total other income (expense), net | 5,373 | (9,035) | (12,879) | (19,976) | ||||||||
Income (loss) before income tax expense | 6,387 | (26,437) | (44,596) | (83,487) | ||||||||
Income tax expense | 27 | 1 | 122 | 26 | ||||||||
Net income (loss) | 6,360 | (26,438) | (44,718) | (83,513) | ||||||||
Other comprehensive gain (loss): | ||||||||||||
Unrealized gain during period, net of tax of | ||||||||||||
$0 and $0, respectively | 9 | - | 33 | - | ||||||||
Comprehensive gain (loss) | $ | 6,369 | $ | (26,438) | $ | (44,685) | $ | (83,513) | ||||
Net income (loss) per common share | ||||||||||||
Basic | $ | 0.57 | $ | (2.99) | $ | (4.31) | $ | (11.57) | ||||
Diluted | $ | 0.42 | $ | (2.99) | $ | (4.31) | $ | (11.57) | ||||
Weighted-average common shares outstanding: | ||||||||||||
Basic | 11,117 | 8,842 | 10,387 | 7,215 | ||||||||
Diluted | 16,520 | 8,842 | 10,387 | 7,215 |
See accompanying notes to condensed consolidated financial statements.
4
PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
(Unaudited)
Accumulated | Total | |||||||||||||||||||||||||
Additional | Retained | Other | Stockholders' | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Treasury | Earnings | Comprehensive | Equity | ||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Stock | (Deficit) | Loss | (Deficit) | ||||||||||||||||||
Balance at December 31, 2015 | - | $ | - | 6,111 | $ | 61 | $ | 227,387 | $ | (5,548) | $ | (188,803) | $ | - | $ | 33,097 | ||||||||||
Net proceeds from issuance of restricted stock | - | - | 4 | - | - | (23) | - | - | (23) | |||||||||||||||||
Reclassification of treasury stock | - | - | - | - | (5,571) | 5,571 | - | - | - | |||||||||||||||||
Compensation expense on share-based awards | - | - | - | - | 2,718 | - | - | - | 2,718 | |||||||||||||||||
Net proceeds from sale of shares | - | - | 3,901 | 39 | 19,775 | - | - | - | 19,814 | |||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | - | (79) | (79) | |||||||||||||||||
Net loss | - | - | - | - | - | - | (169,590) | - | (169,590) | |||||||||||||||||
Balance at December 31, 2016 | - | - | 10,016 | 100 | 244,309 | - | (358,393) | (79) | (114,063) | |||||||||||||||||
Net proceeds from issuance of restricted stock | - | - | 44 | 1 | (68) | - | - | - | (67) | |||||||||||||||||
Compensation expense on share-based awards | - | - | - | - | 1,935 | - | - | - | 1,935 | |||||||||||||||||
Net proceeds from sale of shares | - | - | 372 | 3 | 1,119 | - | - | - | 1,122 | |||||||||||||||||
Net proceeds from exchange of debt | - | - | 1,100 | 11 | 12,499 | - | - | - | 12,510 | |||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | - | 33 | 33 | |||||||||||||||||
Net loss | - | - | - | - | - | - | (44,718) | - | (44,718) | |||||||||||||||||
Balance at September 30, 2017 | - | $ | - | 11,532 | $ | 115 | $ | 259,794 | $ | - | $ | (403,111) | $ | (46) | $ | (143,248) |
See accompanying notes to condensed consolidated financial statements.
5
PERNIX THERAPEUTICS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended | ||||||
September 30, | ||||||
2017 | 2016 | |||||
Cash flows from operating activities: | ||||||
Net loss | $ | (44,718) | $ | (83,513) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation | 277 | 588 | ||||
Amortization of intangibles | 54,788 | 64,886 | ||||
Amortization of deferred financing costs | 2,376 | 1,824 | ||||
Accretion expense | 3,837 | 2,655 | ||||
Deferred income tax benefit | - | 24 | ||||
Stock compensation expense | 1,935 | 2,080 | ||||
Fair market value change in derivative liability | 38 | (6,744) | ||||
Fair market value change in contingent consideration | 344 | (8,958) | ||||
Gain from legal settlement | (10,476) | - | ||||
Gain from exchange of debt | (14,650) | - | ||||
Loss on disposal of fixed assets | - | 35 | ||||
Impairment of fixed assets and intangibles | 25 | 2,388 | ||||
(Increase) decrease in operating assets: | ||||||
Accounts receivable | 2,361 | 16,966 | ||||
Income tax receivable | 985 | 3,384 | ||||
Inventory | (355) | 1,753 | ||||
Prepaid expenses and other assets | 6,605 | 635 | ||||
Increase (decrease) in operating liabilities: | ||||||
Accounts payable and accrued expenses | (2,979) | (7,005) | ||||
Accrued allowances | (2,707) | (6,323) | ||||
Interest payable | (5,026) | (5,285) | ||||
Other liabilities | (1,878) | (2,280) | ||||
Net cash used in operating activities | (9,218) | (22,890) | ||||
Cash flows from investing activities: | ||||||
Acquisitions | - | (583) | ||||
Purchase of software and equipment | (5) | (964) | ||||
Net cash used in investing activities | (5) | (1,547) | ||||
Cash flows from financing activities: | ||||||
Payments on Treximet Secured Notes | (17,511) | (20,406) | ||||
Net proceeds from Delayed Draw Term Loan | 30,000 | - | ||||
Payments of financing costs | (13,586) | - | ||||
Net payments on credit facilities | 185 | (1,000) | ||||
Payments on mortgages and capital leases | (55) | (50) | ||||
Proceeds from issuance of common stock, net of tax and costs | 1,123 | 18,303 | ||||
Shares withheld for the payment of taxes | (67) | (24) | ||||
Net cash provided by (used in) financing activities | 89 | (3,177) | ||||
Net decrease in cash and cash equivalents | (9,134) | (27,614) | ||||
Cash and cash equivalents, beginning of period | 36,375 | 56,135 | ||||
Cash and cash equivalents, end of period | $ | 27,241 | $ | 28,521 |
See accompanying notes to condensed consolidated financial statements.
6
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 targets underserved therapeutic areas, such as the central nervous system (CNS) and Pain, including neurology, psychiatry as well as Pain specialties, and has an interest in expanding into additional specialty segments. The Company promotes its branded products to physicians through its Pernix sales force, and markets its generic portfolio through its wholly owned subsidiaries, Macoven Pharmaceuticals, LLC (Macoven) and Cypress Pharmaceuticals, Inc. (Cypress).
The Company's branded products include Treximet®, a medication indicated for the acute treatment of migraine attacks with and without aura, Silenor®, a non-controlled substance and approved medication for the treatment of insomnia characterized by difficulty with sleep maintenance and Zohydro ER® with BeadTek, an extended-release opioid agonist indicated for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with generally accepted accounting principles in the United States (GAAP) and under the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim reporting. In management's opinion, the interim financial data presented includes all adjustments (consisting solely of normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. Certain information required by GAAP has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2017.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for the year ended December 31, 2016, included in Pernix's 2016 Annual Report on Form 10-K filed with the SEC.
The preparation of the unaudited condensed consolidated financial statements requires management to make estimates and assumptions relating to reporting of the assets and liabilities and the disclosure of contingent assets and liabilities to prepare these unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period in conformity with GAAP. Significant estimates of the Company include: revenue recognition, sales allowances such as returns on product sales, government program rebates, customer coupon redemptions, wholesaler/pharmacy discounts, product service fees, rebates and chargebacks, sales commissions, amortization, stock-based compensation, the determination of fair values of assets and liabilities in connection with business combinations, and deferred income taxes. Actual results could differ from these estimates.
Subsequent Events
The Company has evaluated all events and transactions since September 30, 2017 and did not have any recognized but did have the following non-recognized subsequent event:
On October 12, 2017, Graham G. Miao, President and Chief Financial Officer of the Company, notified the Chairman of the Board of Directors of the Company (the "Board") that the decision not to re-nominate him for re-election as a member of the Board at the Company's 2017 Annual Meeting of Stockholders being held on November 15, 2017, created a "Good Reason" basis for resignation pursuant to the terms of his Employment Agreement dated November 3, 2016. Dr. Miao informed the Company of his decision to pursue other professional opportunities and offered his resignation effective December 31, 2017, unless the Company cures the events constituting "Good Reason" within thirty days following the date of his notice. Pursuant to Dr. Miao's employment agreement, he is eligible to receive separation benefits upon resignation for "Good Reason." Dr. Miao's resignation does not reflect any disagreement with the Company's financial results or strategy for growth.
7
Going Concern
In the Company's Form 10-Q for the quarterly period ended March 31, 2017, the Company disclosed that there was substantial doubt about the Company's ability to continue as a going concern. However, management has evaluated, among other things, the effects of the refinancing transactions the Company entered into in July 2017 (as described below in Note 7) and the effects of the Company's entering into GSK Amendment No. 2 (as defined below in Note 10) on the Company's financial condition and now believes that any potential going concern uncertainty that previously existed has been remediated. The Company believes its existing cash balance, cash from operations and funding from the refinancing transactions will be sufficient to fund its existing level of operating expenses, current development activities, non-operating payments of debt, interest and general capital expenditure requirements through at least the next twelve months.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Pernix's wholly-owned subsidiaries Pernix Therapeutics, LLC; Macoven; Cypress' Cypress' subsidiary, Hawthorn Pharmaceuticals, Inc.; Pernix Ireland Limited; and Pernix Ireland Pain Designated Activity Company, (or PIPL DAC), formerly known as Pernix Ireland Pain Limited. Transactions between and among the Company and its consolidated subsidiaries are eliminated.
Fair Value of Financial Instruments
A financial instrument is defined as cash equivalent, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from another party. The Company's financial instruments consist primarily of cash equivalents, notes receivable, a credit facility, and an arbitration award. The carrying values of these assets and liabilities approximate their fair value due to their short-term nature.
Significant Customers
The Company's customers consist of drug wholesalers, retail drug stores, mass merchandisers and grocery store pharmacies in the United States. The Company primarily sells its products directly to large national drug wholesalers, which in turn resell the products to smaller or regional wholesalers, retail pharmacies, chain drug stores, and other third parties. The following tables list the Company's customers that individually comprised greater than 10% of total gross product sales for the three and nine months ended September 30, 2017 and 2016, or 10% of total accounts receivable as of September 30, 2017 and December 31, 2016.
Gross Product Sales: | ||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
McKesson Corporation | 35% | 34% | 34% | 35% | ||||||||
AmerisourceBergen Drug Corporation | 29% | 31% | 30% | 32% | ||||||||
Cardinal Health, Inc. | 23% | 26% | 24% | 26% | ||||||||
Total | 87% | 91% | 88% | 93% |
Accounts Receivable, net: | ||||||
September 30, | December 31, | |||||
2017 | 2016 | |||||
McKesson Corporation | 32% | 36% | ||||
Cardinal Health, Inc. | 30% | 28% | ||||
AmerisourceBergen Drug Corporation | 24% | 28% | ||||
Total | 86% | 92% |
8
Note 2. 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.
The following table sets forth the computation of basic and diluted net loss per share (in thousands except per share data):
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Numerator - Basic: | ||||||||||||
Net income (loss) | $ | 6,360 | $ | (26,438) | $ | (44,718) | $ | (83,513) | ||||
Denominator - Basic: | ||||||||||||
Weighted-average common shares | 11,117 | 8,842 | 10,387 | 7,215 | ||||||||
Numerator - Diluted: | ||||||||||||
Net income (loss) | $ | 6,360 | $ | (26,438) | $ | (44,718) | $ | (83,513) | ||||
Adjustment for interest, net of income tax effect | 599 | - | - | - | ||||||||
Net income (loss), adjusted | $ | 6,959 | $ | (26,438) | $ | (44,718) | $ | (83,513) | ||||
Denominator - Diluted: | ||||||||||||
Weighted-average common shares | 11,117 | 8,842 | 10,387 | 7,215 | ||||||||
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 | 16,520 | 8,842 | 10,387 | 7,215 | ||||||||
Basic income (loss) per share | $ | 0.57 | $ | (2.99) | $ | (4.31) | $ | (11.57) | ||||
Diluted income (loss) per share | $ | 0.42 | $ | (2.99) | $ | (4.31) | $ | (11.57) |
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, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
4.25% Convertible Notes | 780 | 1,133 | 1,014 | 1,133 | ||||||||
Exchangeable Notes | - | - | 1,738 | - | ||||||||
Stock options and restricted stock units | 370 | 696 | 562 | 805 | ||||||||
Warrants | - | 33 | 33 | 33 | ||||||||
Total potential dilutive effect | 1,150 | 1,862 | 3,347 | 1,971 |
9
Note 3. 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).
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. These investments are initially valued at the transaction price and subsequently valued utilizing third-party pricing providers or other market observable data. Data used in the analysis include reportable trades, broker/dealer quotes, bids and offers, benchmark yields and credit spreads. The Company validates the prices provided by its third-party pricing providers by reviewing their pricing methods, analyzing pricing inputs and confirming that the securities have traded in normally functioning markets. The Company did not adjust or override any fair value measurements provided by its pricing providers as of September 30, 2017 or December 31, 2016.
The Company had no financial assets that are required to be measured at fair value as of September 30, 2017 and December 31, 2016.
As of September 30, 2017 and December 31, 2016, the Company did not have any investments in Level 2 or Level 3 securities.
There were no transfers of assets or liabilities between Level 1 and Level 2 during the three and nine months ended September 30, 2017 and 2016.
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 and the Treximet Secured Notes (each, as defined below in Note 7) are recorded at carrying value. The derivative liability and contingent consideration are recorded at fair value. Within the hierarchy of fair value measurements, the derivative liability and contingent consideration are Level 3 fair values. The fair and carrying value of our debt instruments are detailed as follows (in thousands):
As of September 30, 2017 | As of December 31, 2016 | |||||||||||
Fair | Carrying | Fair | Carrying | |||||||||
Value | Value | Value | Value | |||||||||
4.25% Convertible Notes | $ | 33,366 | $ | 64,879 | $ | 32,595 | $ | 104,071 | ||||
Exchangeable Notes | 24,483 | 8,266 | - | - | ||||||||
Delayed draw term loan | 30,000 | 27,584 | - | - | ||||||||
Derivative liability | 178 | 178 | 230 | 230 | ||||||||
Contingent consideration | 2,747 | 2,747 | 2,403 | 2,403 | ||||||||
Treximet Secured Notes | 137,470 | 168,833 | 147,551 | 183,353 | ||||||||
Total | $ | 228,244 | $ | 272,487 | $ | 182,779 | $ | 290,057 |
10
Convertible Notes, Exchangeable Notes and Delayed Draw Term Loan
The fair values of the 4.25% Convertible Notes, the Exchangeable Notes and the Delayed Draw Term Loan (as defined below in Note 7) were estimated using the (i) terms of the agreements; (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, and volatility); (vi) valuation of derivative liability; and (vii) precedent sale transactions.
Derivative Liability
The fair value of the derivative liability was 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 fair value of contingent consideration 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 fair value of the Company's Treximet Secured Notes 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 | Year Ended | |||||
September 30, 2017 | December 31, 2016 | |||||
Derivative liability: | ||||||
Balance at beginning of year | $ | 230 | $ | 9,165 | ||
Impairment due to partial conversion | (90) | - | ||||
Remeasurement adjustments - loss (gains) included in earnings | 38 | (8,935) | ||||
Ending balance | $ | 178 | $ | 230 | ||
Contingent consideration: | ||||||
Balance at beginning of year | $ | 2,403 | $ | 14,055 | ||
Initial measurement of contingent consideration | - | - | ||||
Remeasurement adjustments - loss (gains) included in earnings | 344 | (11,652) | ||||
Ending balance | $ | 2,747 | $ | 2,403 |
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Inventories are stated at the lower of cost or market. Inventories consist of the following (in thousands):
September 30, | December 31, | |||||
2017 | 2016 | |||||
Raw materials | $ | 1,738 | $ | 2,365 | ||
Work-in-process | - | - | ||||
Finished goods | 6,872 | 7,393 | ||||
Inventory, gross | 8,610 | 9,758 | ||||
Reserve for obsolescence | (480) | (1,983) | ||||
Inventory, net | $ | 8,130 | $ | 7,775 |
Note 5. Goodwill and Intangible Assets
Goodwill consists of the following (in thousands):
Amount | |||
Balance at December 31, 2015 | $ | 54,865 | |
Measurement period adjustments - Zohydro ER | (499) | ||
Goodwill impairment | (23,766) | ||
Balance at December 31, 2016 | 30,600 | ||
Measurement period adjustments | - | ||
Balance at September 30, 2017 | $ | 30,600 |
Intangible assets consist of the following (dollars in thousands):
As of September 30, 2017 | |||||||||||||||
Weighted | Gross Carrying | Accumulated | Net Carrying | ||||||||||||
Average Life | 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 | 8.4 years | 2,846 | - | (1,507) | 1,339 | ||||||||||
Supplier contracts | 5.0 years | 583 | - | (165) | 418 | ||||||||||
Acquired developed technologies | 7.7 years | 357,892 | - | (255,866) | 102,026 | ||||||||||
Total amortized intangible assets | 361,321 | - | (257,538) | 103,783 | |||||||||||
Total intangible assets | $ | 372,321 | $ | - | $ | (257,538) | $ | 114,783 |
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As of December 31, 2016 | |||||||||||||||
Weighted | Gross Carrying | Accumulated | Net Carrying | ||||||||||||
Average Life | Amount | Impairment | Amortization | Amount | |||||||||||
Unamortized intangible assets: | |||||||||||||||
In-process research and development | Indefinite | $ | 26,500 | $ | (15,500) | $ | - | $ | 11,000 | ||||||
Total unamortized intangible assets | 26,500 | (15,500) | - | 11,000 | |||||||||||
Amortized intangible assets: | |||||||||||||||
Brand | 0.0 years | 3,887 | (891) | (2,996) | - | ||||||||||
Product licenses | 8.4 years | 2,846 | - | (1,232) | 1,614 | ||||||||||
Supplier contracts | 5.0 years | 583 | - | (78) | 505 | ||||||||||
Acquired developed technologies | 7.7 years | 379,737 | (15,052) | (208,233) | 156,452 | ||||||||||
Total amortized intangible assets | 387,053 | (15,943) | (212,539) | 158,571 | |||||||||||
Total intangible assets | $ | 413,553 | $ | (31,443) | $ | (212,539) | $ | 169,571 |
As of September 30, 2017, the weighted average remaining life for our definite-lived intangible assets in total was approximately 11.6 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.
During 2016, the Company determined that the carrying value of certain of its intangible assets was not recoverable based upon the existence of one or more of the indicators of impairment. The Company measured these impairments based on a probability weighted projected discounted cash flow method using a discount rate determined to be commensurate with the risk inherent in the Company's current business model and therefore, recorded impairment charges of approximately $15.5 million against IPR&D, $891,000 against brands, and $15.1 million against acquired developed technologies.
