Overview

Pernix Therapeutics (PTX) is a specialty pharmaceutical company focused on improving patients' lives by identifying, developing and commercializing differentiated products that address unmet medical needs. Its strategy is to continue to create shareholder value by:

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

Pernix Therapeutics target underserved segments, such as central nervous system (CNS) indications, including neurology, pain and psychiatry. The company promote its core branded products to physicians through its sales forces. The company market its generic products through its wholly owned subsidiaries, Macoven and Cypress.¹

Its 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

- Exchange Agreement On July 20, 2017, Pernix Therapeutics 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:

1. A new five-year $40 million asset-based revolving credit facility (the "New ABL Facility") by and among Pernix and certain subsidiaries of Pernix as borrowers and guarantors (the "ABL Borrowers") and Pernix Ireland Pain Limited ("PIPL"), Pernix Ireland Limited, Pernix Holdco 1, LLC, Pernix Holdco 2, LLC and Pernix Holdco 3, LLC as additional guarantors (the "ABL Guarantors"), Cantor Fitzgerald Securities, as agent, and the Holders, as lenders. The New ABL Facility will replace Pernix's asset-based revolving credit agreement, dated as of August 21, 2015, by and among the ABL Borrowers, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, as amended (the "Old ABL Facility");
2. A new five-year $45 million delayed draw term loan facility (the "Term Facility") among PIPL, Cantor Fitzgerald Securities, as agent, and the Holders, as lenders;
3. A new indenture providing for 4.25%/5.25% Exchangeable Senior Notes due 2022 (the "New Notes Indenture") under which PIPL is the issuer and Pernix and its other subsidiaries are the guarantors (the "Guarantors"), with Wilmington Trust, National Association, as trustee (the "Trustee");
4. The issuance to the Holders of (a) $36,242,500 aggregate principal amount of PIPL's 4.25%/5.25% Exchangeable Senior Notes due 2022 (the "Exchangeable Notes") pursuant to the New Notes Indenture and (b) 1,100,498 shares of Pernix's common stock (the "Exchange Shares"), in exchange for the tender to PIPL of $51.8 million aggregate principal amount of Convertible Notes held by the Holders (the "Exchange"). The Exchangeable Notes will be exchangeable for Pernix's common stock. After giving effect to the Exchange, approximately $78.2 million principal amount of the 4.25% Convertible Notes will remain outstanding; and
5. A registration rights agreement among Pernix, PIPL and the Holders that provides for the registration under the Securities Act of 1933, as amended, of the offer and sale of the Exchange Shares and the Underlying Shares (the "Registration Rights Agreement").

The parties to the Exchange Agreement made certain customary representations and warranties. Under the Exchange Agreement, Pernix and each of its subsidiaries party thereto agreed to indemnify each Holder (or certain funds and/or accounts for which a Holder or any of its affiliates acts as investment advisor), its affiliates and the directors, officers, employees and agents of such Holder and each person who controls such Holder for certain losses arising out of the Exchange Agreement or the "transactions," as defined therein. Pernix also agreed to conduct a search for up to three new directors and to use its reasonable best efforts to facilitate the selection and appointment of such directors to Pernix's board of directors within ninety days following the closing of the Transactions.

New ABL Facility

The ABL Borrowers entered into an asset-based revolving credit agreement (the "ABL Credit Agreement") with Cantor Fitzgerald Securities, as agent (the "ABL Agent") and the lenders party thereto to obtain the New ABL Facility.

The ABL Borrowers' obligations under the New ABL Facility are guaranteed by the ABL Borrowers and the ABL Guarantors and are secured by, among other things, the ABL Borrowers' cash, inventory and accounts, in each case pursuant to a guaranty and security agreement between the ABL Borrowers, ABL Guarantors and Cantor Fitzgerald Securities as agent. Availability of borrowings under the New ABL Facility from time to time will be subject to a borrowing base calculation based upon a valuation of the ABL Borrowers' eligible inventories and eligible accounts receivable, each multiplied by an applicable advance rate, subject to adjustments in accordance with the ABL Credit Agreement. Borrowings under the New ABL Facility will bear interest at the rate of LIBOR plus 7.50%. In addition, the ABL Borrowers will be required to pay a commitment fee on the undrawn commitments under the New ABL Facility from time to time at a rate per annum of 0.25% on the unused commitments under the New ABL Facility, payable monthly. The ABL Credit Agreement contains representations and warranties, affirmative and negative covenants, and events of default applicable to the Company, the other ABL Borrowers, the ABL Guarantors and their respective subsidiaries that are customary for credit facilities of this type. The New ABL Facility will mature on July 21, 2022.

The New ABL Facility will refinance the Old ABL Facility in full and enhances the Company's financial flexibility, increases liquidity and extends the maturity date from July 31, 2017 to July 21, 2022. Immediately following entry into the ABL Credit Agreement and initial draw down, the Company anticipates having approximately $21 million available under the New ABL Facility.