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 | |||
2017 (October - December) | $ | 18,152 | |
2018 | 13,961 | ||
2019 | 5,507 | ||
2020 | 5,420 | ||
2021 | 5,325 | ||
Thereafter | 55,418 | ||
Total | $ | 103,783 |
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. Amortization expense was $20.6 million and $64.9 million for the three and nine months ended September 30, 2016, respectively, of which, $29,000 and $48,000 is included in cost of product sales in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2016, respectively.
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Accrued allowances consist of the following (in thousands):
September 30, | December 31, | |||||
2017 | 2016 | |||||
Accrued returns allowance | $ | 19,875 | $ | 18,314 | ||
Accrued price adjustments | 31,927 | 35,234 | ||||
Accrued government program rebates | 6,452 | 7,413 | ||||
Total | $ | 58,254 | $ | 60,961 |
Note 7. Debt
Debt, net of discounts and deferred financing costs, consists of the following (in thousands):
September 30, | December 31, | |||||
2017 | 2016 | |||||
4.25% Convertible Notes | $ | 64,879 | $ | 104,071 | ||
Exchangeable Notes | 8,266 | - | ||||
Delayed draw term loan | 27,584 | - | ||||
Treximet Secured Notes | 168,833 | 183,353 | ||||
Wells Fargo Credit Facility | - | 14,000 | ||||
ABL Credit Agreement | 14,185 | - | ||||
Total outstanding debt | 283,747 | 301,424 | ||||
Less current portion | - | 11,103 | ||||
Long-term debt outstanding, net | $ | 283,747 | $ | 290,321 |
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. The Company received net proceeds from the sale of the 4.25% Convertible Notes of $125.0 million, after deducting placement agent fees and commissions and offering expenses payable by the Company. 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 (the 4.25% Convertible Notes Indenture), between the Company and Wilmington Trust, National Association (the 4.25% Convertible Notes Trustee), 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. Upon conversion, the Company will deliver a number of shares of the Company's common stock equal to the conversion rate in effect on the conversion date. Effective upon the 1-for-10 reverse stock split effected on October 13, 2016, the conversion rate decreased from 87.2030 shares of the Company's common stock for each $1,000 principal amount of the 4.25% Convertible Notes to 8.7237 shares of the Company's common stock for each $1,000 principal amount of the 4.25% Convertible Notes, which represents a conversion price of approximately $114.63 per share. Following certain corporate transactions that can occur on or prior to the stated maturity date, the Company will increase the conversion rate for a holder that elects to convert its 4.25% Convertible Notes in connection with such a corporate transaction. In addition to the holder option to convert, the 4.25% Convertible Notes may be redeemed upon the occurrence of certain events. The Company incurred debt issuance costs of approximately $5.0 million, which have been deferred and which are being amortized over a six-year period, unless earlier converted, in which case the unamortized costs would be recorded in additional paid-in capital. The effective interest rate on the 4.25% Convertible Notes, including debt issuance costs and bifurcated conversion option derivative (discussed below), is 9.7%.
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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 $178,000 and $230,000 as of September 30, 2017 and December 31, 2016, respectively. If the Company obtains shareholder approval to remove the contractual limit on the number of shares that may be delivered to settle the conversion of the 4.25% Convertible Notes, the conversion feature may meet an exception from derivative accounting and no longer require separate accounting as a bifurcated derivative. As the conversion feature is accounted for as a bifurcated derivative liability, the Company was not required to consider whether the cash conversion or beneficial conversion guidance contained in ASC 470-20, Debt with Conversion and Other Options , is applicable to the 4.25% Convertible Notes.
In addition to the bifurcated conversion feature, there are two other features that require bifurcation but contain de minimis value. Although the probability was considered remote, at the time of the transaction, that (1) additional interest would be incurred for failure to file financial statements timely or (2) the 4.25% Convertible Notes would be redeemed by the Company following the failure of the Zohydro ER acquisition (see Note 12, Business Combinations , for further information) to close prior to July 8, 2015. The Company will continue to monitor the timely filing of its financial statements for any additional interest that could be incurred.
Interest expense was $1.7 million and $6.4 million for the three and nine months ended September 30, 2017, respectively and $2.3 million and $6.8 million for the three and nine months ended September 30, 2016, respectively, related to the 4.25% Convertible Notes. Change in fair value of derivative liability was a benefit of $46,000 and an expense of $38,000 for the three and nine months ended September 30, 2017, respectively, and an expense of $209,000 and a benefit of $6.7 million for the three and nine months ended September 30, 2016, respectively. Accrued interest on the 4.25% Convertible Notes was approximately $1.7 million and $1.4 million as of September 30, 2017 and December 31, 2016, respectively. The Company recorded debt issuance costs of $5.0 million, which are being amortized using the effective interest method. As of September 30, 2017, $525,000 and $1.6 million are recorded on the unaudited condensed consolidated balance sheet in Prepaid expenses and other current assets and Convertible Notes - long-term, respectively. As of December 31, 2016, $705,000 and $3.3 million are recorded on the consolidated balance sheet in Prepaid expenses and other current assets and Convertible Notes - long-term, respectively. As of September 30, 2017 and December 31, 2016, the Company had outstanding borrowings of $78.2 million and $130.0 million, respectively, related to the 4.25% Convertible Notes.
The Company recorded $14.7 million as gain from exchange of debt for the three and nine months ended September 30, 2017, respectively. The $14.7 million gain consisted of the following (in thousands):
4.25% Convertible Notes: | ||||
Principal | $ | 51,775 | ||
Deferred financing costs | (1,452) | |||
Debt discount | (8,147) | |||
Derivative liability | 91 | |||
Exchangeable Notes: | ||||
Principal | (36,243) | |||
Debt discount | 25,091 | |||
Fair value of conversion option | (12,690) | |||
Issuance of 1.1 million shares | (3,775) | |||
Net Gain on Extinguishment | $ | 14,650 |
15
Exchangeable Notes
On July 20, 2017, the Company entered into an exchange agreement (the Exchange Agreement) with certain holders of its 4.25% Convertible Notes pursuant to which $51.8 million of aggregate principal amount of its 4.25% Convertible Notes held by such 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 Pernix Ireland Pain Limited, or PIPL, a wholly-owned subsidiary of the Company, pursuant to an Indenture, dated July 21, 2017 (the New Notes Indenture), among PIPL, the guarantors party thereto (the Guarantors), and Wilmington Trust, National Association, as Trustee and (ii) 1,100,498 shares of the Company's common stock.
The Exchangeable Notes issued under the New Notes Indenture are guaranteed by the Company and each other subsidiary thereof. The Exchangeable Notes are senior, unsecured obligations of PIPL DAC. Interest on the Exchangeable Notes will be paid in cash or a combination of cash and in-kind interest at PIPL 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 the Company's common stock at an exchange price per share of $5.50 (the Exchange Price). The Exchange Price will be subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on the Company's common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain Company tender or exchange offers.
Holders will exchange all or a portion of their Exchangeable Notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.
Upon not less than 30 nor more than 45 trading days' notice, if the daily Volume Weighted Average Price (VWAP) (as defined in the Exchangeable Notes Indenture) of the Company's common stock has been at least 120% of the Exchange Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which such notice of redemption is provided (the "Provisional Redemption", and such date of a Provisional Redemption, the "Redemption Date"), the Company will have the right to redeem any or all of the Exchangeable Notes at a price equal to 100% of the principal amount thereof (including any interest capitalized thereto) plus accrued interest that has not been paid or capitalized to, but excluding, the date on which the Exchangeable Notes are to be redeemed. The redemption price will be paid in cash.
No "sinking fund" will be provided for the Exchangeable Notes, which means that PIPL DAC will not be required to periodically redeem or retire the Exchangeable Notes. If PIPL DAC or the Company undergoes a Fundamental Change (as defined below), subject to certain conditions, holders of the Exchangeable Notes may require PIPL DAC to repurchase for cash all or part of their Exchangeable Notes. The fundamental change repurchase price will be equal to 100% of the principal amount (including any interest capitalized thereto) of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the date, chosen by PIPL DAC, that is not less than 20 business days or more than 35 business days following the date on which notice of the Fundamental Change was provided by PIPL DAC.
16
Under the Exchangeable Notes Indenture, a "Fundamental Change" will be deemed to have occurred if, among other events, any of the following occurs: (i) any "group" or "person," within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (as amended, the "Exchange Act"), other than a permitted holder under the Exchangeable Notes Indenture, becomes the direct or indirect "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of the Company's common stock representing more than 50% of the Company's voting power; (ii) the Company consummates any recapitalization, reclassification or change of the Company's common stock, subject to certain exceptions as contained in the Exchangeable Notes Indenture; (iii) the Company effects any share exchange, consolidation or merger pursuant to which the Company's common stock will be converted into cash, securities or other property or assets; (iv) the Company effects any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the Company's consolidated assets to a person or entity other than a permitted holder under the Exchangeable Notes Indenture; (v) the Company's stockholders approve a plan or proposal for the Company's liquidation or dissolution or the liquidation or dissolution of PIPL DAC; and (vi) the Company's common stock ceases to be listed on The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors).
Holders of the Exchangeable Notes are entitled to receive, in certain circumstances, additional shares of the Company's common stock upon exchanges of Exchangeable Notes in connection with a Provisional Redemption or certain Fundamental Changes.
Subject to certain limited exceptions, the Exchangeable Notes contain covenants which prohibit or limit the ability of PIPL DAC and the Guarantors to, among other things: (i) pay cash dividends or making distributions on the Company's capital stock or redeem or repurchase the Company's capital stock; (ii) create, assume or suffer to exist at any time any lien upon any of the Company's properties or assets; (iii) incur any debt other than debt permitted under the terms of the Exchangeable Notes Indenture; (iv) enter into transactions with affiliates other than on terms and conditions that, taken as a whole, would be obtained in an arm's-length transaction with non-affiliates; and (v) make any sale of the Company's assets and the assets of the Company's subsidiaries except in accordance with the terms of the Exchangeable Notes Indenture.
The Exchangeable Notes Indenture provides for customary events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving PIPL DAC) occurs and is continuing, the Trustee by notice to PIPL DAC, or the holders of at least 25% in principal amount of the then outstanding Exchangeable Notes by written notice to PIPL DAC and the Trustee, may declare 100% of the accreted principal of and accrued and unpaid interest, if any, on all of the Exchangeable Notes to be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving PIPL DAC, 100% of the principal of and accrued and unpaid interest, if any, on all of the Exchangeable Notes will become due and payable automatically, including a make-whole premium in an amount equal to the present value of the interest that would accrue on such Exchangeable Notes (assuming the All Cash Method) from, and including, such date of acceleration until the maturity date of the Exchangeable Notes, with such present value computed using a discount rate equal to the sum of (i) the yield to maturity of United States Treasury securities with remaining maturity equal to that of the Exchangeable Notes (as determined in a commercially reasonable manner by PIPL DAC) on such date of acceleration and (ii) 50 basis points. Notwithstanding the foregoing, for up to 270 days after the occurrence of an event of default, PIPL DAC may elect to have the sole remedy for an event of default relating to certain of PIPL DAC's failures to comply with certain reporting covenants in the Exchangeable Notes Indenture consist exclusively of the right to receive additional interest on the Exchangeable Notes.
Holders of Exchangeable Notes will not be entitled to receive shares of the Company's common stock upon exchange of any Exchangeable Notes to the extent such holder (or group of which such holder is a part) would beneficially own more than 9.99% of the outstanding shares of the Company's common stock. Subject to such limitation, at the initial Exchange Price, the Exchangeable Notes will be exchangeable into approximately 40% of the Company's outstanding common stock as of the date hereof (after giving effect to the issuance of the Exchange Shares and the common stock underlying the Exchangeable Notes).
The Exchange allowed the Company to reduce the principal amount of its outstanding indebtedness through the exchange of the Holders' 4.25% Convertible Notes for a smaller principal amount of the Exchangeable Notes. The principal amount of the Exchangeable Notes may be reduced if the holders thereof exchange their Exchangeable Notes for shares of the Company's common stock. The Exchangeable Notes Indenture will provide capacity to refinance up to an additional $25.0 million principal amount of the 4.25% Convertible Notes, which refinancing could also provide an opportunity to further reduce the principal amount of the Company's outstanding indebtedness.
17
Interest expense was $599,000 for the three and nine months ended September 30, 2017, respectively, and $0 for the three and nine months ended September 30, 2016, related to the Exchangeable Notes. Accrued interest on the Exchangeable Notes was approximately $300,000 and $0 as of September 30, 2017 and December 31, 2016, respectively. The Company recorded debt issuance costs of $3.5 million, which are being amortized using the effective interest method. As of September 30, 2017, $278,000 and $3.2 million are recorded on the unaudited condensed consolidated balance sheet in Prepaid expenses and other current assets and Convertible Notes - long-term, respectively. As of September 30, 2017 and December 31, 2016, the Company had outstanding borrowings of $36.2 million and $0, respectively, related to the Exchangeable Notes, respectively and classified as Convertible Notes - long-term, on the unaudited condensed consolidated balance sheets.
Term Facility:
PIPL DAC entered into a term loan credit agreement (the Delayed Draw Term Loan or DDTL) with Cantor Fitzgerald Securities, as agent (the Term Agent) and the lenders party thereto to obtain the DDTL. $30 million under the DDTL was drawn on the date of closing of the Transactions, and the remaining $15 million will be available for subsequent draws for certain specified purposes, including to finance certain acquisitions, subject to conditions set forth in the Term Credit Agreement. The DDTL includes an incremental feature that allows PIPL DAC, with the consent of the requisite lenders under the Term Facility, to obtain up to an additional $20 million in term loan commitments from new or existing lenders under the DDTL that agree to provide such commitments. Interest on the loans will accrue either in cash or a combination of cash and in kind interest, at PIPL 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 contains representations and warranties, affirmative and negative covenants, and events of default applicable to PIPL DAC and its subsidiaries (if any) that are customary for credit facilities of this type. The DDTL will mature on July 21, 2022.
PIPL DAC also entered into a mortgage debenture with Cantor Fitzgerald Securities as agent, pursuant to which PIPL DAC's obligations under the DDTL will be secured by substantially all of the assets of PIPL DAC and its future-acquired subsidiaries.
Interest expense was $438,000 for the three and nine months ended September 30, 2017, respectively and $0 for the three and nine months ended September 30, 2016, related to the DDTL. Accrued interest on the DDTL was approximately $438,000 and $0 as of September 30, 2017 and December 31, 2016, respectively. The Company recorded debt issuance costs of $3.0 million, which are being amortized using the effective interest method. As of September 30, 2017, $496,000 and $2.4 million are recorded on the unaudited condensed consolidated balance sheet in Prepaid expenses and other current assets and Delayed draw term loan - long-term, net, respectively. As of September 30, 2017 and December 31, 2016, the Company had outstanding borrowings of $30.0 million and $0, respectively, related to the DDTL, respectively and classified as Delayed draw term loan - long-term, on the unaudited condensed consolidated balance sheets, net of unamortized issuance costs.
Secured Notes:
Treximet Note Offering
On August 19, 2014, the Company issued $220.0 million aggregate principal amount of its 12% Senior Secured Notes due 2020 (the 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.
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 each month-end of each six-month period does not result in any excess over the interest due, no principal payment must be paid
18
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, 2017 and December 31, 2016, the Company classified $0 and $12.8 million, respectively, of the Treximet Secured Notes as a current liability and $172.1 and $176.8 million as a non-current liability, respectively.
The Treximet Secured Notes are unconditionally guaranteed, jointly and severally, by the Treximet Guarantors. The Treximet Secured Notes and the guarantees of the Treximet Guarantors 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.
The Company may redeem the Treximet Secured Notes at its option, in whole at any time or in part from time to time, on any business day, on not less than 30 days nor more than 60 days prior notice provided to each holder's registered address. If such redemption was prior to August 1, 2015, the redemption price would have been equal to the greater of (i) the principal amount of the Treximet Secured Notes being redeemed and (ii) the present value, discounted at the applicable treasury rate of the principal amount of the Treximet Secured Notes being redeemed plus 1.00%, of such principal payment amounts and interest at the rate per annum shown above on the outstanding principal balance of the Treximet Secured Notes being redeemed assuming the principal balances were amortized at the times and in the assumed amounts set forth on Schedule A to the August 2014 Indenture. If such redemption occurred on or after August 1, 2015 and prior to August 1, 2016, the redemption price would have been equal to 106% of the outstanding principal amount of Treximet Secured Notes being redeemed plus accrued and unpaid interest thereon, or occurs (i) on or after August 1, 2016 and prior to August 1, 2017, the redemption price would be equal 103% of the outstanding principal amount of the Treximet Secured Notes being redeemed plus accrued and unpaid interest thereon and (ii) on or after August 1, 2017, the redemption price will equal 100% of the outstanding principal amount of the Treximet Secured Notes being redeemed plus accrued and unpaid interest thereon.
The August 2014 Indenture contains covenants that limit the ability of the Company and the Treximet Guarantors to, among other things: incur certain additional indebtedness; pay dividends on, redeem or repurchase stock or make other distributions in respect of its capital stock; repurchase, prepay or redeem certain indebtedness; make certain investments; create restrictions on the ability of the Treximet Guarantors to pay dividends to the Company or make other intercompany transfers; create liens; transfer or sell assets; consolidate, merge or sell or otherwise dispose of all or substantially all of its assets and enter into certain transactions with affiliates. Upon the occurrence of certain events constituting a change of control, the Company is required to make an offer to repurchase all of the Treximet Secured Notes (unless otherwise redeemed) at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any to the repurchase date.
The August 2014 Indenture provides that an Event of Default (as defined in the August 2014 Indenture) will occur if, among other things, (a) the Company defaults in any payment of interest on any note when due and payable, and such default continues for a period of 30 days; (b) the Company defaults in the payment of principal of or premium, if any, on any note when due and payable on the maturity date, upon declaration of acceleration or otherwise, or to pay the change of control repurchase price, when due and payable, and such default continues for a period of five days; (c) failure to make a repurchase offer in the event of a change in control when required under the August 2014 Indenture, which continues for three business days; (d) the Company or any Treximet Guarantor fails to comply with certain covenants after receiving written notice from the August 2014 Trustee or the holders of more than 25% of the principal amount of the outstanding Treximet Secured Notes; (e) the Company or any Treximet Guarantor defaults with respect to other indebtedness for borrowed money in excess of $8.0 million and such default is not cured within 30 days after written notice from the August 2014 Trustee or the holders of more than 25% of the principal amount of the outstanding Treximet Secured Notes; (f) the Company or any Treximet Guarantor has rendered against it a final judgment for the payment of $8.0 million (or its foreign currency equivalent) or more (excluding any amounts covered by insurance) under certain circumstances; (g) certain bankruptcy, insolvency, liquidation, reorganization or similar events occur with respect to the Company or any Treximet Guarantor; (h) a guarantee of the Treximet Secured Notes (with certain exceptions) is held to be unenforceable or invalid in a judicial proceeding or ceases to be in full force and effect or a Treximet Guarantor disaffirms its obligations under its guarantee of the Treximet Secured Notes; and (i) certain changes in control of a Treximet Guarantor.
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Interest expense related to the Treximet Secured Notes was $5.2 million and $15.9 million for the three and nine months ending September 30, 2017, respectively and was $5.7 million and $17.6 million for the three and nine months ending September 30, 2016, respectively. Accrued interest on the Treximet Secured Notes was approximately $3.4 million and $9.5 million as of September 30, 2017 and December 31, 2016, respectively. The Company recorded debt issuance costs of $7.8 million, which are being amortized using the effective interest method. As of September 30, 2017, $1.3 million and $2.5 million are recorded on the unaudited condensed consolidated balance sheet in Prepaid expenses and other current assets and Treximet Secured Notes - long-term, respectively. As of December 31, 2016, $1.3 million and $3.4 million are recorded on the consolidated balance sheet in Treximet Secured Notes - current and Treximet Secured Notes - long-term, respectively.
On April 13, 2015, the Company furnished to the holders of the Treximet Secured Notes a Consent Solicitation Statement (the Consent Solicitation). The Consent Solicitation sought the consent of the holders of a majority of the principal amount of the Treximet Secured Notes to amend the August 2014 Indenture, that governs the Treximet Secured Notes to allow the Company to, among other things, incur up to $42.2 million of additional debt (the Indenture Amendments) in exchange for a consent fee in cash equal to 1% of the principal amount of consenting Treximet Secured Notes (the Consent Fees). Through April 28, 2015, the Company received consent to the Indenture Amendments from holders representing approximately 98% of the principal amount of the Notes, and subsequently paid the holders approximately $2.2 million during the year ended December 31, 2015. The remaining unamortized cost of inducement of $403,000 and $773,000 is recorded in prepaid expenses and other current assets and Treximet Secured Notes - long term on the unaudited condensed consolidated balance sheet at September 30, 2017, respectively and $403,000 and $1.1 million is recorded in Treximet Secured Notes - current and Treximet Secured Notes - long term on the unaudited condensed consolidated balance sheet at December 31, 2016, respectively and are being amortized using the straight-line method, which approximates the effective interest method.
Credit Facility :
Cantor Fitzgerald
On July 21, 2017, Pernix and certain subsidiaries of Pernix as borrowers and guarantors (the "ABL Borrowers") and Pernix Ireland Pain 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 the ABL Credit Agreement.
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, in each case pursuant to a guaranty and security agreement between the ABL Borrowers, ABL Guarantors and Cantor Fitzgerald Securities as agent. Availability of borrowings under the ABL Credit Agreement from time to time will be subject to a borrowing base calculation based upon a valuation of the ABL Borrowers' eligible inventories and eligible accounts receivable, each multiplied by an applicable advance rate, subject to adjustments in accordance with the ABL Credit Agreement. Borrowings under the ABL Credit Agreement will bear interest at the rate of LIBOR plus 7.50%. In addition, the ABL Borrowers will be required to pay a commitment fee on the undrawn commitments under the ABL Credit Agreement from time to time at a rate per annum of 0.25% on the unused commitments under the ABL Credit Agreement, 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.
Interest expense was $257,000 for the three and nine months ended September 30, 2017, respectively and $0 for the three and nine months ended September 30, 2016, related to the ABL Credit Agreement. Accrued interest on the ABL Credit Agreement was approximately $31,000 and $0 as of September 30, 2017 and December 31, 2016, respectively. The Company recorded debt issuance costs of $2.9 million, which are being amortized using the effective interest method. As of September 30, 2017, $581,000 and $2.2 million are recorded on the unaudited condensed consolidated balance sheet in Prepaid expenses and other current assets and Other assets, respectively. As of September 30, 2017 and December 31, 2016, the Company had outstanding borrowings of $14.2 million and $0, respectively, related to the ABL Credit Agreement, respectively and classified as Credit facility - long-term, net, on the unaudited condensed consolidated balance sheets.
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Wells Fargo
On August 21, 2015, the Company entered into the 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), which may be increased by an additional $20.0 million in the lenders' discretion.
As discussed earlier, the ABL Credit Facility entered into on July 21, 2017 replaced the Wells Fargo Credit Facility and the Company used the proceeds from the ABL Credit Facility to repay the outstanding obligation of the Wells Fargo Credit Facility.
The Company's obligations under the Wells Fargo Credit Facility were secured by, among other things, the Company's and certain subsidiaries' inventory and accounts receivable, and were guaranteed by certain of the Company's subsidiaries. As of September 30, 2017 and December 31, 2016, $0 and $14.0 million was outstanding under the Wells Fargo Credit Facility, respectively. The $14.0 million outstanding at December 31, 2016 was classified as Credit facility - long-term on the unaudited condensed consolidated balance sheet. The Wells Fargo Credit Facility contained representations and warranties, affirmative, restrictive and financial covenants, and events of default (applicable to the Company and certain of its subsidiaries) which were customary for a credit facility of this type. The effective interest rate was 14.91% at June 30, 2017.
On April 18, 2017, the Borrowers entered into the Amendment with Wells Fargo and the lenders party thereto. The Amendment amends the Credit Agreement governing the Wells Fargo Credit Facility.
Pursuant to the Amendment, the Base Rate Margin (as defined in the Credit Agreement) was increased from 1.00% to 3.00% and the LIBOR Rate Margin (as defined in the Credit Agreement) was increased from 2.00% to 4.00%, in each case effective as of the date of the Amendment. The Company has previously disclosed that it was reviewing its strategic alternatives, including the potential sale of all or a portion of the Company. Consistent with this prior disclosure, the Borrowers agreed to market their businesses and assets for sale. Further, as the Company intended to transition to another financing source on or before July 31, 2017, it also agreed that a failure to repay all borrowings under the Credit Agreement on or before July 31, 2017 would constitute an event of default under the Credit Agreement. Furthermore, the Amendment reduced the lenders' commitment to $14,200,000, the amount outstanding under the facility on the date of the Amendment (inclusive of a portion of the fee described below), and eliminated the ability to request letters of credit thereunder.
The Amendment also amended certain of the covenants with which the Borrowers must comply under the Credit Agreement. The Amendment replaced the financial covenant in the Credit Agreement with (i) the requirement to maintain a cash balance of at least $8,000,000, tested weekly, and (ii) the requirement that the Borrowing Base (as defined in the Credit Agreement), less the principal amount of all loans outstanding, be greater than $15,000,000 from and after the date that is 30 days after the effective date of the Amendment. The Amendment also provides Wells Fargo, as Administrative Agent, with certain additional information rights and appraisal rights. In addition, Wells Fargo agreed to not impose certain reserves upon the Borrowing Base in connection with the previously disclosed arbitral award made to GSK. The Borrowers paid to Wells Fargo a fee of $140,000 in connection with the execution of the Amendment.
Interest expense related to the Wells Fargo Credit Facility was $55,000 and $378,000, for the three and nine months ending September 30, 2017, respectively and was $103,000 and $241,000, for the three and nine months ending September 30, 2016, respectively. Accrued interest on the Wells Fargo Credit Facility was approximately $0 and $37,000 as of September 30, 2017 and December 31, 2016, respectively. The Company recorded debt issuance costs of $270,000 as a result of the original agreement and an additional $220,000 as a result of the Amendment, both of which were amortized using the effective interest method. As of September 30, 2017, $0 is recorded on the unaudited condensed consolidated balance sheet. As of December 31, 2016, $90,000 and $60,000 are recorded on the consolidated balance sheet in Prepaid expenses and other current assets and Other assets, respectively. Due to the Amendment discussed above, the Company accelerated the amortization of the remaining debt issuance costs in the quarter ended June 30, 2017.
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The following table represents the future maturity schedule of the outstanding debt and line of credit at September 30, 2017 (in thousands):
Amount | ||||
2017 | $ | - | ||
2018 | - | |||
2019 | - | |||
2020 | 172,070 | |||
2021 | 78,225 | |||
Thereafter | 80,428 | |||
Total maturities | 330,723 | |||
Less: | ||||
Note discount | (36,563) | |||
Deferred financing costs | (10,413) | |||
Total outstanding debt, net | $ | 283,747 |
Note 8. Stockholders' Equity
Reverse Stock Split
On October 13, 2016, the Company effectuated a reverse stock split of its outstanding shares of common stock at a ratio of 1 to 10 (the Reverse Stock Split). Upon the effectiveness of the Reverse Stock Split, which occurred on October 13, 2016, the Company's issued and outstanding shares of common stock was decreased from 94,961,549 to 9,499,812 shares, all with a par value of $0.01. Accordingly, all share and per share information has been restated in this Report to retroactively show the effect of the Reverse Stock Split.
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. 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 three months ended September 30, 2017 and 2016, the Company sold 372,176 and 984,148 shares, respectively, of common stock under the Sales Agreement at an average price of approximately $3.21 per share and $6.56 per share for gross proceeds of $1.2 million and $6.5 million and net proceeds of $1.1 million and $6.2 million, respectively, after deducting Cantor's commission. During the nine months ended September 30, 2017 and 2016, the Company sold 372,176 and 3,376,284 shares of common stock under the Sales Agreement at an average price of approximately $3.21 and $5.59 per share for gross proceeds of $1.2 million and $18.9 million and net proceeds of $1.1 million and $18.3 million, respectively, after deducting Cantor's commission. As of September 30, 2017, approximately $78.4 million of common stock remained available to be sold under this facility.
Warrants
As of September 30, 2017, the Company has approximately 32,992 outstanding common stock warrants in connection with the acquisition of Somaxon Pharmaceuticals, Inc. (Somaxon) in March 2013.
Stock Option Plans
In June 2015, the Company's shareholders approved the 2015 Omnibus Incentive Plan (the 2015 Plan). The maximum number of shares that can be offered under this plan is 700,000. Incentives may be granted under the 2015 Plan to eligible participants in the form of (a) incentive stock options, (b) non-qualified stock options, (c) restricted shares, (d) restricted stock units, (e) share appreciation rights and (f) other share-based awards. Incentive grants under the 2015 Plan generally vest based on four years of continuous service and have 10-year contractual terms.
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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 determination of the fair value of share-based payment awards on the date of grant using an option pricing model is affected by the Company's stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company's expected stock price volatility over the term of the awards, actual employee exercise behaviors, risk-free interest rate and expected dividends.
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, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Weighted average expected | ||||||||||||
stock price volatility | 88.0% | 81.7% | 87.6% | 71.8% | ||||||||
Estimated dividend yield | - | - | - | - | ||||||||
Risk-free interest rate | 2.0% | 1.3% | 2.0% | 1.4% | ||||||||
Expected life of option (in years) | 6.2 | 6.2 | 6.2 | 6.2 | ||||||||
Weighted average grant date | ||||||||||||
fair value per option | $ | 2.15 | $ | 4.20 | $ | 2.15 | $ | 12.59 |
The expected stock price volatility for the stock options is based on historical volatility of the Company's stock. The Company has not paid and does not anticipate paying cash dividends; therefore, the expected dividend rate is assumed to be 0%. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The expected life of the stock options granted was estimated based on the historical exercise patterns over the option lives.
The Company measures the grant date fair value of restricted stock units using the Company's closing common stock price on the trading date immediately preceding the grant date.
Stock-based compensation expense was $531,000 and $1.9 million for the three and nine months ended September 30, 2017, respectively and was ($159,000) and $2.1 million for the three and nine months ended September 30, 2016, respectively. 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.
Stock Options
As of September 30, 2017, approximately 889,000 options are outstanding that have been issued to employees and directors under the Company's Golf Trust of America, Inc. 2007 Stock Option Plan, the Amended and Restated Pernix Therapeutics Holdings, Inc. 2009 Stock Incentive Plan and the 2015 Plan. As of September 30, 2017, there was approximately $3.0 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 1.91 years.
During the year ended December 31, 2015, the Company's Board of Directors awarded a total of 48,500 options (Performance Options) to certain of the Company's former executive officers. Due to the corporate restructuring that was announced in July 2016 and the associated departures of Company's former executive officers, all outstanding Performance Options have been canceled and none of these Performance Options have vested.
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The Company utilized a Monte Carlo simulation to determine the grant date fair value of the Performance Options. Compensation expense is recognized over the performance period of each tranche in accordance with ASC 718, Compensation - Stock Compensation . The Company recorded share-based compensation expense related to these options of $0 for each of the three and nine months ended September 30, 2017, respectively and $0 and $35,000, for the three and nine months ended September 30, 2016, respectively.
The following table shows the option activity, described above, during the nine months ended September 30, 2017 (share and intrinsic values in thousands):
Weighted Average | ||||||||||||
Average | Remaining | Aggregate | ||||||||||
Exercise | Contractual Life | Intrinsic | ||||||||||
Shares | Price | (years) | Value | |||||||||
Options Outstanding at December 31, 2016 | 650 | $ | 25.85 | |||||||||
Granted | 295 | 2.89 | ||||||||||
Exercised | - | - | $ | - | ||||||||
Cancelled | (56) | 43.26 | ||||||||||
Expired | - | - | ||||||||||
Options outstanding at September 30, 2017 | 889 | $ | 17.22 | 8.8 | $ | 87 | ||||||
Options vested and expected to | ||||||||||||
vest as of September 30, 2017 | 624 | $ | 22.41 | 8.5 | $ | 36 | ||||||
Options vested and exercisable as of September 30, 2017 | 232 | $ | 34.83 | 7.8 | $ | - |
The total intrinsic value of options exercised during each of the three and nine months ended September 30, 2017 and 2016 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, 2017 (share and intrinsic values in thousands):
Weighted Average | Aggregate | ||||||||
Grant Date Fair | Intrinsic | ||||||||
Shares | Value | Value | |||||||
Non-vested restricted stock outstanding at December 31, 2016 | 197 | $ | 3.36 | ||||||
Granted | 59 | 2.81 | |||||||
Vested | (66) | 3.36 | $ | 206 | |||||
Forfeited | (1) | 2.78 | |||||||
Non-vested restricted stock outstanding at September 30, 2017 | 189 | $ | 3.19 |
As of September 30, 2017, there was $314,000 of total unrecognized compensation cost related to non-vested restricted stock issued to employees and directors of the Company.
Note 9. Income Taxes
The Company reported an income tax expense of $27,000 and $122,000 for the three and nine months ended September 30, 2017, respectively and an income tax expense of $1,000 and $26,000 for the three and nine months ended September 30, 2016, respectively. The Company's effective tax rate was (0.3%) for the nine months ended September 30, 2017, compared to an estimated annual effective rate of 0.0% for the nine months ended September 30, 2016.
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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 September 30, 2017 and December 31, 2016.
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, 2017 and December 31, 2016.
As of September 30, 2017, our gross deferred tax assets are comprised primarily of U.S. Federal net operating losses and accruals, and our 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. As of September 30, 2017, the Company's 2014 and 2015 Federal tax returns are under examination by the Internal Revenue Service (the IRS). Other years subject to potential examination by the IRS include 2013 and 2016.
Note 10. Commitments and Contingencies
Legal Proceedings
GlaxoSmithKline (GSK) Arbitration
The Company was involved in an arbitration proceeding with GSK. GSK claimed that the Company owed GSK damages relating to an alleged breach by the Company of a covenant contained in the Asset Purchase and Sale Agreement (APSA), dated as of May 13, 2014 by and among GSK and the Company pertaining to a pre-existing customer agreement. The Company asserted counterclaims and defenses under the APSA and also asserted claims against GSK related to breaches of a supply agreement between the parties. The Company and GSK entered into an interim settlement agreement (the Interim Settlement Agreement) under which the Company agreed to make payments to GSK and escrow additional funds. Additionally, the parties agreed to submit the matter to binding arbitration.
On January 31, 2017, the arbitration tribunal issued opinions in favor of GSK, awarding it damages and fees in the amount of approximately $35 million, plus interest (estimated to be approximately $2 to $5 million). The tribunal also denied the Company's claim that GSK breached its obligations under the supply agreement. The Company had already paid to GSK an aggregate of $16.5 million, including $6.2 million from the escrow account, which will offset the total award. After discussions with GSK, an agreement was reached on March 17, 2017, to amend the Interim Settlement Agreement with GSK whereby the Company agreed to establish a payment schedule for satisfaction of the current balance of the award. Pursuant to the amendment, the Company agreed that the outstanding balance as of the date of the amendment was approximately $21.5 million to GSK and the Company agreed to make quarterly installments in amounts totaling $1.0 million in 2017, $3.5 million in 2018 and approximately $17.0 million in 2019. The Company recorded the fair value of this settlement in the amount of approximately $18.5 million in its financial statements at December 31, 2016 and recorded $15.3 million as a reduction to net revenues, $1.0 million to selling, general and administrative expense and $2.2 million to interest expense in the year ended December 31, 2016.
On July 20, 2017, the Pernix Parties and GSK entered into Amendment No. 2 to the Interim Settlement Agreement between the Pernix Parties and GSK dated July 27, 2015. Amendment No. 2 supersedes Amendment No. 1 and permits payment by the Pernix Parties to GSK of a reduced amount in full satisfaction of the remaining approximately $21.2 million unpaid portion of the Award granted to GSK in the arbitration of certain matters previously disputed by the parties. Pursuant to Amendment No. 2, the Pernix Parties are obligated to make two fixed payments to GSK: (i) a payment of $3.45 million due on or before August 4, 2017 and (ii) a payment of $3.2 million due on or before December 31, 2017. Also pursuant to Amendment No. 2, the Pernix Parties agreed that if on or before September 30, 2019, Pernix (x) redeems or repurchases 4.25% Convertible Notes for greater than 31.00 cents for every one dollar of principal amount outstanding or (y) exchanges such notes for new notes or similar
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instruments that have a face value providing such exchanging holders a recovery that is greater than 31.00 cents for every one dollar of 4.25% Convertible Notes exchanged by such holders, Pernix shall, no later than five business days thereafter, distribute to GSK additional cash or notes, as applicable, equal to such excess recovery, but in no event to exceed $2 million. GSK has agreed that for so long as the Pernix Parties comply with the payment terms set forth in the Amendment No. 2, enforcement of the Award will be stayed and GSK shall not seek to enforce or exercise any other remedies in respect of the Award, and that the outstanding balance of the Award shall be unconditionally and irrevocably forgiven upon satisfaction of such terms. As of September 30, 2017, $3.2 million is owed under this settlement and is recorded in other liabilities - current on the Company's unaudited condensed consolidated balance sheet. Also, 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 - long term on the Company's unaudited condensed consolidated balance sheet at September 30, 2017. Also, the Company recorded $10.5 million as Gain from legal settlement in the three and nine months ended September 30, 2017 pursuant to Amendment No. 2 in the condensed consolidated statements of operations and comprehensive loss.