Term Facility

PIPL entered into a term loan credit agreement (the "Term Credit Agreement") with Cantor Fitzgerald Securities, as agent (the "Term Agent") and the lenders party thereto to obtain the new Term Facility. $30 million under the Term Facility was drawn on the date of closing of the Transactions, and the remaining $15 million will be available for subsequent draws for certain specified purposes, including to finance certain acquisitions, subject to conditions set forth in the Term Credit Agreement. The Term Facility includes an incremental feature that allows PIPL, with the consent of the requisite lenders under the Term Facility, to obtain up to an additional $20 million in term loan commitments from new or existing lenders under the Term Facility that agree to provide such commitments. Interest on the loans will accrue either in cash or a combination of cash and in kind interest, at PIPL's election. Cash interest will accrue at a rate of 7.50% per annum, while the combination of cash and in-kind interest will accrue at a rate of 8.50% per annum, with up to 4.00% per annum added to the principal amount of loans and the balance paid in cash. The Term Facility will contain representations and warranties, affirmative and negative covenants, and events of default applicable to PIPL and its subsidiaries (if any) that are customary for credit facilities of this type. The Term Facility will mature on July 21, 2022.

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

Upon the closing of the Transactions, the Term Facility provided the Company with $30 million of liquidity immediately and, subject to conditions set forth in the Term Credit Agreement, $15 million of additional liquidity for certain specified purposes in the future, as well as the potential for an additional $20 million in commitments subject to lender consent.

Immediately following the closing of the Transactions, Pernix is expected to have approximately $63 million of total liquidity, including approximately $42 million of cash and cash equivalents and approximately $21 million available to draw under the New ABL Facility.

Exchangeable Notes

PIPL, the Guarantors, and Wilmington Trust, National Association, as Trustee, entered into the New Exchangeable Notes Indenture. The Exchangeable Notes issued under the New Notes Indenture will be guaranteed by Pernix and each other subsidiary thereof. The Exchangeable Notes are senior, unsecured obligations of PIPL. Interest on the Exchangeable Notes will be paid in cash or a combination of cash and in-kind interest at PIPL's election. Interest paid in cash (the "All Cash Method") will accrue at a rate of 4.25% per annum, while interest paid in a combination of cash and in-kind will accrue at a rate of 5.25% per annum, with 2.25% per annum of interest (plus additional interest, if any) capitalized to the principal amount of the Exchangeable Notes, and the balance paid in cash. The maturity date of the Exchangeable Notes Indenture is July 15, 2022.

The Exchangeable Notes initially are exchangeable into shares of the Company's common stock at an exchange price per share of $5.50 (the "Exchange Price"). The Exchange Price will be subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on the Company's common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain Company tender or exchange offers.

Holders will exchange all or a portion of their Exchangeable Notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

Upon not less than 30 nor more than 45 trading days' notice, if the daily VWAP (as defined in the Exchangeable Notes Indenture) of the Company's common stock has been at least 120% of the Exchange Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which such notice of redemption is provided (the "Provisional Redemption", and such date of a Provisional Redemption, the "Redemption Date"), the Company will have the right to redeem any or all of the Exchangeable Notes at a price equal to 100% of the principal amount thereof (including any interest capitalized thereto) plus accrued interest that has not been paid or capitalized to, but excluding, the date on which the Exchangeable Notes are to be redeemed. The redemption price will be paid in cash.

No "sinking fund" will be provided for the Exchangeable Notes, which means that PIPL will not be required to periodically redeem or retire the Exchangeable Notes. If PIPL or the Company undergoes a Fundamental Change (as defined below), subject to certain conditions, holders of the Exchangeable Notes may require PIPL to repurchase for cash all or part of their Exchangeable Notes. The fundamental change repurchase price will be equal to 100% of the principal amount (including any interest capitalized thereto) of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the date, chosen by PIPL, that is not less than 20 business days or more than 35 business days following the date on which notice of the Fundamental Change was provided by PIPL.

Under the Exchangeable Notes Indenture, a "Fundamental Change" will be deemed to have occurred if, among other events, any of the following occurs:  any "group" or "person," within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (as amended, the "Exchange Act"), other than a permitted holder under the Exchangeable Notes Indenture, becomes the direct or indirect "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of the Company's common stock representing more than 50% of the Company's voting power; (ii) the Company consummates any recapitalization, reclassification or change of the Company's common stock, subject to certain exceptions as contained in the Exchangeable Notes Indenture; (iii) the Company effects any share exchange, consolidation or merger pursuant to which the Company's common stock will be converted into cash, securities or other property or assets; (iv) the Company effects any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the Company's consolidated assets to a person or entity other than a permitted holder under the Exchangeable Notes Indenture; (v) the Company's stockholders approve a plan or proposal for the Company's liquidation or dissolution or the liquidation or dissolution of PIPL; and (vi) the Company's common stock ceases to be listed on The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors).

Holders of the Exchangeable Notes are entitled to receive, in certain circumstances, additional shares of the Company's common stock upon exchanges of Exchangeable Notes in connection with a Provisional Redemption or certain Fundamental Changes.