Recro Gainesville LLC v. Actavis Laboratories FL, Inc., District of Delaware Case Nos. 14-1118, 15-413, and 15-1196; Recro Gainesville LLC v. Alvogen Malta Operations Ltd., District of Delaware Case No. 14-1364
Recro is the owner of U.S. Patent Nos. 6,228,398 ("the '398 Patent") and 6,902,742 ("the '742 Patent"), both of which expire on November 1, 2019, and U.S. Patent No. 9,132,096 ("the '096 Patent"), which expires on September 12, 2034. All three patents (collectively, "the Orange Book Patents") are listed in the United States Food and Drug Administration's ("FDA's") Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations ("Orange Book") as covering Zohydro ER. Actavis and Alvogen each filed Abbreviated New Drug Applications ("ANDAs") with the FDA seeking approval of proposed generic versions of Zohydro ER in 10, 15, 20, 30, 40, and 50 mg dosage strengths. Those ANDAs and amendments thereto contained certifications asserting that the Orange Book Patents are invalid and not infringed. Pursuant to the Hatch-Waxman Act, Recro brought suit against Actavis on September 3, 2014 and May 21, 2015 for declaratory judgment of infringement of the '398 and '742 Patents, and on December 23, 2015 for declaratory judgment of infringement of the '096 Patent. In response, Actavis filed counterclaims seeking declaratory judgments of noninfringement and invalidity of all three Orange Book Patents. Pursuant to the Hatch-Waxman Act, Recro brought suit against Alvogen on November 3, 2014 for declaratory judgment of infringement of the '398 and '742 Patents. In response, Alvogen filed counterclaims seeking declaratory judgments of noninfringement and invalidity of those two patents. On September 13, 2016, Recro and Actavis jointly filed a stipulation of dismissal of all claims and counterclaims relating to the '398 Patent, and that stipulation was entered by the Court on September 14, 2016. On September 29, 2016, Recro and Alvogen jointly filed a stipulation of dismissal of all claims and counterclaims then-pending, and that stipulation was entered by the Court on September 30, 2016, ending the case between Recro and Alvogen. Recro and Actavis participated in a bench trial in the United States District Court for the District of Delaware regarding the '742 and '096 Patents, which was completed on October 7, 2016. During the trial, Actavis declined to pursue its invalidity counterclaims as to both the '742 and '096 Patents. The parties' post-trial submissions regarding the remaining issues of infringement were filed on November 7, 2016. The 30-month stay for Actavis expired on February 12, 2017 and on February 22, 2017, the United States District Court for the District of Delaware concluded that Actavis Laboratories FL, Inc.'s proposed generic versions of Zohydro ER infringe U.S. Patent Nos. 9,132,096 (which expires on September 12, 2034) and 6,902,742 (which expires on November 1, 2019). Further, the court entered an order enjoining Actavis from engaging in the commercial manufacture, use, offer to sell, or sale in the United States, or importation into the United States of Actavis' ANDA product prior to expiration of these two patents. On March 22, 2017, Actavis filed an appeal, which is currently pending.
Pernix Ireland Pain, DAC and Pernix Therapeutics, LLC v. Actavis Laboratories FL, Inc., District of Delaware Case No. 16-138; Pernix Ireland Pain, DAC. and Pernix Therapeutics, LLC v. Alvogen Malta Operations, Ltd., District of Delaware Case No. 16-139.
Pernix Ireland Pain, DAC is the owner of U.S. Patent No. 9,265,760 ("the '760 Patent"), which issued on February 23, 2016, U.S. Patent No. 9,326,982 ("the '982 Patent"), which issued on May 3, 2016, U.S. Patent No. 9,333,201 ("the '201 Patent"), which issued on May 10, 2016, and U.S. Patent No. 9,339,499 ("the '499 Patent"), which issued on May 17, 2016 (collectively, the "Pernix Zohydro® ER Patents"). The Pernix Zohydro® ER Patents are listed in the Orange Book as covering Zohydro® ER. Pernix Therapeutics, LLC ("Pernix") is the exclusive
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licensee of the Pernix Zohydro® ER Patents and is the sole distributor of Zohydro® ER in the United States. As discussed above, Actavis and Alvogen ("Defendants") each filed Abbreviated New Drug Applications ("ANDAs") with the FDA seeking approval of proposed generic versions of Zohydro® ER in 10, 15, 20, 30, 40, and 50 mg dosage strengths, and litigation regarding those ANDAs is ongoing in the District of Delaware in Recro Gainseville LLC v. Actavis Laboratories FL, Inc., District of Delaware Case Nos. 14-1118, 15-413, 15-1196; and Recro Gainseville LLC v. Alvogen Malta Operations Ltd., District of Delaware Case No. 14-1364. Pernix brought suit against Defendants 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. Defendants filed Motions to Dismiss the Complaints under Rule 12(b)(6), asserting that the claims of the Pernix Zohydro® ER Patents are invalid under 35 U.S.C. 101. Briefing regarding the 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 Pernix patents. Trial is scheduled for April 16, 2018.
Medicine to Go Pharmacies, Inc. v. Macoven Pharmaceuticals, LLC and Pernix Therapeutics Holdings, Inc., District Court of New Jersey Case No. 3:16-cv-07717
On October 23, 2016, Medicine to Go Pharmacies, Inc. (the Macoven Plaintiff) filed an action against Macoven, Pernix and unidentified individuals seeking redress for the sending of 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 fax campaign that is the subject of this litigation was administered by a third party, Odyssey Services (Odyssey), that was not initially named as a defendant in this litigation. On June 22, 2017, Pernix filed a third-party complaint against Odyssey, seeking indemnity and contribution for any amounts that Pernix may be liable to pay to the Plaintiff. Odyssey has since filed a motion for summary judgment, seeking to dismiss the third-party claims against it. That motion is currently pending before the Court. Pernix therefore may not be able to secure indemnification from Odyssey for costs that it might incur relative to this matter, and insurance defense and indemnity do not appear available to the Company. Pernix is in the process of attempting to quantify its potential liability; however, it disputes plaintiffs' claims and, based upon known facts, intends to vigorously defend itself in this litigation.
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, 2017, remaining payment obligations of the Company owed under these settlement agreements are $500,000. The balance is payable in equal annual installments of $250,000 through 2019. The current portion is recorded in other liabilities - current and the non-current portion is recorded in other liabilities - long-term on the Company's unaudited condensed consolidated balance sheets as of September 30, 2017.
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, 2017, the net present value of remaining payment obligations owed under this settlement agreement is $3.8 million. The current portion is recorded in other liabilities - current and the non-current portion is recorded in other liabilities - long-term on the Company's unaudited condensed consolidated balance sheet as of September 30, 2017.
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In connection with the acquisition of Treximet, the Company is responsible for the payment of royalties to Pozen of 18% of Treximet net sales with quarterly minimum royalty amounts of $4.0 million for the calendar quarters commencing on January 1, 2015 and ending on March 31, 2018.
Note 11. Restructuring
On July 7, 2016, the Company announced a restructuring of its sales force and operations (2016 Restructuring). The 2016 Reorganization included (1) a reduction of 54 sales positions, primarily from the Company's Neurology sales team; (2) prioritization and reorganization of sales territories to reduce the inefficient time that sales representatives spent driving long distances between customers; (3) improvement of the Company's compensation plan to incentivize the field sales staff to increase the frequency of calls on the focused targets; and (4) consolidation of the Neurology and Pain sales forces under one sales management structure to eliminate redundancies. In addition, as part of this initiative, the Company reduced its administrative staff by 6 employees. The Company incurred $34,000 during the nine months ended September 30, 2017 in contract termination costs associated with the 2016 Restructuring. To date the Company has incurred $2.4 million in costs related to the 2016 Restructuring, consisting of $1.4 million related to employee termination benefits and $1.0 million related to contract termination costs. All associated contract termination cost payments are expected to be paid by December 31, 2017.
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, | September 30, | ||||||||||||||
2016 | Charges | Cash | Non-cash | 2017 | |||||||||||
2016 Restructuring | $ | 618 | $ | 34 | $ | (361) | $ | - | $ | 291 | |||||
(Contract termination costs) |
Note 12. Business Combinations
Consideration paid by the Company for each business it purchased is allocated to the assets and liabilities acquired based upon their estimated fair values as of the date of each acquisition. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed is recorded as goodwill.
Zohydro ER Acquisition
On April 24, 2015, Pernix completed the acquisition of the pharmaceutical product line, Zohydro ER, including an abuse-deterrent pipeline and all related intellectual property, a favorable supplier contract and an associated liability payable, and a specified quantity of inventory associated therewith, from Zogenix, Inc. (Zogenix). There were no other tangible or intangible assets acquired and liabilities assumed related to the Zohydro ER product line from Zogenix. The total purchase price consisted of an upfront cash payment of $80.0 million including a deposit of $10.0 million in an escrow fund, stock consideration of $11.9 million issued in common stock of Pernix, $927,000 for a specified quantity of inventory, and regulatory and commercial milestones of up to $283.5 million including a $12.5 million milestone payment upon approval of a ZX007 abuse-deterrent extended-release hydrocodone tablet and up to $271.0 million in potential sales milestones if the Zohydro ER product line achieves certain agreed-upon net sales targets.
The Zohydro ER product line acquisition was accounted for as a business combination in accordance with ASC 805 Business Combinations . The Company finalized the purchase price allocation in the quarter ended June 30, 2016 and recorded the measurement period adjustments in accordance with Accounting Standards Update (ASU) 2015-16, Business Combinations (Topic 805) . The results of operations of the acquired Zohydro ER product line, along with the estimated fair values of the net assets acquired, have been included in the Company's unaudited condensed consolidated financial statements since the Company acquired Zohydro ER on April 24, 2015.
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Note 13. Supplemental Cash Flow Information
Nine Months Ended | ||||||
September 30, | ||||||
2017 | 2016 | |||||
Supplemental disclosures of Cash Flow Information: | ||||||
Cash (received) paid for income taxes, net | $ | (873) | $ | (3,482) | ||
Cash paid for interest | 25,920 | 27,294 | ||||
Supplemental disclosures of Non-cash Investing and Financing Activities: | ||||||
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 | - |
Note 14. Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (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. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this ASU is not expected to have a material impact on the Company's financial position or results of operations.
In July 2017, the FASB issued ASU 2017-11 , Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception , (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) (ASU 2017-04) which addresses concerns over the cost and complexity of the two-step goodwill impairment test, the amendments remove the second step of the impairment test. Under the new standard, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the potential impact of adopting ASU 2017-04 on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805) (ASU 2017-01) which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluation whether transactions should be accounted for as acquisitions (or disposals) of a business. The amendments in this update provide a screen to determine when an asset is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early application of the amendments in this update is allowed as follows:
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The Company is currently assessing the potential impact of adopting ASU 2017-01 on its financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (ASU 2016-15) 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 fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently assessing the potential impact of adopting ASU 2016-15 on its financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , (ASU 2016-09).
ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before they can be recognized. Previously unrecognized deferred tax assets were recognized on a modified retrospective basis for the three months ended March 31, 2017, which resulted in a cumulative-effect adjustment to our retained earnings of zero due to the full valuation allowance against deferred tax assets. Under ASU 2016-09, excess tax benefits related to employee share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows. We applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash flows, prospectively. Since there were no excess tax benefits for the three and nine months ended September 30, 2017, this election did not result in a change in presentation on the statement of cash flows for the nine months ended September 30, 2017. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company's financial position or results of operations.In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). ASU 2016-02 is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as "Lessees" to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases (i.e. operating and capital) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases.
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The leasing standard will be effective for calendar year-end public companies beginning after December 15, 2018. Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will be permitted for all companies and organizations upon issuance of the standard. For calendar year-end public companies, this means an adoption date of January 1, 2019 and retrospective application to previously issued annual and interim financial statements for 2018 and 2017. The Company is currently in the process of evaluating the impact that this new leasing ASU will have on its financial statements.
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. Early adoption is permitted for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations.
In July 2015, the FASB issued, ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires that inventory within the scope of the guidance, be measured at the lower of cost and net realizable value. Prior to the issuance of the standard, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). The accounting guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. Early adoption is permitted. The Company adopted this standard during the first quarter of 2017. The adoption of this standard did not have a material impact on the Company's financial position or results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (ASU 2015-14), which defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years and interim periods within those years, beginning after December 15, 2016. Accordingly, the standard is effective for the Company on January 1, 2018 using either a full retrospective or a modified retrospective approach. The Company anticipates adopting the standard using the modified retrospective method. There may be differences in timing of revenue recognition under the new standard compared to recognition under ASC 605, Revenue Recognition . The Company is continuing to evaluate the new revenue recognition guidance. The Company has completed a high-level impact assessment and has commenced an in-depth evaluation of the adoption impact, which involves review of selected revenue arrangements. The majority of the Company's revenue relates to the sale of finished product to various customers and we are still in the process of evaluating the impact that the adoption of the new standard will have on the accounting for these transactions.
There were no other recent accounting pronouncements that have not yet been adopted by the Company that are expected to have a material impact on the Company's consolidated financial statements.
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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, 2016. 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, 2016, "Part II-Item1A. Risk Factors" of our Quarterly Report on Form 10-Q for the three months ended March 31, 2017, Exhibit 99.4 of our Current Report on Form 8-K, filed with the SEC on July 20, 2017 and "Part II-Item1A. Risk Factors" of this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017.
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, our new asset based revolving credit facility and our new delayed draw term loan; 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 in the United States; our ability to address any adverse impact on our net revenues caused by our ceasing to distribute the combination product isometheptene mucate, dichlorphenazone, 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, including our ability to address the temporary stockout of the 20mg strength of Zohydro ER with BeadTek; 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; the success and timing of our clinical development efforts; the 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; 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, 2016, Exhibit 99.4 of our Current Report on Form 8-K, filed with the SEC on July 20, 2017 and "Part II-Item1A. Risk Factors" of this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, 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. 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.
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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:
We target underserved segments, such as central nervous system (CNS) indications, including neurology, pain and psychiatry. 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 Treximet, a medication indicated for the acute treatment of migraine attacks, with or without aura, in adults, Zohydro ER with BeadTek, an extended-release opioid agonist indicated for the management of pain, and Silenor, a non-controlled substance and approved medication indicated for the treatment of insomnia characterized by difficulty with sleep maintenance.
Quarterly Update
On July 20, 2017, we entered into an exchange agreement (the Exchange Agreement) between Pernix and certain holders (the Holders) of Pernix's outstanding 4.25% Convertible Senior Notes due 2021 (the 4.25% Convertible Notes). The Exchange Agreement governs the entry into several refinancing transactions (collectively, the Transactions). The Transactions closed on July 21, 2017, and include:
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The parties to the Exchange Agreement made certain customary representations and warranties. Under the Exchange Agreement, Pernix and each of its subsidiaries party thereto agreed to indemnify each Holder (or certain funds and/or accounts for which a Holder or any of its affiliates acts as investment advisor), its affiliates and the directors, officers, employees and agents of such Holder and each person who controls such Holder for certain losses arising out of the Exchange Agreement or the "transactions," as defined therein. Pernix also agreed to conduct a search for up to three new directors and to use its reasonable best efforts to facilitate the selection and appointment of such directors to Pernix's board of directors within ninety days following the closing of the Transactions.
Cantor ABL Facility
The ABL Borrowers entered into an asset-based revolving credit agreement (the ABL Credit Agreement) with Cantor Fitzgerald Securities, as agent (the ABL Agent) and the lenders party thereto to obtain the ABL Credit Agreement.
The ABL Borrowers' obligations under the New ABL Facility are guaranteed by the ABL Borrowers and the ABL Guarantors and are secured by, among other things, the ABL Borrowers' cash, inventory and accounts, in each case pursuant to a guaranty and security agreement between the ABL Borrowers, ABL Guarantors and Cantor Fitzgerald Securities as agent. Availability of borrowings under the ABL Credit Agreement from time to time will be subject to a borrowing base calculation based upon a valuation of the ABL Borrowers' eligible inventories and eligible accounts receivable, each multiplied by an applicable advance rate, subject to adjustments in accordance with the ABL Credit Agreement. Borrowings under the ABL Credit Agreement will bear interest at the rate of LIBOR plus 7.50%. In addition, the ABL Borrowers will be required to pay a commitment fee on the undrawn commitments under the ABL Credit Agreement from time to time at a rate per annum of 0.25% on the unused commitments under the ABL Credit Agreement, 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.
Term Facility
PIPL DAC entered into a term loan credit agreement (the Delayed Draw Term Loan or DDTL) with Cantor Fitzgerald Securities, as agent (the Term Agent) and the lenders party thereto to obtain the DDTL. $30 million under the DDTL was drawn on the date of closing of the Transactions, and the remaining $15 million will be available for subsequent draws for certain specified purposes, including to finance certain acquisitions, subject to conditions set forth in the DDTL Credit Agreement. The DDTL includes an incremental feature that allows PIPL DAC, with the consent of the requisite lenders under the Term Facility, to obtain up to an additional $20 million in term loan commitments from new or existing lenders under the Term Facility that agree to provide such commitments. Interest on the loans will accrue either in cash or a combination of cash and in kind interest, at PIPL 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 contain representations and warranties, affirmative and negative covenants, and events of default applicable to PIPL DAC and its subsidiaries (if any) that are customary for credit facilities of this type. The DDTL will mature on July 21, 2022.
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PIPL DAC also entered into a mortgage debenture with Cantor Fitzgerald Securities as agent, pursuant to which PIPL DAC's obligations under the DDTL will be secured by substantially all of the assets of PIPL DAC and its future-acquired subsidiaries.
Upon the closing of the Transactions, the DDTL provided the Company with $30 million of liquidity immediately and, subject to conditions set forth in the DDTL Credit Agreement, $15 million of additional liquidity for certain specified purposes in the future, as well as the potential for an additional $20 million in commitments subject to lender consent.
Exchangeable Notes
PIPL DAC, the Guarantors, and Wilmington Trust, National Association, as Trustee, entered into the New Exchangeable Notes Indenture. The Exchangeable Notes issued under the New Notes Indenture will be guaranteed by Pernix and each other subsidiary thereof. The Exchangeable Notes are senior, unsecured obligations of PIPL DAC. Interest on the Exchangeable Notes will be paid in cash or a combination of cash and in-kind interest at PIPL 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 of interest (plus additional interest, if any) capitalized to the principal amount of the Exchangeable Notes, and the balance paid in cash. The maturity date of the Exchangeable Notes Indenture is July 15, 2022.
The Exchangeable Notes initially are exchangeable into shares of the Company's common stock at an exchange price per share of $5.50 (the "Exchange Price"). The Exchange Price will be subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on the Company's common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain Company tender or exchange offers.
Holders will exchange all or a portion of their Exchangeable Notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.
Upon not less than 30 nor more than 45 trading days' notice, if the daily VWAP (as defined in the Exchangeable Notes Indenture) of the Company's common stock has been at least 120% of the Exchange Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which such notice of redemption is provided (the "Provisional Redemption", and such date of a Provisional Redemption, the "Redemption Date"), the Company will have the right to redeem any or all of the Exchangeable Notes at a price equal to 100% of the principal amount thereof (including any interest capitalized thereto) plus accrued interest that has not been paid or capitalized to, but excluding, the date on which the Exchangeable Notes are to be redeemed. The redemption price will be paid in cash.
No "sinking fund" will be provided for the Exchangeable Notes, which means that PIPL DAC will not be required to periodically redeem or retire the Exchangeable Notes. If PIPL DAC or the Company undergoes a Fundamental Change (as defined below), subject to certain conditions, holders of the Exchangeable Notes may require PIPL DAC to repurchase for cash all or part of their Exchangeable Notes. The fundamental change repurchase price will be equal to 100% of the principal amount (including any interest capitalized thereto) of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the date, chosen by PIPL DAC, that is not less than 20 business days or more than 35 business days following the date on which notice of the Fundamental Change was provided by PIPL DAC.
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Under the Exchangeable Notes Indenture, a "Fundamental Change" will be deemed to have occurred if, among other events, any of the following occurs: (i) any "group" or "person," within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (as amended, the "Exchange Act"), other than a permitted holder under the Exchangeable Notes Indenture, becomes the direct or indirect "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of the Company's common stock representing more than 50% of the Company's voting power; (ii) the Company consummates any recapitalization, reclassification or change of the Company's common stock, subject to certain exceptions as contained in the Exchangeable Notes Indenture; (iii) the Company effects any share exchange, consolidation or merger pursuant to which the Company's common stock will be converted into cash, securities or other property or assets; (iv) the Company effects any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the Company's consolidated assets to a person or entity other than a permitted holder under the Exchangeable Notes Indenture; (v) the Company's stockholders approve a plan or proposal for the Company's liquidation or dissolution or the liquidation or dissolution of PIPL DAC; and (vi) the Company's common stock ceases to be listed on The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors).
Holders of the Exchangeable Notes are entitled to receive, in certain circumstances, additional shares of the Company's common stock upon exchanges of Exchangeable Notes in connection with a Provisional Redemption or certain Fundamental Changes.
Subject to certain limited exceptions, the Exchangeable Notes contain covenants which prohibit or limit the ability of PIPL DAC and the Guarantors to, among other things: (i) pay cash dividends or making distributions on the Company's capital stock or redeem or repurchase the Company's capital stock; (ii) create, assume or suffer to exist at any time any lien upon any of the Company's properties or assets; (iii) incur any debt other than debt permitted under the terms of the Exchangeable Notes Indenture; (iv) enter into transactions with affiliates other than on terms and conditions that, taken as a whole, would be obtained in an arm's-length transaction with non- affiliates; and (v) make any sale of the Company's assets and the assets of the Company's subsidiaries except in accordance with the terms of the Exchangeable Notes Indenture.
The Exchangeable Notes Indenture also provides for customary events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving PIPL DAC) occurs and is continuing, the Trustee by notice to PIPL DAC, or the holders of at least 25% in principal amount of the then outstanding Exchangeable Notes by written notice to PIPL DAC and the Trustee, may declare 100% of the accreted principal of and accrued and unpaid interest, if any, on all of the Exchangeable Notes to be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving PIPL DAC, 100% of the principal of and accrued and unpaid interest, if any, on all of the Exchangeable Notes will become due and payable automatically, including a make-whole premium in an amount equal to the present value of the interest that would accrue on such Exchangeable Notes (assuming the All Cash Method) from, and including, such date of acceleration until the maturity date of the Exchangeable Notes, with such present value computed using a discount rate equal to the sum of (i) the yield to maturity of United States Treasury securities with remaining maturity equal to that of the Exchangeable Notes (as determined in a commercially reasonable manner by PIPL DAC) on such date of acceleration and (ii) 50 basis points. Notwithstanding the foregoing, for up to 270 days after the occurrence of an event of default, PIPL DAC may elect to have the sole remedy for an event of default relating to certain of PIPL DAC's failures to comply with certain reporting covenants in the Exchangeable Notes Indenture consist exclusively of the right to receive additional interest on the Exchangeable Notes.
Holders of Exchangeable Notes will not be entitled to receive shares of the Company's common stock upon exchange of any Exchangeable Notes to the extent such holder (or group of which such holder is a part) would beneficially own more than 9.99% of the outstanding shares of the Company's common stock.
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The Exchange allowed the Company to reduce the principal amount of its outstanding indebtedness through the exchange of the Holders' 4.25% Convertible Notes for a smaller principal amount of the Exchangeable Notes. The principal amount of the Exchangeable Notes may be reduced if the holders thereof exchange their Exchangeable Notes for shares of the Company's common stock. The Exchangeable Notes Indenture will provide capacity to refinance up to an additional $25.0 million principal amount of the 4.25% Convertible Notes, which refinancing could also provide an opportunity to further reduce the principal amount of the Company's outstanding indebtedness.
Second Supplemental Indenture
In connection with the Transactions, the Company and certain of its wholly owned subsidiaries, Pernix Holdco 1, LLC, Pernix Holdco 2, LLC and Pernix Holdco 3, LLC (each, a "New Guarantor", and collectively, the "New Guarantors") and U.S. Bank, National Association, as trustee, entered into a second supplemental indenture (the "Second Supplemental Indenture") to that certain indenture dated as of August 19, 2014, as amended by that certain first supplemental indenture, dated as of April 21, 2015 (as so supplemented, the August 2014 Indenture) among the Company, certain of its subsidiaries (the "Treximet Guarantors") and U.S. Bank National Association (the August 2014 Trustee), as trustee and collateral agent. Pursuant to the Second Supplemental Indenture, the New Guarantors provided guarantees of the obligations of the Company with respect to its 12.0% Senior Secured Notes due 2020 (the "Treximet Secured Notes") issued under the August 2014 Indenture.
On January 31, 2017, the arbitration tribunal issued opinions in favor of GSK, awarding it damages and fees in the amount of approximately $35 million, plus interest (estimated to be approximately $2 to $5 million) (collectively, the Award). The tribunal also denied our claim that GSK breached its obligations under the supply agreement. We had already paid to GSK an aggregate amount of $16.5 million, including $6.2 million from the escrow account, which will offset the Award. On February 28, 2017, we entered into a stay agreement with GSK, whereby, GSK agreed to stay the enforcement of the arbitration award until July 3, 2017, subject to us releasing the escrow amount of $6.2 million and paying $250,000 to GSK. On March 17, 2017, we amended the Interim Settlement Agreement with GSK, whereby we agreed to a payment schedule for satisfaction of the current balance of the Award. Pursuant to the amendment, we agreed that the outstanding balance of the Award as of the date of the amendment was approximately $21.5 million, and that we are obligated to pay the outstanding balance in quarterly installments in amounts totaling $1.0 million in 2017, $3.5 million in 2018 and approximately $17.0 million in 2019. We also agreed that for so long as the Interim Settlement Agreement was in effect, we would be subject to certain restrictions on non-ordinary course payments and transactions and GSK would have certain information rights. GSK agreed that for so long as we complied with the payment schedule set forth in the amended Interim Settlement Agreement, as well as other agreed-upon obligations, enforcement of the Award would be stayed and GSK would not seek to enforce or exercise any other remedies in respect of the Award. We recorded the fair value of this settlement in the amount of approximately $18.5 million in our financial
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statements at December 31, 2016 and recorded $15.3 million as a reduction to net revenues, $1.0 million to selling, general and administrative expense and $2.2 million to interest expense in the year ended December 31, 2016.
On July 20, 2017, Pernix and its wholly owned subsidiary Pernix Ireland Limited (together, the "Pernix Parties") and Glaxo Group Limited, GlaxoSmithKline LLC, GlaxoSmithKline Intellectual Property Holdings Limited, and GlaxoSmithKline Intellectual Property Management Limited (collectively, "GSK") entered into an amendment ("Amendment No. 2") to the Interim Settlement Agreement between the Pernix Parties and GSK dated July 27, 2015 (as amended, the "Interim Settlement Agreement"). Amendment No. 2, which supersedes Amendment No. 1, permits payment by the Pernix Parties to GSK of a reduced amount in full satisfaction of the remaining approximately $21.2 million unpaid portion of the award (the "Award") granted to GSK in the arbitration of certain matters previously disputed by the parties. Pursuant to Amendment No. 2, the Pernix Parties are obligated to make two fixed payments to GSK: (i) a payment of $3.45 million due on or before August 4, 2017, and (ii) a payment of $3.2 million due on or before December 31, 2017. In addition, the Pernix Parties agreed that if on or before September 30, 2019, Pernix (x) redeems or repurchases 4.25% Convertible Notes for greater than 31.00 cents for every one dollar of principal amount outstanding or (y) exchanges such notes for new notes or similar instruments that have a face value providing such exchanging holders a recovery that is greater than 31.00 cents for every one dollar of 4.25% Convertible Notes exchanged by such holders, Pernix shall, no later than five business days thereafter, distribute to GSK additional cash or notes, as applicable, equal to such excess recovery, but in no event to exceed $2 million. GSK has agreed that for so long as the Pernix Parties comply with the payment terms set forth in the Amendment No. 2, enforcement of the Award will be stayed and GSK shall not seek to enforce or exercise any other remedies in respect of the Award, and that the outstanding balance of the Award shall be unconditionally and irrevocably forgiven upon satisfaction of such terms. A portion of the proceeds from the Transactions were used to pay certain of the amounts due to GSK under Amendment No. 2.
Pursuant to the Amendment, the Base Rate Margin (as defined in the Credit Agreement) was increased from 1.00% to 3.00% and the LIBOR Rate Margin (as defined in the Credit Agreement) was increased from 2.00% to 4.00%, in each case effective as of the date of the Amendment. We have previously disclosed that we were reviewing our strategic alternatives, including the potential sale of all or a portion of the Company. Consistent with this prior disclosure, the Borrowers have agreed to market their businesses and assets for sale. Further, as we intend to transition to another financing source on or before July 31, 2017, we have also agreed that a failure to repay all borrowings under the Credit Agreement on or before July 31, 2017 would constitute an event of default under the Credit Agreement. Furthermore, the Amendment reduced the lenders' commitment to $14,200,000, the amount outstanding under the Wells Fargo Credit Facility on the date of the Amendment (inclusive of a portion of the fee described below), and eliminated the ability to request letters of credit thereunder.
The Amendment also amended certain of the covenants with which the Borrowers must comply under the Credit Agreement. The Amendment replaced the financial covenant in the Credit Agreement with (i) the requirement to maintain a cash balance of at least $8,000,000, tested weekly, and (ii) the requirement that the Borrowing Base (as defined in the Credit Agreement), less the principal amount of all loans outstanding, be greater than $15,000,000 from and after the date that is 30 days after the effective date of the Amendment. The Amendment also provides the Administrative Agent certain additional information rights and appraisal rights. In addition, Wells Fargo agreed to not impose certain reserves upon the Borrowing Base in connection with the previously disclosed arbitral award made to GSK. The Borrowers paid to Wells Fargo a fee of $140,000 in connection with the execution of the Amendment.
On July 20, 2017, we announced that the Company used the proceeds from the New ABL Facility, discussed above, to repay the outstanding obligation of this Wells Fargo Credit Facility.
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During the quarter ended March 31, 2017, we discussed our substantial doubt to continue as a going concern after July 31, 2017. However, management has evaluated the effects of the Transactions and GSK Amendment No. 2 on our financial condition. Management is of the opinion that any potential going concern uncertainty that previously existed has been remediated and that our existing cash balance, cash from operations and funding from the Transactions will be sufficient to fund our existing level of operating expenses, current development activities, non-operating payments of debt, interest and general capital expenditure requirements through at least the next twelve months.
Through our Macoven entity, Pernix has distributed a combination product called isometheptene mucate, dichlorphenazone, and acetaminophen ("IDA"). IDA was originally approved in 1948 for safety only. The product's efficacy as an adjunct to peptic ulcer treatment and for other indications, including the treatment of migraine headaches was reviewed under the Drug Efficacy Study Implementation process, DESI notice 3265. In January 2014, the FDA announced that all outstanding hearings requests for DESI 3265 have been withdrawn. On October 20, 2017, we received a letter dated October 19, 2017 from the FDA that asserts that IDA is subject to DESI 3265 and that since the outstanding requests for hearings in that matter were withdrawn, any drug products that are identified in DESI 3265, including IDA, require an approved New Drug Application ("NDA") or Abbreviated New Drug Application ("ANDA") in order for them to be distributed. Since we have not obtained an NDA or ANDA for IDA, the FDA stated in its letter that we should immediately cease distribution of IDA. While IDA has a long history of safe use, we intend to comply with the FDA's request and confirm with the Agency within the requested time frame that the Company has ceased distribution of the product. For the three and nine months ended September 30, 2017, our net revenues from the sale of IDA were $3.8 million and $9.7 million, respectively. At this time, we do not anticipate that ceasing the distribution of IDA will have a material adverse impact on our net revenues in 2017. However, as we will not have further revenues from the product in 2018, we anticipate that the discontinuance of the product will impact net revenues beginning January 1, 2018.
Results of Operations
Comparison of Three Months Ended September 30, 2017 and 2016
The following table summarizes our results of operations for the three months ended September 30, 2017 and 2016 (in thousands):
Three Months Ended | ||||||||||||
September 30, | Increase / | |||||||||||
2017 | 2016 | (Decrease) | Percent | |||||||||
Net revenues | $ | 40,469 | $ | 41,468 | $ | (999) | -2% | |||||
Costs and operating expenses: | ||||||||||||
Cost of product sales | 10,580 | 10,840 | (260) | -2% | ||||||||
Selling, general and administrative expense | 20,226 | 22,173 | (1,947) | -9% | ||||||||
Research and development expense | 99 | 1,712 | (1,613) | -94% | ||||||||
Depreciation and amortization expense | 18,214 | 20,700 | (2,486) | -12% | ||||||||
Change in fair value of contingent consideration | 884 | 516 | 368 | 71% | ||||||||
Loss from disposal and impairment of assets | 25 | 652 | (627) | -96% | ||||||||
Gain from legal settlement | (10,476) | - | (10,476) | * | ||||||||
Restructuring costs | (97) | 2,277 | (2,374) | * | ||||||||
Other income (expense): | ||||||||||||
Interest expense | (9,323) | (8,857) | 466 | 5% | ||||||||
Change in fair value of derivative liability | 46 | (209) | 255 | * | ||||||||
Gain from exchange of debt | 14,650 | - | 14,650 | * | ||||||||
Foreign currency transaction gain (loss) | - | 31 | (31) | * | ||||||||
Income tax expense (benefit) | 27 | 1 | 26 | * |
* Comparison to prior period is not meaningful. |
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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 primary 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 revenue on sales we generate or on sales they generate.
The following table sets forth a summary of our net revenues for the three months ended September 30, 2017 and 2016 (in thousands):
Three Months Ended | ||||||||||||
September 30, | Increase / | |||||||||||
2017 | 2016 | (Decrease) | Percent | |||||||||
Treximet | $ | 19,802 | $ | 24,015 | $ | (4,213) | -18% | |||||
Zohydro ER | 6,305 | 6,100 | 205 | 3% | ||||||||
Silenor | 6,881 | 4,615 | 2,266 | 49% | ||||||||
Other | 7,372 | 6,667 | 705 | 11% | ||||||||
Net product revenues | 40,360 | 41,397 | (1,037) | -3% | ||||||||
Co-promotion and other revenue | 109 | 71 | 38 | 54% | ||||||||
Total net revenues | $ | 40,469 | $ | 41,468 | (999) | -2% |
Net revenues decreased $1.0 million or 2% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016.
Treximet revenues decreased by $4.2 million or 18% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 due primarily to lower volume partially offset by higher net price.
Zohydro ER revenues increased by $205,000 or 3% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The increase was due to an increase in net price partially offset by lower sales volume.
Silenor revenues increased by $2.3 million or 49% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. $1.0 million of this increase was due to a favorable settlement with one of our customers. The remaining increase was due primarily to favorable gross-to-net rates.
Net product revenues - other increased by $705,000 or 11% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The increase was due primarily to higher sales in our generic products portfolio.
Co-promotion and other revenue increased by $38,000 during the three months ended September 30, 2017 compared to the three months ended September 30, 2016.
Cost of Product Sales
Cost of product sales decreased by $260,000 or 2% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The decrease in cost of product sales was due primarily to a reduction in inventory obsolescence costs of $0.2 million as well as a reduction in product costs due to product mix.
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Selling, General and Administrative Expense
Selling, general and administrative expense decreased by $1.9 million or 9% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The decrease was driven primarily by lower selling and marketing expenses as a result of the restructuring of our sales force and operations which was implemented in the third quarter of 2016 as well as reduced legal costs.
Research and Development Expense
Research and development expense decreased by $1.6 million during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The decrease was related to lower spending on Treximet and Zohydro research projects.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by $2.5 million or 12% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The decrease was related primarily to intangible asset impairments during the year ended December 31, 2016.
Change in Fair Value of Contingent Consideration
For the acquisition of Zohydro ER, we 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, 2017, the current fair value of the contingent consideration was approximately $2.7 million. We recorded an expense of $884,000 and $516,000 as change in fair value of contingent consideration in the three months ended September 30, 2017 and 2016, respectively.
Gain from Legal Settlement
The Company recorded a gain of $10.5 million during the three months ended September 30, 2017 as a result of concluding Amendment No. 2 with GSK as previously discussed.
Restructuring Costs
Restructuring costs were a credit of $97,000 and an expense of $2.3 million during the three months ended September 30, 2017 and 2016, respectively. Restructuring costs during the three months ended September 30, 2016 were related to the initiative to restructure our sales force and operations in the third quarter of 2016.
Interest Expense
Interest expense increased by $466,000, or 5%, during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The increase was due primarily to the interest expense associated with the GSK Award as well as interest expense and the acceleration of deferred financing fees pursuant to the amendment of the Wells Fargo Credit Agreement. These increases were partially offset 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 $46,000 and an expense of $209,000 as change in fair value of derivative liability in other income (expense) in the three months ended September 30, 2017 and 2016, respectively.
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Gain from Exchange of Debt
The Company 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 in Exchangeable Notes.
Income Tax Expense
We recognized an income tax expense of $27,000 and $1,000, during the three months ended September 30, 2017 and 2016, respectively.