Subject to certain limited exceptions, the Exchangeable Notes contain covenants which prohibit or limit the ability of PIPL and the Guarantors to, among other things:  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) occurs and is continuing, the Trustee by notice to PIPL, or the holders of at least 25% in principal amount of the then outstanding Exchangeable Notes by written notice to PIPL and the Trustee, may declare 100% of the accreted principal of and accrued and unpaid interest, if any, on all of the Exchangeable Notes to be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving PIPL, 100% of the principal of and accrued and unpaid interest, if any, on all of the Exchangeable Notes will become due and payable automatically, including a make-whole premium in an amount equal to the present value of the interest that would accrue on such Exchangeable Notes (assuming the All Cash Method) from, and including, such date of acceleration until the maturity date of the Exchangeable Notes, with such present value computed using a discount rate equal to the sum of  the yield to maturity of United States Treasury securities with remaining maturity equal to that of the Exchangeable Notes (as determined in a commercially reasonable manner by PIPL) on such date of acceleration and (ii) 50 basis points. Notwithstanding the foregoing, for up to 270 days after the occurrence of an event of default, PIPL may elect to have the sole remedy for an event of default relating to certain of PIPL's failures to comply with certain reporting covenants in the Exchangeable Notes Indenture consist exclusively of the right to receive additional interest on the Exchangeable Notes.

Holders of Exchangeable Notes will not be entitled to receive shares of the Company's common stock upon exchange of any Exchangeable Notes to the extent such holder (or group of which such holder is a part) would beneficially own more than 9.99% of the outstanding shares of the Company's common stock. Subject to such limitation, at the initial Exchange Price, the Exchangeable Notes will be exchangeable into approximately 40% of the Company's outstanding common stock as of the date hereof (after giving effect to the issuance of the Exchange Shares and the common stock underlying the Exchangeable Notes).

The Exchange allowed the Company to reduce the principal amount of its outstanding indebtedness through the exchange of the Holders' 4.25% Convertible Notes for a smaller principal amount of the Exchangeable Notes. The principal amount of the Exchangeable Notes may be reduced if the holders thereof exchange their Exchangeable Notes for shares of the Company's common stock. The Exchangeable Notes Indenture will provide capacity to refinance up to an additional $25.0 million principal amount of the 4.25% Convertible Notes, which refinancing could also provide an opportunity to further reduce the principal amount of the Company's outstanding indebtedness.

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.

As previously disclosed, 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 APSA 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) (collectively, the Award). The tribunal also denied its claim that GSK breached its obligations under the supply agreement. The company 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, The company entered into a stay agreement with GSK, whereby, GSK agreed to stay the enforcement of the arbitration award until July 3, 2017, subject to it releasing the escrow amount of $6.2 million and paying $250,000 to GSK. On March 17, 2017, The company amended the Interim Settlement Agreement with GSK, whereby The company agreed to a payment schedule for satisfaction of the current balance of the Award. Pursuant to the amendment The company agreed that the outstanding balance of the Award as of the date of the amendment was approximately $21.5 million, and that the company is 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. The company also agreed that for so long as the Interim Settlement Agreement is in effect, The company will be subject to certain restrictions on non-ordinary course payments and transactions and GSK will have certain information rights. GSK has agreed that for so long as the company comply with the payment schedule set forth in the amended Interim Settlement Agreement, as well as other agreed-upon obligations, enforcement of the Award will be stayed and GSK shall not seek to enforce or exercise any other remedies in respect of the Award. 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 have 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 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:  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  redeems or repurchases 4.25% Convertible Notes for greater than 31.00 cents for every one dollar of principal amount outstanding or  exchanges such notes for new notes or similar instruments that have a face value providing such exchanging holders a recovery that is greater than 31.00 cents for every one dollar of 4.25% Convertible Notes exchanged by such holders, Pernix shall, no later than five business days thereafter, distribute to GSK additional cash or notes, as applicable, equal to such excess recovery, but in no event to exceed $2 million. GSK has agreed that for so long as the Pernix Parties comply with the payment terms set forth in the Amendment No. 2, enforcement of the Award will be stayed and GSK shall not seek to enforce or exercise any other remedies in respect of the Award, and that the outstanding balance of the Award shall be unconditionally and irrevocably forgiven upon satisfaction of such terms. A portion of the proceeds from the Transactions will be used to pay the amounts due to GSK under Amendment No. 2.

On April 18, 2017, Pernix and certain of its subsidiaries entered into the Amendment with Wells Fargo, as Administrative Agent and the lenders party thereto. The Amendment amends the Credit Agreement. 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 have previously disclosed that the company were reviewing its 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 rhe company intend to transition to another financing source on or before July 31, 2017, The company 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  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 and in certain circumstances will pay an additional fee of $140,000.

On July 20, 2017, Pernix 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.

During the quarter ended March 31, 2017, the company discussed its 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 its financial condition. Management is of the opinion that any potential going concern uncertainty that previously existed has been remediated and that its existing cash balance, cash from operations and funding from the Transactions will be sufficient to fund its existing level of operating expenses, current development activities, non-operating payments of debt, interest and general capital expenditure requirements through at least the next twelve months.

References

1. ^ https://fintel.io/doc/sec-ptx-pernix-therapeutics-holdings-10q-2018-may-10-17955