Comparison of Nine Months Ended September 30, 2017 and 2016
The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016 (in thousands):
Nine Months Ended | ||||||||||||
September 30, | Increase / | |||||||||||
2017 | 2016 | (Decrease) | Percent | |||||||||
Net revenues | $ | 104,527 | $ | 110,683 | $ | (6,156) | -6% | |||||
Costs and operating expenses: | ||||||||||||
Cost of product sales | 31,113 | 34,272 | (3,159) | -9% | ||||||||
Selling, general and administrative expense | 59,519 | 73,615 | (14,096) | -19% | ||||||||
Research and development expense | 709 | 5,139 | (4,430) | -86% | ||||||||
Depreciation and amortization expense | 54,976 | 65,426 | (10,450) | -16% | ||||||||
Change in fair value of contingent consideration | 344 | (8,958) | 9,302 | * | ||||||||
Loss from disposal and impairments of assets | 25 | 2,423 | (2,398) | * | ||||||||
Gain from legal settlement | (10,476) | - | (10,476) | * | ||||||||
Restructuring costs | 34 | 2,277 | (2,243) | * | ||||||||
Other income (expense): | ||||||||||||
Interest expense | (27,491) | (26,818) | 673 | 3% | ||||||||
Change in fair value of derivative liability | (38) | 6,744 | (6,782) | * | ||||||||
Gain from exchange of debt | 14,650 | - | 14,650 | * | ||||||||
Foreign currency transaction gain | - | 98 | (98) | * | ||||||||
Income tax expense (benefit) | 122 | 26 | (96) | * |
* Comparison to prior period is not meaningful. |
The following table sets forth a summary of our net revenues for the nine months ended September 30, 2017 and 2016 (in thousands):
Nine Months Ended | ||||||||||||
September 30, | Increase / | |||||||||||
2017 | 2016 | (Decrease) | Percent | |||||||||
Treximet | $ | 50,412 | $ | 58,149 | $ | (7,737) | -13% | |||||
Zohydro ER | 17,955 | 17,448 | 507 | 3% | ||||||||
Silenor | 15,580 | 12,388 | 3,192 | 26% | ||||||||
Other | 20,335 | 22,396 | (2,061) | -9% | ||||||||
Net product revenues | 104,282 | 110,381 | (6,099) | -6% | ||||||||
Co-promotion and other revenue | 245 | 302 | (57) | -19% | ||||||||
Total net revenues | $ | 104,527 | $ | 110,683 | (6,156) | -6% |
Net revenues decreased $6.2 million or 6% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
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Treximet revenues decreased by $7.7 million or 13% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due primarily to lower sales volume partially offset by higher net price.
Zohydro ER revenues increased by $507,000 or 3% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase was due a higher net price.
Silenor revenues increased by $3.2 million or 26% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. $1.0 million of this increase was due to a favorable settlement with one of our customers. The remaining increase was due to an increase in sales volume and higher net price.
Net product revenues - other decreased by $2.1 million or 9% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease was due primarily to lower sales in our generic products portfolio and no longer selling certain less profitable products.
Co-promotion and other revenue decreased by $57,000 during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease in co-promotion and other revenue was attributable primarily to the termination of a co-promotion agreement.
Cost of Product Sales
Cost of product sales decreased by $3.2 million or 9% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease in cost of product sales was due primarily to a reduction in inventory obsolescence costs of $2.0 million as well as a reduction in product costs due to product mix.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased by $14.1 million or 19% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease was driven primarily by lower selling and marketing expenses as a result of the restructuring of our sales force and operations which was implemented in the third quarter of 2016 as well as reduced legal costs.
Research and Development Expense
Research and development expense decreased by $4.4 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease was related to lower spending on Treximet and Zohydro research projects.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by $10.5 million or 16% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease was related primarily to intangible asset impairments during the year ended December 31, 2016 and the extension of the patent life of Zohydro ER developed technology in the first quarter of 2016.
Change in Fair Value of Contingent Consideration
For the acquisition of Zohydro ER, we 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, 2017, the current fair value of the contingent consideration was approximately $2.7 million. We recorded an expense of $344,000 and a benefit of $9.0 million as change in fair value of contingent consideration in the nine months ended September 30, 2017 and 2016, respectively.
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Gain from Legal Settlement
The Company recorded a gain of $10.5 million during the nine months ended September 30, 2017 as a result of concluding Amendment No. 2 with GSK as previously discussed.
Restructuring Costs
Restructuring costs were $34,000 and $2.3 million during the nine months ended September 30, 2017 and 2016, respectively. Restructuring costs during the nine months ended September 30, 2016 were related to the initiative to restructure our sales force and operations in the third quarter of 2016.
Interest Expense
Interest expense increased by $673,000, or 3%, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase was due primarily to the interest expense associated with the GSK Award as well as interest expense and the acceleration of deferred financing fees pursuant to the amendment of the Wells Fargo Credit Agreement. These increases were partially offset 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 an expense of $38,000 and a benefit of $6.7 million as change in fair value of derivative liability in other income (expense) in the nine months ended September 30, 2017 and 2016, respectively.
Gain from Exchange of Debt
The Company 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.
Income Tax Expense
We recognized an income tax expense of $122,000 and $26,000, during the nine months ended September 30, 2017 and 2016, 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, deal costs, stock compensation expense, severance expenses, arbitration and litigation settlement expenses, change in fair value of contingent consideration, gain from exchange of debt and d erivative liabilities, loss from disposal and impairment of assets, foreign currency transactions and restructuring costs. 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.
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We believe that this non-GAAP financial measure is 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. This non-GAAP financial measure is not prepared in accordance with GAAP, does not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Adjustment items that are excluded from our non-GAAP financial measure can have a material impact on net earnings. As a result, this non-GAAP financial measure has 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 this non-GAAP financial measure 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, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
GAAP net income (loss) | $ | 6,360 | $ | (26,438) | $ | (44,718) | $ | (83,513) | ||||||
Adjustments: | ||||||||||||||
Interest expense | 9,323 | 8,857 | 27,491 | 26,818 | ||||||||||
Depreciation and amortization | 18,243 | 20,730 | 55,064 | 65,475 | ||||||||||
Income tax expense | 27 | 1 | 122 | 26 | ||||||||||
EBITDA | 33,953 | 3,150 | 37,959 | 8,806 | ||||||||||
Selling, general and administrative adjustments (1) | 1,985 | 1,606 | 3,720 | 4,766 | ||||||||||
Change in fair value of contingent consideration | 884 | 516 | 344 | (8,958) | ||||||||||
Loss from disposal and impairments of assets (2) | 25 | 652 | 25 | 2,423 | ||||||||||
Gain from legal settlement | (10,476) | - | (10,476) | - | ||||||||||
Change in fair value of derivative liability | (46) | 209 | 38 | (6,744) | ||||||||||
Restructuring costs (3) | (97) | 2,277 | 34 | 2,277 | ||||||||||
Gain from exchange of debt | (14,650) | - | (14,650) | - | ||||||||||
Foreign currency transaction gain | - | (31) | - | (98) | ||||||||||
Adjusted EBITDA | $ | 11,578 | $ | 8,379 | $ | 16,994 | $ | 2,472 |
(1) |
To exclude deal costs of $1.3 million and $0; stock compensation expense of $531,000 and $(159,000); severance expense of $173,000 and $431,000; and litigation settlement expenses of $20,000 and $1.3 million for the three months ended September 30, 2017 and 2016, respectively. Also, to exclude deal costs of $1.5 million and $18,000; stock compensation expense of $1.9 million and $2.1 million; severance expense of $217,000 and $1.6 million; and arbitration and litigation settlement expenses of $38,000 and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. |
(2) |
To exclude the impairment of assets related to our cough and cold product line. |
(3) |
To exclude the cost related to the initiative to restructure our sales force and operations in 2016. |
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Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources (amounts in thousands):
September 30, | December 31, | |||||
2017 | 2016 | |||||
Cash and cash equivalents | $ | 27,241 | $ | 36,375 | ||
Total current assets | 92,982 | 108,910 | ||||
Current debt (1) | - | 11,103 | ||||
Arbitration award (2) | 5,200 | 17,522 | ||||
Non-current debt (1) | 283,747 | 290,321 | ||||
Stockholders' deficit | $ | (143,248) | $ | (114,063) |
(1) |
The term "Current Debt" consists of the line items "Treximet Secured Notes - current" in our Condensed Consolidated Balance Sheets included in this Quarterly Report on Form 10-Q. The term "Non-current debt" consists of the sum of the line items "Convertible notes - long term", "Delayed draw term Loan - long-term", "Treximet Secured Notes - long term" and "Credit facility - long term" in our Condensed Consolidated Balance Sheets included in this Quarterly Report on Form 10-Q. Our debt includes, among other things, borrowings under the Wells Fargo Credit Facility (as defined below). During August 2015, we entered into the Wells Fargo Credit Agreement with Wells Fargo, National Association, 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), which may have be increased by an additional $20.0 million in the lenders' discretion. During July 2017, we entered into the ABL Credit Agreement with Cantor Fitzgerald, as Administrative Agent and the lenders party thereto for a $40.0 million, five-year senior secured revolving credit facility (the ABL Credit Agreement). We repaid the outstanding obligation of the Wells Fargo Credit Facility Upon entering into the ABL Credit Agreement. As of September 30, 2017, our debt also included $172.1 million aggregate principal amount of our Treximet Secured Notes issued August 19, 2014 and due August 1, 2020, $78.2 million aggregate principal amount of our 4.25% Convertible Notes, issued April 22, 2015 and due April 1, 2021, unless earlier converted, $30.0 million aggregate principal amount of our DDTL, issued July 21, 2017 and due July 21, 2022, $14.2 million aggregate principal amount of our ABL Credit Agreement, issued July 21, 2017 and due July 21, 2022 and $36.2 million aggregate principal amount of our Exchangeable Notes, issued July 21, 2017 and due July 15, 2022, unless earlier converted. On each Payment Date, as defined in the August 2014 Indenture, commencing August 1, 2015, we will pay an installment of principal on 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). Pursuant to the August 2014 Indenture, the first principal payment was due on August 1, 2015 and was calculated on net sales for the first and second quarters of 2015, less interest paid during those same two quarters. At each month-end beginning during January 2015, the net sales of Treximet will be calculated, and 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 each month-end of each six-month period does not result in any excess over the interest due, no principal payment will be paid at that time. The balance outstanding on the Treximet Secured Notes will be due on the maturity date of the Treximet Secured Notes, which is August 1, 2020. Based on the calculation of the principal payments as described, we have recorded $172.1 million of the Treximet Secured Notes as long-term debt as of September 30, 2017. In our Form 10-Q for the quarterly period ended March 31, 2017, we disclosed that there was substantial doubt about our ability to continue as a going concern. However, management has evaluated the effects of the Transactions and GSK Amendment No. 2 on our financial condition and we now believe that any potential going concern uncertainty that previously existed has been remediated. We believe that our existing cash balance, cash from operations and funding from the Transactions will be sufficient to fund our existing level of operating expenses, current development activities, non-operating payments of debt, interest and general capital expenditure requirements through at least the next twelve months. |
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(2) |
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 APSA by and among GSK and its affiliates and us pertaining to a pre-existing customer agreement. The parties entered into an 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 million, plus interest (estimated to be approximately $2 to $5 million). The tribunal also denied our claim that GSK breached its obligations under the supply agreement. We have already paid to GSK an aggregate of $16.5 million, consisting of $10.3 million in 2015 and 2016 pursuant to the Interim Settlement Agreement and $6.2 million from the escrow account originally created pursuant to the Interim Settlement Agreement, which will offset the total award. On March 17, 2017, we amended the Interim Settlement Agreement with GSK whereby we agreed to establish a payment schedule for satisfaction of the current balance of the award. Pursuant to the amendment, we agreed that the current outstanding balance was approximately $21.5 million and that we were obligated to pay the outstanding balance in quarterly installments in amounts totaling $1.0 million in 2017, $3.5 million in 2018 and approximately $17.0 million in 2019. We further agreed that for so long as the Interim Settlement Agreement, as amended, was in effect, we would be subject to certain restrictions on non-ordinary course payments and transactions and GSK would have certain information rights. GSK agreed that for so long as we complied with the payment schedule set forth in the Interim Settlement Agreement, as amended, as well as other agreed-upon obligations, enforcement of the award would be stayed and GSK would not seek to enforce or exercise any other remedies in respect of the award. As discussed earlier, on July 20, 2017, the Pernix Parties and GSK entered into Amendment No. 2 to the Interim Settlement Agreement between the Pernix Parties and GSK dated July 27, 2015, which superseded Amendment No. 1. Amendment No. 2 permits payment by the Pernix Parties to GSK of a reduced amount in full satisfaction of the remaining approximately $21.2 million unpaid portion of the Award granted to GSK in the arbitration of certain matters previously disputed by the parties. Pursuant to Amendment No. 2, the Pernix Parties are obligated to make two fixed payments to GSK: (i) a payment of $3.45 million due on or before August 4, 2017 and (ii) a payment of $3.2 million due on or before December 31, 2017. In addition, we agreed that if on or before September 30, 2019, we (x) redeem or repurchase 4.25% Convertible Notes for greater than 31.00 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 31.00 cents for every one dollar of 4.25% Convertible Notes exchanged by such holders, Pernix shall, no later than five business days thereafter, distribute to GSK additional cash or notes, as applicable, equal to such excess recovery, but in no event to exceed $2 million. GSK has agreed that for so long as the Pernix Parties comply with the payment terms set forth in the Amendment No. 2, enforcement of the Award will be stayed and GSK shall not seek to enforce or exercise any other remedies in respect of the Award, and that the outstanding balance of the Award shall be unconditionally and irrevocably forgiven upon satisfaction of such terms. A portion of the proceeds from the Transactions were used to pay certain of the amounts due to GSK under Amendment No. 2. |
During the nine months ended September 30, 2017 and 2016 we utilized cash from operations of $9.2 million and $22.9 million, respectively.
As of September 30, 2017, we had cash and cash equivalents of $27.2 million, borrowing availability of $23.9 million under our $40.0 million ABL Credit Agreement.
We have an effective shelf registration statement on Form S-3 with the SEC, which covers the offering, issuance and sale of up to $300.0 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 $100.0 million of 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 have sold 372,176 and 3,859,903 shares of common stock under this controlled equity program in the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively, for net proceeds of $1.1 million and $19.7 million during the nine months ended September 30, 2017 and year ended December 31, 2016, respectively.
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Our future capital requirements will depend on many factors, including:
Going Concern
In our Form 10-Q for the quarterly period ended March 31, 2017, we disclosed that there was substantial doubt about our ability to continue as a going concern. However, management has evaluated the effects of the Transactions and GSK Amendment No. 2 on our financial condition and we now believe that any potential going concern uncertainty that previously existed has been remediated. We believe that our existing cash balance, cash from operations and funding from the Transactions will be sufficient to fund our existing level of operating expenses, current development activities, non-operating payments of debt, interest and general capital expenditure requirements through at least the next twelve months.
To continue to grow our business over the longer term, we may need to commit substantial resources to one or more of product acquisition, product development and clinical trials of product candidates, business acquisition, technology acquisition and expansion of other operations. In this regard, we have evaluated and expect to continue to evaluate a wide array of strategic transactions as part of our strategy to acquire or in-license and develop additional products and product candidates. To improve financial flexibility, we have retained advisors to explore options to restructure our debt and assess other potential alternatives in order to maximize value for all stakeholders. Acquisition opportunities that we pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition, we may pursue new operations or the expansion of our existing operations. There can be no assurance that the exploration of options will result in the identification or consummation of any transaction.
48
The following table provides information regarding our cash flows for the nine months ended September 30, 2017, and 2016 (in thousands).
Nine Months Ended | ||||||
September 30, | ||||||
Cash provided by (used in) | 2017 | 2016 | ||||
Operating activities | $ | (9,218) | $ | (22,890) | ||
Investing activities | (5) | (1,547) | ||||
Financing activities | 89 | (3,177) | ||||
Net decrease in cash and cash equivalents | $ | (9,134) | $ | (27,614) |
Comparison of the Nine Months Ended September 30, 2017 and 2016
Net cash used in operating activities
Net cash used in operating activities during the nine months ended September 30, 2017 was $9.2 million, a decrease of $13.7 million from cash used in operating activities during the nine months ended September 30, 2016 of $22.9 million. The cash used in operating activities during the nine months ended September 30, 2017 was driven by the net loss of $44.7 million and net changes in operating assets/liabilities of $3.0 million. This use was partially offset by non-cash expenses totaling $38.5 million. The $22.9 million used in operating activities during the nine months ended September 30, 2016 was primarily driven by a net loss of $83.5 million. This use was partially offset by non-cash expenses totaling $58.8 million and net changes in operating assets/liabilities of $1.8 million.
Net cash used in investing activities
Net cash used in investing activities during the nine months ended September 30, 2017 was $5,000 compared to a use of $1.5 million during the nine months ended September 30, 2016 resulting from less capital expenditures in 2017.
Net cash provided by (used in) financing activities
Net cash provided by financing activities during the nine months ended September 30, 2017 was $89,000. Cash provided by financing activities for the nine months ended September 30, 2017 was primarily from the net proceeds from the DDTL of $30.0 million and the issuance of 372,000 shares under the Controlled Equity Offering Sales Agreement for $1.1 million. This cash provided by financing activities was partially offset primarily by principal payments on our Treximet Secured Notes of $17.5 million, and the payment of financing costs related to the debt restructuring that was completed in July 2017 of $13.6 million. Net cash used in financing activities for the nine months ended September 30, 2016 was primarily for principal payments on our Treximet Secured Notes of $20.4 million. This use was partially offset by the issuance of 3.4 million shares of common stock under the Controlled Equity Offering Sales Agreement for gross proceeds of $18.3 million.
We have committed to make potential future milestone payments to third parties as part of licensing, distribution, acquisition and development agreements. Payments under these agreements generally become due and payable only upon achievement of certain development, regulatory and/or commercial milestones. As the achievement of milestones is neither probable nor reasonably estimable, such contingent payments have not been recorded, except for the contingent consideration discussed in Note 12, Business Combinations , for the acquisition of Zohydro ER in April 2015, on our unaudited condensed consolidated balance sheets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
49
We maintain "disclosure controls and procedures" within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Our disclosure controls and procedures, or Disclosure
Controls, are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within
the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Our Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in
evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures.
As of September 30, 2017, we evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures, which
was done under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Immediately following the Signatures section of this Quarterly Report on Form
10-Q are certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning
the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Based on the controls evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of the date of their evaluation, our disclosure controls and procedures were effective to provide reasonable assurance that (a) the information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (b) such information is accumulated and
communicated to our management, including our Chief Executive Officer and President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Change in Internal Control over Financial Reporting
. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during our
most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Information regarding legal proceedings is incorporated by reference herein from
Legal Proceedings
under Note 10,
Commitments and Contingencies
, to our unaudited condensed consolidated financial
statements for the three and nine months ended September 30, 2017 and 2016 contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
You should carefully consider the risk factors contained in
Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 28, 2017, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017,
filed with the SEC on July 27, 2017 and Exhibit 99.4 of our Current Report on Form 8-K filed with the SEC on July 20, 2017. The risk factors set forth below supplement or amend those risk factors, as applicable. The occurrence
of any one or more of these risks could materially harm our business, operating results, financial condition and prospects. These risks and uncertainties could also cause actual results to differ materially and adversely from those
expressed or implied by forward-looking statements that we make from time to time.
50
Risks Related to our Business
Our business operations and financial position could be adversely affected as a result of our substantial indebtedness and other payment obligations.
In connection with the closing of the Transactions, we had approximately $335.4 million aggregate principal amount of debt outstanding, consisting of approximately $36.2 million aggregate principal amount of
our 4.25%/5.25% Exchangeable Senior Notes due 2022 (the "Exchangeable Notes") issued pursuant to a new indenture, under which PIPL DAC is the issuer and Pernix Therapeutics Holdings, Inc.
("Pernix" or the "Company") and its other subsidiaries are the guarantors with Wilmington Trust, National Association, as trustee, approximately $78.2 million aggregate principal amount of our 4.25%
Convertible Notes due 2021, approximately $176.8 million aggregate principal amount of our 12% Senior Secured Notes due 2020, approximately $14 million outstanding under our new five-year $40 million asset-based revolving
credit facility (the "New ABL Facility") and approximately $30.0 million aggregate principal amount outstanding under PIPL DAC's new term loan credit agreement with Cantor Fitzgerald Securities, as agent and the
lenders party thereto (the "Term Credit Agreement") (the Term Credit Agreement together with the New ABL Facility are hereinafter referred to as the "credit facilities"). In addition, we will have the ability to
borrow up to an additional $15.0 million under the Term Credit Agreement for certain specified purposes, including future acquisitions, subject to conditions set forth in the Term Credit Agreement, and up to an additional
approximately $26 million under the New ABL Facility, subject to borrowing base capacity and the conditions set forth in the New ABL Facility. We will also owe approximately $6.7 million to GSK pursuant to the Interim Settlement
Agreement between us and GSK, as amended by Amendment No. 2 to the Interim Settlement Agreement. This significant indebtedness and other payment obligations could have important consequences. For example, it
may
In the event our capital resources are otherwise insufficient to meet future capital requirements and operating expenses, we may seek to finance our cash needs through public or private equity or debt financings,
strategic relationships, including the divestiture of non-core assets, assigning receivables, milestone payments or royalty rights, or other arrangements. Securing additional financing will require a substantial amount of time and
attention from our management and may divert a disproportionate amount of its attention away from our day-to-day activities, which may adversely affect our management's ability to conduct our day-to-day operations. In addition,
we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:
51
Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be permissible under the indentures governing our outstanding notes or the covenants in the agreements governing our
credit facilities, or otherwise available on acceptable terms, if at all. Additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve additional restrictive covenants. In addition, if we raise
additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not
favorable to us.
Exchange of the Exchangeable Notes and conversion of the Convertible Notes may dilute the ownership interest of existing
stockholders.
Subject to certain contractual restrictions, holders of the Exchangeable Notes and the 4.25% Convertible Senior Notes due 2021 (the " Convertibles Notes ") will be entitled to exchange or convert,
respectively, the Exchangeable Notes or the Convertible Notes for shares of our common stock at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity
date of the Exchangeable Notes or the Convertible Notes, respectively. The exchange of some or all of the Exchangeable Notes or the conversion of some or all of the Convertible Notes will dilute the ownership interests of
existing stockholders. If Holders of the Exchangeable Notes were to exchange all of the outstanding Exchangeable Notes (not taking into account the potential for capitalization of interest or additional interest or changes to the
exchange price), we would need to deliver approximately 6,589,545 shares of our common stock to settle the exchange, which would result in significant dilution to existing stockholders. If Holders of the Convertible Notes were to
exchange all of the outstanding Convertible Notes, we would need to deliver approximately 682,413 shares of our common stock to settle the conversion, which would result in additional dilution to existing stockholders. Any sales
in the public market of any shares of our common stock issuable upon such exchange or conversion could adversely affect prevailing market prices of our common stock.
We may not be able to continue to grow through acquisitions of businesses and assets.
We have sought growth largely through acquisitions, including the acquisitions of Zohydro ER product line in 2015, the rights to Treximet intellectual property in 2014, Pernix Sleep in 2013 and Cypress in
2012. As part of our ongoing expansion strategy, we plan to make additional strategic acquisitions of assets and businesses. However, the indentures governing the Exchangeable Notes, the
Convertible Notes and the 12% Senior Secured Notes due 2020 (the " Treximet Secured Notes ") and the agreements governing our credit facilities will contain restrictive covenants, which include, among other things,
restrictions on the incurrence of indebtedness, as well as certain consolidations, acquisitions, mergers, purchases or sales of assets and capital expenditures, subject to certain exceptions and permissions limited in scope and
dollar value, among other things. For additional information see the notes to our audited consolidated financial statements for the years ended December 31, 2016 and 2015 contained in Part II, Item 8 of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2016. We cannot assure you that acquisitions will be available on terms attractive to us. Moreover, we cannot assure you that such acquisitions will be
permissible under indentures governing our outstanding notes and the covenants in the agreements governing our credit facilities or that we will be able to arrange financing on terms acceptable to us or to obtain timely federal
and state governmental approvals on terms acceptable to us, or at all.
Despite our significant level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.
We may be able to incur substantial additional indebtedness in the future. Although certain of our agreements, including the agreements governing our credit facilities and the indentures governing the Exchangeable
Notes, the Convertible Notes and the Treximet Secured Notes, will limit our ability and the ability of our subsidiaries to incur additional indebtedness, these restrictions are subject to waiver and a number of qualifications and
exceptions and, under certain circumstances, debt incurred following receipt of a waiver or in compliance with these restrictions could be substantial. Among other things, we have the ability to borrow up to an additional $15.0
million under the Term Credit Agreement for certain specified purposes, including future acquisitions, subject to conditions set forth in the Term Credit Agreement, and an additional approximately $26 million under the New ABL
Facility, subject to borrowing base capacity and the conditions set forth in the New ABL Facility. In addition, the Term Credit Agreement will include an incremental feature that allows us, with the consent of the requisite lenders
52
under the Term Credit Agreement, to obtain up to an additional $20 million in term loan commitments from new or existing lenders under the Term Credit Agreement that agree to provide such commitments. To the extent that we
incur additional indebtedness, the risks associated with our substantial leverage described herein, including our possible inability to service our debt, would increase.
Our debt service obligations may adversely affect our cash flow.
A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flow to pay the interest on our debt, and future working capital, borrowings
or equity financing may not be available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt, we may have to delay or curtail our operations.
Our ability to generate cash flows from operations and to make scheduled payments on our indebtedness will depend on our future financial performance. Our future financial performance will be affected by a range of
economic, competitive and business factors that we cannot control, such as those risks described in this section and in our other filings with the SEC. A significant reduction in operating cash flows resulting from
changes in economic conditions, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business,
financial condition, results of operations, prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness we will be forced to adopt an alternative strategy that may include actions
such as reducing capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital, or seeking Chapter 11 Bankruptcy Court protection.
These alternative strategies may not be effected on satisfactory terms, if at all, and they may not yield sufficient funds to make required payments on our indebtedness.
If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which may allow our creditors at that time to declare
outstanding indebtedness to be due and payable, which would in turn trigger cross-acceleration or cross-default rights between the relevant agreements.
In addition, the borrowings under our credit facilities will bear interest at variable rates and other debt we incur could likewise be variable-rate debt. If interest rates increase, our debt service obligations on the variable rate
indebtedness would increase even though the amount borrowed thereunder remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
The indentures governing the Exchangeable Notes, the 4.25% Convertible Notes and the Treximet Secured Notes and the covenants in the agreements governing our credit facilities impose significant operating and/or
financial restrictions on us and our subsidiaries that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.
The indentures governing the Exchangeable Notes, the 4.25% Convertible Notes and the Treximet Secured Notes and the agreements governing our credit facilities will contain covenants that restrict our and our
subsidiaries' ability to take various actions, such as:
53
In addition, the terms of the Treximet Secured Notes require us to maintain a minimum liquidity of $8.0 million at all times and the terms of the New ABL Facility will require us to maintain unrestricted minimum liquidity of $7.5
million at all times. In order to maintain minimum liquidity, we must maintain cash or the availability to borrow cash under the New ABL Facility in a combined amount of no less than the minimum liquidity set forth in the Treximet
Secured Notes indenture and the New ABL Facility.
Upon the occurrence of a fundamental change, as described in the indenture governing the 4.25% Convertible Notes, holders of the 4.25% Convertible Notes may require us to repurchase for cash all or part of their 4.25%
Convertible Notes at a repurchase price equal to 100% of the principal amount of the 4.25% Convertible Notes to be repurchased, plus accrued and unpaid interest. If a holder elects to convert its 4.25% Convertible
Notes for shares in excess of the conversion cap, as described in the indenture governing the 4.25% Convertible Notes, we will be obligated to deliver cash in lieu of any share that was not delivered on account of such
limitation. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the 4.25% Convertible Notes surrendered therefor in connection with a
fundamental change or payments of cash on 4.25% Convertible Notes converted in excess of the conversion cap. In addition, our ability to repurchase the 4.25% Convertible Notes or to pay cash upon conversions of the 4.25%
Convertible Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness. Our failure to repurchase the 4.25% Convertible Notes at a time when the repurchase is required by the indenture or
to pay any cash payable on future conversions of the 4.25% Convertible Notes as required by the indenture would constitute a default under the indenture. A default under the indenture could also lead to a default under
agreements governing our other outstanding indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the
indebtedness and repurchase the 4.25% Convertible Notes or make cash payments upon conversions as required by the indenture.
Upon the occurrence of a fundamental change, as described in the indenture governing the Exchangeable Notes, holders of the Exchangeable Notes may require us to repurchase for cash all or part of Exchangeable Notes at
a repurchase price equal to 100% of the capitalized principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest. However, we may not have enough available cash or be able to
obtain financing at the time we are required to make repurchases of the Exchangeable Notes surrendered therefor in connection with a fundamental change. In addition, our ability to repurchase the Exchangeable Notes or to pay
cash upon conversions of the Exchangeable Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness. Our failure to repurchase the Exchangeable Notes at a time when the repurchase is
required by the indenture or to pay any cash payable on future conversions of the Exchangeable Notes as required by the indenture would constitute a default under the indenture. A default under the indenture could also lead to a
default under agreements governing our other outstanding indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay
the indebtedness and repurchase the Exchangeable Notes or make cash payments upon conversions as required by the indenture.
Our ability to comply with these covenants will likely be affected by many factors, including events beyond our control, and we may not satisfy those requirements. Our failure to comply with our debt-related obligations could
result in an event of default under the particular debt instrument, which could permit acceleration of the indebtedness under that instrument and, in some cases, the acceleration of our other indebtedness, in whole or in part.
These restrictions will also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into
acquisitions or to engage in other business activities that would be in our interest.
Our ability to borrow under the New ABL Facility will be limited by the amount of our borrowing base. Any negative impact on the elements of our borrowing base, such as accounts receivable and inventory or an imposition of
a reserve against our borrowing base, which Cantor Fitzgerald Securities has the authority to do in its sole discretion, could reduce our borrowing capacity under the New ABL Facility.
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Changes to our Board of Directors may impact our ability to compete effectively and profitably and could result in a change in our strategy.
In the Exchange Agreement that we entered into in July 2017 with certain holders of our 4.25% Convertible Notes, we agreed to conduct a search for up to three new directors with relevant expertise to our business
and facilitate the selection and appointment of such individuals to our Board of Directors. The ability of these new directors to quickly expand their knowledge of our business plans, operations and strategies and our products will
be critical to their ability to make informed decisions about our strategy and operations, particularly given the competitive environment in which our business operates and the need to quickly adjust to trends and advancements in
our industry. If these new directors are not sufficiently informed to make such decisions, our ability to compete effectively and profitably could be adversely affected. In addition, we have not yet identified any such directors, and
we cannot predict whether they would implement any changes to our strategy or business plan and whether any such change would be successful.
Our April 2015 acquisition of Zohydro ER and the August 2014 acquisition of the rights to Treximet intellectual property and our strategy of obtaining, through asset acquisitions and in-licenses, rights to other products
and product candidates for our development pipeline and to proprietary drug delivery and formulation technologies for our life cycle management of current products may not be successful.
We acquired the rights to Zohydro ER in April 2015 and Treximet intellectual property in August 2014 and from time to time we may seek to engage in additional strategic transactions with third parties to acquire rights
to other pharmaceutical products, pharmaceutical product candidates in the late stages of development and proprietary drug delivery and formulation technologies. Because we do not have discovery and research capabilities, the
growth of our business will depend in significant part on our ability to acquire or in-license additional products, product candidates or proprietary drug delivery and formulation technologies that we believe have significant
commercial potential and are consistent with our commercial objectives. However, we may be unable to license or acquire suitable products, product candidates or technologies from third parties for a number of reasons.
The licensing and acquisition of pharmaceutical products, product candidates and related technologies is a competitive area. A number of more established companies are also pursuing strategies to license or acquire
products, product candidates and drug delivery and formulation technologies, which may mean fewer suitable acquisition opportunities for us as well as higher acquisition prices. Many of our competitors have a competitive
advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.
Other factors that may prevent us from licensing or otherwise acquiring suitable products, product candidates or technologies include:
If we are unable to successfully identify and acquire rights to products, product candidates and proprietary drug delivery and formulation technologies and successfully integrate them into our operations, we may not be able to
increase our revenues in future periods, which could result in significant harm to our financial condition, results of operations and development prospects.
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If we fail to successfully manage any acquisitions, our ability to develop our product candidates and expand our product pipeline may be harmed.
Our failure to adequately address the financial, operational or legal risks of any acquisitions or in-license arrangements could harm our business. Financial aspects of these transactions that could alter our financial position,
reported operating results or stock price include:
Operational risks that could harm our existing operations or prevent realization of anticipated benefits from these transactions include:
If we are unable to successfully manage our acquisitions, our ability to develop and commercialize new products and continue to expand our product pipeline may be limited.
Risks Related to Commercialization
Changes in laws, regulations and policies applicable to
the market for opioid products, may adversely affect our business, financial condition and results of operations.
The manufacture, marketing, sale, promotion and distribution of Zohydro ER are subject to comprehensive government regulations. Changes in laws and regulations applicable to the market for opioid products,
including Zohydro ER, could potentially affect our business. For instance, federal, state and local governments have recently given increased attention to the public health issue of opioid abuse.
At the federal level, the White House Office of National Drug Control Policy continues to coordinate efforts between the U.S. Food and Drug Administration, or the FDA, the U.S. Drug Enforcement Agency, or the DEA, and
other agencies to address this issue. The FDA recently requested that Endo International plc, or Endo, withdraw Opana ® ER, one of its opioid pain medications, from the market due to the public health consequences of
abuse (even when taken at recommended doses) associated with the use of Endo's product. Endo has voluntarily complied with the FDA's removal request. In publicly announcing the request, the FDA noted that it would take
similar regulatory action with regard to other opioid products if the risks for abuse outweighed the product's potential benefits. The FDA also recently revised the "black-box" warnings required in the labeling of opioid
paid medications, including Zohydro ER, that highlight the risk of misuse, abuse, addiction, overdose and death. The DEA continues its efforts to hold manufacturers, distributors, prescribers and pharmacies accountable through
various enforcement actions, as well as the implementation of compliance practices for controlled substances. In addition, the Centers for Disease Control and Prevention, or CDC, in 2016 issued national, non-binding guidelines
on the prescribing of opioids, providing recommended considerations for primary care providers when prescribing opioids, including specific considerations and cautionary information about opioid dosage increases and morphine
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milligram equivalents. Certain payors are, or are considering, adopting these CDC guidelines, as well as putting other restrictions on the prescribing of opioid pain medications. Additionally, there have been calls,
including by President Trump during the 2016 presidential campaign and more recently by members of Congress, for the DEA to restrict the amount of opioids that can be manufactured in the United States.
Recent federal activity includes President Trump's establishing a commission to make recommendations regarding new laws and policies to combat opioid addiction and abuse; Mallinckrodt's $35 million settlement with the
Justice Department regarding allegations that the company failed to report signs that large quantities of its highly addictive oxycodone pills were diverted to the black market in Florida; and the FDA's announced intention to extend
to immediate-release opioids the Risk Evaluation and Mitigation Strategy, or REMS, currently imposed on extended-release opioids, such as Zohydro ER. At the state and local level, a number of states and major cities have
brought separate lawsuits against various pharmaceutical companies marketing and selling opioid based pain medications, alleging misleading or otherwise improper promotion of opioid drugs to physicians and consumers. In
addition, the attorneys general from several states have announced the launch of a joint investigation into the marketing and sales practices of drug companies that manufacture opioid pain medications.
These initiatives and other changes and potential changes in laws, regulations and policies, including those that have the effect of reducing the overall market for opioids or reducing the prescribing of opioids, could adversely
affect our business, financial condition and results of operations.
Our ceasing the distribution of our combination drug product IDA will impact our net revenues.
Through our Macoven entity, Pernix has distributed a combination product called isometheptene mucate, dichlorphenazone, and acetaminophen ("IDA"), which was originally approved by the US Food and
Drug Administration (FDA) in 1948 for safety only. The product's efficacy as an adjunct treatment for peptic ulcer disease, as well as other medical conditions, such as migraine headaches, was reviewed under the FDA's Drug
Efficacy Study Implementation process, DESI notice 3265.
On October 20, 2017, we received a letter dated October 19, 2017 from the FDA that asserts that IDA is subject to DESI 3265 and that any drug products that are identified in DESI 3265, including IDA, require an approved
New Drug Application ("NDA") or Abbreviated New Drug Application ("ANDA") in order for them to be distributed. Since we have not obtained an NDA or ANDA for IDA, the FDA stated in its letter that we
should immediately cease distribution of IDA. While IDA has a long history of safe use, we intend to comply with the FDA's request and confirm with the Agency within the requested time frame that Company has ceased
distribution of the product. For the three and nine months ended September 30, 2017, our net revenues from the sale of IDA were $3.8 million and $9.7 million, respectively. At this time, we do not anticipate that ceasing the
distribution of IDA will have a material adverse impact on our net revenues in 2017. However, as we will not have further revenues from the product in 2018, we anticipate that the discontinuance of the product will impact net
revenues beginning January 1, 2018.
Risks Related to Our Financial Position
We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs, commercialization efforts or acquisition
strategy.
We make significant investments in our currently-marketed products for sales, marketing, and distribution. We have used, and expect to continue to use, revenue from sales of our marketed products to fund
acquisitions (at least partially), for development costs and to establish and expand our sales and marketing infrastructure.
Our future capital requirements will depend on many factors, including:
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We intend to obtain any additional funding we require through public or private equity or debt financings, strategic relationships, including the divestiture of non-core assets, assigning receivables, milestone payments or
royalty rights, or other arrangements and we cannot assure such funding will be available on reasonable terms, or at all. Additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies,
or grant licenses on terms that are not favorable to us.
If our efforts in raising additional funds when needed are unsuccessful, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or all rights to our products or
renegotiate less favorable terms with respect to such rights than we would otherwise choose or cease operating as a going concern. In addition, if we do not meet our payment obligations to third parties as they come due, we
may be subject to litigation claims. Even if we were successful in defending against these potential claims, litigation could result in substantial costs and be a distraction to management, and may result in unfavorable results that
could further adversely impact our financial condition.
If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all
or a part of their investments.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We did not make any distributions for the years ended December 31, 2016 and 2015. We are currently investing in our promoted product lines and product candidates and do not anticipate paying dividends in the
foreseeable future. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of the agreements governing our credit facilities and the indentures
governing the Exchangeable Notes, the 4.25% Convertible Notes and the Treximet Secured Notes will prohibit us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source
of gain for the foreseeable future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
None.
Not applicable.
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None.
EXHIBIT INDEX
Exhibit
Description
Indenture dated July 21, 2017, by and among Pernix Ireland Pain Limited, as issuer, the guarantors party thereto, and Wilmington Trust, National Association, as the trustee (incorporated by reference to
Exhibit 4.1 of the Registrant's Current Report on Form 8-K/A filed on July 21, 2017).
Form of 4.25%/5.25% Exchangeable Senior Note due 2022 (included in Exhibit 4.1, which is incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K/A filed on July 21,
2017)
Second Supplemental Indenture, dated July 21, 2017, by and among Pernix Therapeutics Holdings, Inc., Pernix Holdco 1, LLC, Pernix Holdco 2, LLC, Pernix Holdco 3, LLC and U.S. Bank, National
Association as the trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K/A filed on July 21, 2017).
Exchange Agreement dated July 20, 2017 by and among Pernix Ireland Pain Limited, Pernix Therapeutics Holdings, Inc. and certain of its subsidiaries as guarantors party thereto and 1992 MSF International
Ltd. and 1992 Tactical Credit Master Fund, L.P. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on July 20, 2017).
Credit Agreement, dated as of July 21, 2017, by and among the lenders identified on the signature pages thereof, Cantor Fitzgerald Securities, as agent, Pernix Therapeutics Holdings, Inc., Pernix
Therapeutics, LLC, Pernix Sleep, Inc., Cypress Pharmaceuticals, Inc., Gaine, Inc., Respicopea, Inc., Macoven Pharmaceuticals, L.L.C., and Hawthorn Pharmaceuticals, Inc., as borrowers, and the guarantors party thereto
(incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K/A filed on July 21, 2017).
Credit Agreement, dated as of July 21, 2017, by and among the lenders identified on the signature pages thereof, Cantor Fitzgerald Securities, as agent, and Pernix Ireland Pain Limited (incorporated by
reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K/A filed on July 21, 2017).
Amendment No. 2 to the Interim Settlement Agreement dated July 21, 2017 by and among Pernix Therapeutics Holdings, Inc., Pernix Ireland Limited, Glaxo Group Limited, GlaxoSmithKline LLC,
GlaxoSmithKline Intellectual Property Holdings Limited and GlaxoSmithKline Intellectual Property Management Limited (incorporated by reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K/A filed on July 21,
2017).
Registration Rights Agreement dated July 21, 2017 between Pernix Therapeutics Holdings, Inc., Pernix Ireland Pain Limited and 1992 MSF International Ltd. and 1992 Tactical Credit Master Fund, L.P
(incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K/A filed on July 21, 2017).
Employment Agreement, dated July 21, 2017, by and between Pernix Therapeutics Holdings, Inc. and Kenneth R. Pina.
Amended and Restated Code of Business Conduct and Ethics of Pernix Therapeutics Holdings, Inc. (incorporated by reference to Exhibit 14.1 of the Registrant's Current Report on Form 8-K filed on
September 22, 2017).
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Certification of the Registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Registrant's Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Registrant's Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language):
(i) Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016;
(ii) Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016;
(iii) Condensed Consolidated Statements of Stockholders' Equity (Deficit) for the Year Ended December 31, 2016 and Nine Months Ended September 30, 2017;
(iv) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 and
(v) Notes to Condensed Consolidated Financial Statements.
_______________________
* Filed herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PERNIX THERAPEUTICS HOLDINGS, INC.
Date: November 7, 2017
By:
/s/ JOHN SEDOR
John Sedor
Chairman and Chief Executive Officer
Date: November 7, 2017
By:
/s/ GRAHAM MIAO
Graham Miao
(Principal Financial Officer)
61
No.
(Principal Executive Officer)
President and Chief Financial Officer
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), made as of July 21, 2017, between PERNIX THERAPEUTICS HOLDINGS, INC., a Maryland corporation (the "Company") and Kenneth Pina ("Executive").
WHEREAS, Executive currently serves as the Senior Vice President, Chief Legal and Compliance Officer and Corporate Secretary of the Company; and
WHEREAS, the Company and Executive desire to enter into this Agreement to set out the terms and conditions for the continued employment relationship of Executive with the Company.
NOW, THEREFORE, intending to be legally bound hereby, the Company hereby agrees to continue to employ Executive, and Executive hereby agrees to continue to be employed by the Company, upon the following terms and conditions:
Subject to the terms and provisions of this Agreement, this Agreement shall commence as of the date hereof (the "Effective Date") and shall continue indefinitely until Executive's employment with the Company is terminated by the Company or by Executive. Executive's employment hereunder is on an "at-will" basis, as defined under applicable law, meaning that either Executive or the Company may terminate Executive's employment at any time and for any reason or no reason at all, subject to the provisions of Section 5 hereof. The period during which this Agreement is in effect and Executive is employed by the Company hereunder is hereinafter referred to as the "Term."
2
terms of such employee benefit plan, practice or program and applicable law. Executive shall be entitled to four (4) weeks of paid vacation, in addition to any Company holidays, subject to reasonable business expectations. Executive shall be entitled to carry forward a cumulative amount of up to ten (10) accrued but unused vacation days from calendar year to calendar year during the Term. The Company shall reimburse Executive for all reasonable expenses properly incurred by Executive in the discharge of his duties hereunder upon production of evidence therefor in accordance with the Company's then current policy.
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4
5
For the avoidance of doubt, the amounts paid under this Section 5(b) are in lieu of payment to Executive under any other severance agreement, plan, policy, practice or program of the Company.
6
becomes eligible to receive coverage from another employer or is otherwise no longer eligible to receive COBRA continuation coverage, which reimbursements shall be paid to Executive on each Company payroll date that occurs after the monthly premium is due and such reimbursements shall commence on the first payroll date that occurs on or after the Release Effective Date, but in any event within sixty (60) days following Executive's termination date, provided that the initial payment will include a catch-up payment to cover the period between Executive's termination date and the date of such first payment and the remaining amounts shall be paid over the remainder of such fifteen (15) month period. Notwithstanding the foregoing provisions of this Section 5(c)(iv), in the event the Company determines that such provisions would subject Executive to taxation under Code Section 105(h), or otherwise violate any healthcare law or regulation, then, in lieu of reimbursing Executive as set forth in the preceding sentence, the Company shall pay to Executive an amount equal to one hundred fifty percent (150%) of the amount Executive would be required to pay for continuation of group health coverage for Executive and his eligible dependents through an election under COBRA for fifteen (15) months. This amount shall be paid in a lump sum at the same time payments under Section 5(b)(i) commence and is intended to assist Executive with costs of health coverage, which Executive may (but is not required to) obtain through an election to continue health care coverage under COBRA
For the avoidance of doubt, the amounts paid under this Section 5(c) are in lieu of payment to Executive under any other severance agreement, plan, policy, practice or program of the Company.
7
8
9
Executive recognizes and acknowledges that: (i) in the course of Executive's employment by the Company it will be necessary for Executive to acquire information which could include, in whole or in part, information concerning the Company's sales, sales volume, sales methods, sales proposals, customers and prospective customers, identity of customers and prospective customers, identity of key purchasing personnel in the employ of customers and prospective customers, amount or kind of customers' purchases from the Company, the Company's sources of supply, computer programs, system documentation, special hardware, product hardware, related software development, manuals, formulae, processes, methods, machines, compositions, ideas, improvements, inventions or other confidential or proprietary information belonging to the Company or relating to the Company's affairs (collectively referred to herein as the "Confidential Information"); (ii) the Confidential Information is the property of the Company; (iii) the use, misappropriation or disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to the Company; and (iv) it is essential to the protection of the Company's good will and to the maintenance of the Company's competitive position that the Confidential Information be kept secret and that Executive not disclose the Confidential Information to others or use the Confidential Information to Executive's own advantage or the advantage of others.
10
11
12
13
This Agreement shall be construed and enforced under and be governed in all respects by the laws of the State of New Jersey without regard to the conflict of laws principles thereof. For the purposes of any claim or cause of action in any legal proceeding initiated over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby that is not subject to arbitration pursuant to Section 12 above, such claim or cause of action shall be initiated in any federal or state court located within the County of Morris, State of New Jersey, and the parties further agree that venue for all such matters shall lie exclusively in those courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any objection that they may now or hereafter have, including, without limitation, any claim of forum non conveniens, to venue and any objection to personal jurisdiction or venue in such jurisdiction in the courts located in the County of Morris, State of New Jersey. The parties agree that a judgment in any such dispute may be enforced in other jurisdictions by proceedings on the judgment or in any other manner provided by law.
No amendment of any provision of this Agreement, and no postponement or waiver of any such provision or of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be valid unless such amendment, postponement or waiver is in writing and signed by or on behalf of the Company and Executive. No such amendment, postponement or waiver shall be deemed to extend to any prior or subsequent matter, whether or not similar to the subject matter of such amendment, postponement or waiver. No failure or delay on the part of the Company or Executive in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
The rights and duties of the Company under this Agreement may be transferred to, and shall be binding upon, any person or company which acquires or is a successor to the Company, its business or a significant portion of the assets of the Company by merger, purchase or otherwise, and the Company shall require any such acquirer or successor by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company, as the case may be, would be required to perform if no such acquisition or succession had taken place. Regardless of whether such agreement is executed, this Agreement shall be binding upon any acquirer or successor in accordance with the operation of law and such acquirer or successor shall be deemed the "Company", as the case may be, for purposes of this Agreement. Except as otherwise provided in this Section 15, neither the Company nor Executive may transfer any of their respective rights and duties hereunder except with the written consent of the other party hereto.
14
Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, or by overnight carrier to the parties at the addresses set forth below (or such other addresses as specified by the parties by like notice):
If to the Company:
Pernix Therapeutics Holdings, Inc.
10 North Park Place, Suite 201
Morristown, NJ 07960
Attn: Vice President, Human Resources
If to Executive, to such address as shall most currently appear on the records of the Company.
The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect.
The Company and Executive have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Company and Executive and no presumption or burden of proof shall arise favoring or disfavoring the Company or Executive because of the authorship of any of the provisions of this Agreement. The word "including" shall mean including without limitation. The rights and remedies expressly specified in this Agreement are cumulative and are not exclusive of any rights or remedies which either party would otherwise have. The Section headings hereof are for convenience only and shall not affect the meaning or interpretation of this Agreement.
This Agreement and the Indemnification Agreement (as defined below) constitute the entire agreement among the parties and supersede any prior understandings, agreements or representations by or among the parties, written or oral, to the extent they relate to the subject matter hereof, including the offer letter between Executive and the Company, dated December 16, 2016 (the "Offer Letter"). Notwithstanding the foregoing, the requirement in the Offer Letter that Executive re-pay to the Company the entire sign-on bonus paid to him pursuant to the Offer Letter if Executive voluntarily leaves the Company prior to a year following Executive's date of hire, shall not be superseded by this Agreement and shall remain in full force and effect. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.
15
The Company and Executive have entered into an Indemnification Agreement, effective as of January 4, 2017 (the "Indemnification Agreement"). To the extent any provision set forth in the Indemnification Agreement is in conflict with any provision set forth in this Agreement, the provision set forth in the Indemnification Agreement shall govern.
The respective rights and obligations of the parties under this Agreement, including, without limitation the Company's obligations to pay and provide the severance benefits described in Section 5(b) and 5(c) of this Agreement, shall survive any termination of Executive's employment to the extent necessary to carry out the intentions of the parties under this Agreement.
The Company may withhold from any benefit payment or any other payment or amount under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling.
16
Section 409A. Neither the Company nor Executive shall have the right to accelerate or defer the delivery of any such payments or benefits except to the extent specifically permitted or required by Section 409A. Executive shall have no right to designate the date or any payment under this Agreement. If the sixty (60) day period following separation from service for which severance payments are to commence begins in one calendar year and ends in a second calendar year, the portion of such payments that are otherwise payable in the first calendar year will be delayed and commence to be paid in a lump sum within the remainder of the sixty (60) day period that occurs in the second calendar, but only (i) with respect to the portion of such amounts that are payable within such sixty (60) day period that constitute deferred compensation subject to Section 409A and (ii) to the extent no additional delay is required pursuant to Section 23(c) below.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
PERNIX THERAPEUTICS HOLDINGS, INC.
By:
/s/ John A. Sedor
John A. Sedor
Chief Executive Officer
/s/ Kenneth Pina
Kenneth Pina
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EXHIBIT A
Prior Inventions
None.
A-1
EXHIBIT B
Release
You, for yourself, your spouse and your agents, successors, heirs, executors, administrators and assigns, hereby irrevocably and unconditionally forever release and discharge Pernix Therapeutics Holdings, Inc. (the " Corporation "), its parents, divisions, subsidiaries and affiliates and its and their current and former owners, directors, officers, stockholders, insurers, benefit plans, representatives, agents and employees, and each of their predecessors, successors, and assigns (collectively, the " Releasees "), from any and all actual or potential claims or liabilities of any kind or nature, including, but not limited to, any claims arising out of or related to your employment and separation from employment with the Corporation and any services that you provided to the Corporation; any claims that you may have for any benefits under the Employee Retirement Income Security Act of 1974 ("ERISA") (except for vested ERISA benefits); any claims that you may have for discrimination, harassment or retaliation of any kind or based upon any legally protected classification or activity; any claims that you may have under Title VII of the Civil Rights Acts of 1964, the Civil Rights Act of 1866 and 1964, as amended, 42 U.S.C. § 1981, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans with Disabilities Act, 42 U.S.C. § 1981, 42 U.S.C. § 1983, the Family Medical Leave Act and any similar state law, the Fair Credit Reporting Act and any similar state law, the Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. , the Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101, et seq. , the Equal Pay Act and any similar state law, the New Jersey Law Against Discrimination, the New Jersey Conscientious Employee Protection Act, the New Jersey Family Leave Act, the New Jersey Wage Payment Law, the New Jersey Wage and Hour Law, the New Jersey Equal Pay Act, and any retaliation claims that you may have under the New Jersey Workers' Compensation Law, as well as any amendments to any such laws; any claims that you may have for any violation of any federal or state constitutions or executive orders; any claims for wrongful or constructive discharge, violation of public policy, breach of contract or promise (oral, written, express or implied), personal injury not covered by workers' compensation benefits, misrepresentation, negligence, fraud, estoppel, defamation, infliction of emotional distress, contribution and any claims that you may have under any other federal, state or local law, including those not specifically listed in this Release, that you, your heirs, executors, administrators, successors, and assigns now have, ever had or may hereafter have, whether known or unknown, suspected or unsuspected, up to and including the date of your execution of this Release.
For the purpose of implementing a full and complete release and discharge of the Releasees as set forth above, you acknowledge that this Release is intended to include in its effect, without limitation, all claims known or unknown that you have or may have against the Releasees which arise out of or relate to your employment, including but not limited to performance or termination of employment with the Corporation, except for, and notwithstanding anything in this Release to the contrary, claims which cannot be released solely by private agreement. This Release also excludes (i) any claims relating to any right you may have to payments pursuant to Section 5(b) or Section 5(c), as applicable, of the Employment Agreement, entered into as of July 21, 2017, by and between the Corporation and you (the " Employment Agreement "), (ii) any Accrued Obligations (as defined in the Employment Agreement), (iii) any entitlements to vested
B-1
equity rights, (iv) any claim for workers' compensation benefits and (v) any rights you may have to indemnification or directors' and officers' liability insurance under the Indemnification Agreement. You further acknowledge and agree that you have received all leave, compensation and reinstatement benefits to which you were entitled through the date of your execution of this Release (other than the Accrued Obligations), and that you were not subjected to any improper treatment, conduct or actions as a result of a request for leave, compensation or reinstatement.
You affirm, by signing this Release, that you have not suffered any unreported injury or illness arising from your employment, and that you have not filed with any federal, state or local court any actions against Releasees relating to or arising out of your employment with or separation from the Corporation.
Nothing in this Agreement restricts or prohibits you from initiating communications directly with, responding to any inquiries from, providing testimony before, providing confidential information to, reporting possible violations of law or regulation to, or from filing a claim or assisting with an investigation directly with a self-regulatory authority or a government agency or entity, including the U.S. Equal Employment Opportunity Commission, the Department of Labor, the National Labor Relations Board, the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General (collectively, the " Regulators "), or from making other disclosures that are protected under the whistleblower provisions of state or federal law or regulation. However, to the maximum extent permitted by law, you are waiving your right to receive any individual monetary relief from the Company or any others covered by the Release resulting from such claims or conduct, regardless of whether you or another party has filed them, and in the event you obtain such monetary relief the Company will be entitled to an offset for the payments made pursuant to this Agreement . This Agreement does not limit your right to receive an award from any Regulator that provides awards for providing information relating to a potential violation of law.
Pursuant to 18 USC § 1833(b), you understand that an individual may not be held liable under any criminal or civil federal or state trade secret law for disclosure of a trade secret: (i) made in confidence to a government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Additionally, you understand that an individual suing an employer for retaliation based on the reporting of a suspected violation of law may disclose a trade secret to his or her attorney and use the trade secret information in the court proceeding, so long as any document containing the trade secret is filed under seal and the individual does not disclose the trade secret except pursuant to court order. Nothing in this Release is intended to conflict with 18 USC § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 USC § 1833(b).
You acknowledge:
B-2
PLEASE READ CAREFULLY. THIS RELEASE INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
ACKNOWLEDGED AND AGREED
____________________________________________________
Kenneth Pina Date
B-3
EXHIBIT 31.1
CERTIFICATION
I, John Sedor, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Pernix Therapeutics Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
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November 7, 2017 |
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/s/ JOHN SEDOR |
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John Sedor |
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Chairman and Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATION
I, Graham Miao, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Pernix Therapeutics Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(d) Disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
November 7, 2017 |
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/s/ GRAHAM MIAO |
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Graham Miao |
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President and Chief Financial Officer
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EXHIBIT 32.1
CERTIFICATION UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of Pernix Therapeutics Holdings, Inc. for the periods covered by this periodic report.
Date: November 7, 2017 |
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/s/ JOHN SEDOR |
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John Sedor |
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Chairman and Chief Executive Officer
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Date: November 7, 2017 |
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/s/ GRAHAM MIAO |
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Graham Miao
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(Principal Financial Officer) |
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